Ahmedabad ITAT Upholds Addition of Penny Stock Gains for Assessee’s Failure to Provide Evidence

The Ahmedabad Income Tax Appellate Tribunal (ITAT) has upheld the order of the Commissioner of Income Tax (Appeals) [CIT(A)] confirming the addition under Section 68 of the Income Tax Act. The addition was made by the Revenue in relation to the long-term capital gains (LTCG) from the sale of penny stocks. The ITAT relied on an Investigation Report that exposed the manipulation of share prices, which resulted in artificial gains or losses for the beneficiaries, including the Assessee.

In this case, the individual Assessee reported LTCG of Rs. 10.42 lakhs on the sale of 1,500 shares of ‘Kappac Pharma Ltd.’ in the assessment year 2014-15, and LTCG of Rs. 58.10 lakhs on the sale of 13,500 shares of the same company in the assessment year 2015-16. The Revenue deemed these gains as bogus based on the Investigation Report, which revealed that the shares of Kappac Pharma were penny stocks manipulated by entry operators and brokers to artificially inflate the price and generate long-term capital gains for investors, including the Assessee. The CIT(A) dismissed the Assessee’s appeal.

The ITAT rejected the Assessee’s contention that Investigation Reports should not be the basis for considering the share transactions as bogus. It relied on a ruling by the Calcutta High Court in PCIT v. Swati Bajaj (2022) 446 ITR 56 (Cal.), which held that reports prepared by an authority like the Deputy Director of Income Tax (DDIT) based on investigations into large-scale scams involving accommodation entries disguised as long-term capital gains should be given due weightage. The reports can be considered internal reports and can initiate proceedings against suspicious assessees. The ITAT also dismissed the Assessee’s argument that the adverse Investigation Report was not confronted. It noted that the investigation primarily targeted brokers and entry operators involved in penny stocks, and the beneficiaries (including the Assessee) were not directly mentioned in the report. However, the Revenue provided the Assessee with the details of the report during the assessment proceedings. The ITAT concluded that the Assessee failed to demonstrate how the lack of direct confrontation with the report caused prejudice, and thus, it did not invalidate the Revenue’s order based on the principle of natural justice.

Additionally, the ITAT observed that the Assessee did not discharge the onus placed upon them. The extraordinary and unsubstantiated rise in share value was not supported by the financial statements of the company. Merely presenting documentary evidence of the sale and purchase of shares was insufficient to fulfill the burden of proof. Consequently, the ITAT upheld the CIT(A)’s decision to add the claimed bogus long-term capital gains to the Assessee’s income.

Therefore, the ITAT’s judgment favored the Revenue, affirming the addition made in relation to the Assessee’s bogus long-term capital gains for the assessment years 2014-15 and 2015-16. This ruling was given in the case of Hemil Subhashbhai Shah v. DCIT [TS-317-ITAT-2023(Ahd)], and the date of judgment was June 12, 2023.

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