ITAT rules additions under sections 68 and 69B unjustified for penny stock LTCG without independent inquiry evidence

The ITAT Mumbai ruled in favor of the assessee regarding alleged bogus LTCG from penny stock transactions. The tribunal found that additions under section 68 based solely on investigation reports without independent inquiry were unjustified. Following precedent from Kamalesh Mohandas Lakhwani case, the tribunal held that mere suspicion of penny stock investment cannot justify additions under section 69B. The Bombay HC in Indravadan Jain case found no substantial question of law on similar penny stock issues. The tribunal concluded that VAS Infrastructure Ltd. transactions could not be deemed fictitious without evidence of manipulation, overturning the AO and CIT(A) orders.

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Issues Involved:
1. Addition of Rs. 26,02,810/- by the CIT(A)/AO.
2. Allegation of undisclosed transactions in penny stock scrip of M/s. VAS Infrastructure Ltd.
3. Validity of the assessment order under sections 143(3) r.w.s. 147 of the Income Tax Act.
4. Sufficiency of documentary evidence provided by the appellant.
5. Applicability of judicial precedents on similar cases involving penny stocks.

Issue-Wise Detailed Analysis:

1. Addition of Rs. 26,02,810/- by the CIT(A)/AO:
The appellant contended that the CIT(A)/AO erred in making an addition of Rs. 26,02,810/-, arguing that the addition was against the principles of equity and natural justice. The appellant claimed that the addition was made despite the genuine nature of the transactions and the proper offering of profits for taxation in the return of income.

2. Allegation of Undisclosed Transactions in Penny Stock Scrip of M/s. VAS Infrastructure Ltd:
The AO received information from the Investigation Wing indicating that the appellant had traded in the penny stock scrip of M/s. VAS Infrastructure Ltd., which was allegedly used to launder money under the guise of Long Term Capital Gain (LTCG) exempted under section 10(38) of the Income Tax Act. The AO observed that the share price movements were not supported by financial fundamentals and added Rs. 26,02,910/- as unexplained cash credit under section 68 of the Act.

3. Validity of the Assessment Order Under Sections 143(3) r.w.s. 147 of the Income Tax Act:
The AO reopened the case under section 147 of the Income Tax Act and issued a notice under section 148 after recording reasons and obtaining necessary approvals. The CIT(A) upheld the AO's decision, noting that the appellant failed to disclose the transactions and did not provide sufficient explanations or documentary evidence to rebut the findings.

4. Sufficiency of Documentary Evidence Provided by the Appellant:
The appellant provided contract notes issued by the broker, demat statements, account details in the broker's books, and bank statements to substantiate the transactions. The appellant argued that these documents sufficiently explained the transactions and that the addition under section 68 was unwarranted. The appellant also highlighted that they were a regular investor in the stock market and had dealt with other scrips without dispute.

5. Applicability of Judicial Precedents on Similar Cases Involving Penny Stocks:
The appellant cited several judicial decisions where similar additions involving penny stocks were deleted. The appellant relied on cases such as PCIT vs. Genuine Finance P. Ltd., ITO vs. Kamalesh Mohandas Lakhwani, and others to support their claim that the transactions were genuine. The DR, however, maintained that the AO's and CIT(A)'s orders were justified based on the modus operandi detailed in the investigation report.

Tribunal's Findings:
The Tribunal found that the coordinate benches of ITAT, Mumbai, had considered similar cases involving the sale of VAS Infrastructure Ltd. scrip and held that the transactions were genuine in the absence of evidence of manipulation. The Tribunal noted that the AO had not conducted any independent enquiry and relied solely on the investigation report. The Tribunal also referred to decisions by the Hon'ble High Courts of Gujarat and Bombay, which upheld ITAT orders on similar issues, indicating no substantial question of law was involved.

Conclusion:
The Tribunal allowed the appeal, holding that the transactions in the VAS Infrastructure Ltd. scrip could not be termed fictitious without evidence of manipulation. The Tribunal found no justification for the addition made by the AO and upheld by the CIT(A), as it was based solely on the investigation report without independent enquiry.

Order:
The appeal was allowed, and the order was pronounced in the open court on 22.08.2024.

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