2025 (12) TMI 694 - AT - Income Tax

Genuine Penny Stock Gains Not Taxable u/s 68; Exempt Long-Term Capital Gains Allowed u/s 10(38)

ITAT Mumbai allowed the assessee's appeal, holding that the alleged bogus long-term capital gain from penny stock could not be taxed as unexplained cash ... Bogus LTCG - Denial of exemption u/s.10(38) - penny stock transactions - onus cast u/s. 68 proved or not? - genuineness of the transaction not proved - as admitted assessee retained the said shares for and about 5 years - no investigation has been carried out by the SEBI HELD THAT:- Assessee before both the authorities below has filed the relevant documents, such as profit and loss account, balance sheet, sale/contract notes for sale of share, copy of demat statement/account, bank statement, etc., in order to prove the genuineness of the transaction. Admittedly, the authorities below have not doubted the documents submitted by the Assessee, which goes to show that the assessee has been able to establish its case prima facie u/s. 68 and discharged the onus cast u/s. 68 of the Act. Admittedly, no allegations have ever been levelled against the Assessee and even otherwise, no investigation has been carried out by the SEBI or any Investigating Agency against the Assessee herein and it is also admitted fact the assessee had purchased the shares involved on dated 17.09.2013 and sold the same through online platform of Bombay Stock Exchange on 01.02.2018 which goes to show that the assessee retained the said shares for and about 5 years As decided in Indravadan Jain [2023 (7) TMI 1091 - BOMBAY HIGH COURT] no reason to add the capital gains as unexplained cash credit under section 68 of the Act. The tribunal while dismissing the appeals filed by the Revenue also observed on facts that these shares were purchased by respondent on the floor of Stock Exchange and not from the said broker, deliveries were taken, contract notes were issued and shares were also sold on the floor of Stock Exchange. Decided in favour of assessee. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether long term capital gain arising from sale of listed shares, supported by documentary evidence and claimed exempt under section 10(38), could be treated as bogus and added as unexplained income under section 68 on the ground that the scrip was a penny stock. 1.2 Whether, on the facts of the case, the assessee had discharged the onus under section 68 to establish the genuineness of the share transactions, and whether the revenue brought any material to rebut such evidence. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Treatment of long term capital gain on listed shares as bogus; onus under section 68 Legal framework (as discussed) 2.1 The Court examined the matter in the context of sections 10(38) and 68 of the Income Tax Act, 1961. The discussion proceeded on the basis that where an assessee furnishes primary evidence to explain a credit/receipt, the onus under section 68 is initially on the assessee, and may shift to the revenue upon satisfactory discharge of that onus. 2.2 The Court relied on the judgment of the jurisdictional High Court in 'Principal Commissioner of Income-tax vs. Indravadan Jain, HUF', where addition under section 68 in respect of long term capital gain on alleged 'penny stock' was deleted after finding that the assessee had effected purchase and sale of shares on the stock exchange through a registered broker, taken and given delivery through demat, and received/paid consideration through banking channels. Interpretation and reasoning 2.3 The assessee had sold 20,500 shares of a company through the Bombay Stock Exchange's online platform on 01.02.2018, declared long term capital gain of Rs. 12,87,180 and claimed exemption under section 10(38). The Assessing Officer treated the gain as bogus, characterizing the scrip as a penny stock, and made addition under section 68, which was affirmed by the appellate authority. 2.4 The Court noted that the assessee had furnished, before both authorities below, documentary evidence including: profit and loss account, balance sheet, sale/contract notes for sale of shares, demat account statements, and bank statements, all in support of the purchase and sale of the shares and the flow of consideration. 2.5 It was specifically observed that the authorities below did not doubt the genuineness or authenticity of these documents. This non-dispute was treated as indicating that the assessee had, at least prima facie, established the factual matrix of the transactions and accordingly discharged the initial burden under section 68. 2.6 The Court further recorded that there were no allegations against the assessee by SEBI or any other investigating agency, and no investigation had been carried out against the assessee in relation to the transactions in question. 2.7 The timeline of holding was also considered material: the assessee had purchased the shares on 17.09.2013 and sold them on 01.02.2018 through the Bombay Stock Exchange, thus holding the shares for about five years. This long holding period was treated as consistent with a genuine investment and inconsistent with a mere accommodation entry. 2.8 Applying the ratio of the jurisdictional High Court in 'Indravadan Jain, HUF', the Court reasoned that where shares are purchased and sold on the floor of a recognized stock exchange through a registered broker, with contract notes, demat delivery, and banking channel payments, and where the revenue does not produce cogent evidence to show that the particular assessee's transactions are sham, mere branding of the scrip as a 'penny stock' or reliance on general investigations is insufficient to justify addition under section 68. 2.9 The Court therefore found that, on the admitted and undisputed documentary record, the assessee had satisfactorily demonstrated the genuineness of the share transactions and the resultant long term capital gain, and the revenue had not brought on record any specific material to rebut this or to establish that the assessee's claim was an accommodation entry. Conclusions 2.10 The addition made by the Assessing Officer by treating the long term capital gain of Rs. 12,87,180 as bogus and undisclosed income under section 68, and affirmed by the appellate authority, was held to be unsustainable. 2.11 The exemption claimed under section 10(38) in respect of the long term capital gain arising from the sale of the shares was effectively allowed, and the impugned addition was deleted. 2.12 The appeal of the assessee was allowed in full.