Penny stock loss disallowance fails where revenue cannot prove direct nexus to sham or synchronized trading

A disallowance of short-term capital loss under section 68 could not be sustained where the revenue relied only on general SEBI and investigation material concerning manipulation in the scrip, without independent enquiry or corroborative evidence linking the assessee to accommodation entries, synchronized trading, or price rigging. The transactions were supported by contract notes, demat records, and a banking trail, and the material did not establish a direct nexus between the assessee and any sham activity. The addition was therefore deleted.

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Issues: Whether the disallowance of short-term capital loss claimed from dealings in the scrip of Kushal Tradelink Ltd. could be sustained under section 68 of the Income-tax Act, 1961 in the absence of any direct material linking the assessee to alleged price rigging or synchronized trading.

Analysis: The addition was founded on general findings in the SEBI and investigation material concerning manipulation in the scrip, but no independent enquiry or corroborative evidence established the assessee's personal involvement in any accommodation entry, synchronized operation, or price rigging. The transactions were supported by contract notes, demat records, and banking trail, and the material relied upon did not show a specific nexus between the assessee and the alleged sham activity. In such circumstances, a mere reliance on the fact that the scrip was treated as a penny stock was held insufficient to justify the addition.

Conclusion: The disallowance under section 68 was not sustainable and was deleted in favour of the assessee.

Ratio Decidendi: An addition cannot be sustained merely because the assessee traded in a scrip later found to be manipulated by third parties unless the revenue establishes a direct nexus between the assessee and the alleged synchronized or sham transactions.

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