ITAT upholds LTCG claim on penny stocks sale, rejects disallowance under sections 69/68 without adverse evidence

ITAT Mumbai upheld the CIT(A)'s order allowing the assessee's claim of LTCG on sale of penny stocks, rejecting the AO's disallowance under sections 69/68 for alleged bogus transactions. The assessee discharged the primary onus by providing confirmations and evidence of long-term shareholding (19 years) and payment of STT. The AO failed to produce adverse material or summon the confirming party. The tribunal affirmed that without contrary evidence, the transaction cannot be deemed non-genuine. The revenue's appeal was dismissed, aligning with precedents where long-held shares sold through recognized exchanges were not to be treated as cash credits.

---

---

ISSUES:

Whether the disallowance of claimed Long Term Capital Gain (LTCG) exemption under section 10(38) on sale of penny stock shares can be deleted when the transaction is alleged to be an arranged accommodation entry involving price rigging and bogus capital gains.Whether commission disallowance under section 69 for arranging bogus capital gain transactions on penny stock sale is justified.Whether the appellate authority erred in deleting disallowance without appreciating the reopening of assessment based on information alleging collusion among promoters/brokers/operators to rig prices and create bogus LTCG.Whether penny stock transactions lacking commercial substance and involving preconceived steps to evade tax can qualify for LTCG exemption.Whether reliance on regulatory findings (SEBI order on price manipulation and penalties on entities involved) supports disallowance of LTCG exemption.Whether acceptance of documentation at face value without examining underlying fraudulent intent and orchestrated steps is erroneous.Whether the principles established in Durga Prasad More and Sumati Dayal regarding evaluation of evidence by applying tests of probabilities and surrounding circumstances were properly applied.Whether the onus lies on the assessee to prove genuineness of price hike and absence of price manipulation in penny stock transactions claiming LTCG exemption.Whether precedent treating penny stock transactions as income from other sources instead of LTCG is applicable.Whether the monetary threshold prescribed by CBDT circulars affects the decision to file appeal in cases involving organized tax evasion and accommodation entries in penny stocks.

RULINGS / HOLDINGS:

The deletion of disallowance of LTCG exemption under section 10(38) on sale of penny stock shares was upheld because the assessee discharged the primary onus by furnishing evidence of long-term holding, payment through cheque, and sale through a recognized stock exchange, and no adverse material was brought on record by the assessing officer to rebut this.The commission disallowance under section 69 was not sustained as the alleged bogus capital gain transactions were not established against the assessee with supporting evidence beyond the information received from the Investigation Wing.The reopening of the assessment based on information alleging collusion and price rigging was not sufficient to disallow the LTCG exemption without concrete adverse evidence against the assessee's specific transactions.Transactions involving penny stocks cannot be denied LTCG exemption solely on the basis of suspicion or allegations of artificial structuring without corroborative evidence; the genuine long-term holding and sale through recognized channels are determinative.Regulatory findings by SEBI against other entities involved in price manipulation do not automatically implicate the assessee or negate the genuineness of the assessee's transactions.Acceptance of documentation and explanations provided by the assessee was appropriate where no contradictory evidence was produced, and the assessment of true character and intent must be based on evidence rather than mere suspicion.The principles from Durga Prasad More and Sumati Dayal require that evidence be judged by applying the test of probabilities and surrounding circumstances, which was not found to have been violated by the appellate authority.The onus to prove genuineness and absence of price manipulation lies initially on the assessee, which was discharged here; the assessing officer failed to produce contrary evidence to displace the presumption of genuineness.Precedent treating similar penny stock transactions as income from other sources was distinguished on facts, and the appellate authority's decision to allow LTCG exemption was affirmed.The tax effect being below the prescribed limit does not preclude filing appeal in cases involving "Organized Tax Evasion" and accommodation entries, but this procedural aspect did not affect the substantive decision dismissing the appeal.

RATIONALE:

The Court applied the statutory provisions of the Income Tax Act, particularly section 10(38) relating to exemption of LTCG on sale of listed securities and section 69 concerning unexplained investments or credits.The Court relied on established judicial principles from Supreme Court decisions in Durga Prasad More and Sumati Dayal emphasizing evaluation of evidence on the basis of probabilities and surrounding circumstances rather than suspicion alone.The Court emphasized that once the assessee discharges primary onus by producing credible evidence of genuine long-term holding and sale through recognized stock exchange channels, the burden shifts to the revenue to produce contrary evidence.The Court noted that mere reliance on information from investigation or regulatory orders against other entities is insufficient to disallow exemption without specific adverse evidence implicating the assessee.The decision reflects adherence to the principle that tax exemptions cannot be denied on conjecture or unsubstantiated allegations, and that assessment must be based on material evidence.The Court acknowledged procedural guidelines from CBDT circulars regarding appeal filing thresholds but clarified that organized tax evasion cases are exceptions where merits govern appeal decisions irrespective of tax effect.

---