Penny-stock capital gains require proof of genuine appreciation; bogus claims are taxable only to the extent of actual gain.

Penny-stock long-term capital gains claimed through a pre-arranged accommodation-entry scheme are not eligible for exemption merely because contract notes, demat records and banking channels exist. Applying human probability and preponderance-of-probabilities tests, the analysis treats abnormal price movement, weak financial fundamentals, investigation material and failure to establish genuine appreciation as sufficient to require proof of genuineness from the taxpayer. A cross-examination objection fails where an available opportunity was not used and no specific prejudice is shown. Even where transactions are bogus, the proposed addition must be confined to the actual long-term capital gain claimed as exempt, not the gross sale consideration.

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Issues: (i) Whether the assessee's claimed long-term capital gain from transactions in penny-stock shares was genuine and eligible for exemption, and whether denial of cross-examination vitiated the determination; (ii) whether the entire sale consideration could be added, or whether the addition was confined to the actual long-term capital gain.

Issue (i): Whether the assessee's claimed long-term capital gain from transactions in penny-stock shares was genuine and eligible for exemption, and whether denial of cross-examination vitiated the determination.

Analysis: The surrounding circumstances, including the abnormal rise in the value of shares of a company with negligible business and financial indicators, the amalgamation ratio of 38 shares for each share, the investigation material concerning the syndicate and accommodation-entry mechanism, the absence of any substantial history of share investment, and the assessee's failure to establish genuine price appreciation, demonstrated that the transactions formed part of a pre-arranged bogus LTCG/STCL scheme. Documentary evidence such as contract notes, demat records and banking transactions did not by itself establish genuineness. Applying the human probability and preponderance-of-probabilities tests, the burden remained on the assessee to prove the genuineness of the claim. The request for cross-examination did not invalidate the proceedings, particularly as an opportunity was provided and was not availed, and no specific prejudice was established.

Conclusion: The claimed long-term capital gain was not genuine and was not eligible for exemption under Section 10(38) of the Income-tax Act, 1961. The challenge based on denial of cross-examination failed.

Issue (ii): Whether the entire sale consideration could be added, or whether the addition was confined to the actual long-term capital gain.

Analysis: Although the transactions were treated as bogus, the sale consideration could not be assessed in full as income. The relevant computation distinguished the long-term sale proceeds of Rs. 86,05,364 from the purchase cost of Rs. 2,80,000, resulting in long-term capital gain of Rs. 83,25,364. The separate short-term transaction resulted in a loss of Rs. 3,300 and did not justify addition of the entire aggregate sale consideration.

Conclusion: The assessable addition was confined to Rs. 83,25,364, being the long-term capital gain claimed as exempt, and could not extend to the entire sale consideration of Rs. 1,34,99,620.

Final Conclusion: The finding that the penny-stock transactions represented accommodation entries was sustained, while the quantum of addition was restricted to the actual long-term capital gain rather than the gross sale consideration.

Ratio Decidendi: In penny-stock cases, exemption cannot be allowed merely on the basis of formal transaction documents where the surrounding circumstances establish a pre-arranged accommodation-entry scheme; nevertheless, any addition must be limited to the actual taxable gain and cannot comprise the entire sale consideration.

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