LTCG on Penny Stocks: When Documentation Trumps General Allegations

ORDER

Pawan Singh, Judicial Member. – This appeal by assessee is directed against the order of ld. CIT(A) / NFAC dated 11.06.2025 for A.Y. 2013-14. The assessee has raised following grounds of appeal:

“1.0On facts and circumstances of the case and in law, Ld. CIT(A) erred in confirming the validity of notice u/s 148 issued in mechanical manner, in absence of new tangible material and on the basis of borrowed satisfaction and without having reason to believe of escapement of income;

2. 0 On facts and circumstances of the case and in law, Ld. CIT-(A) erred in confirming the addition made u/s 68 of entire sale consideration of STT paid listed shares of Rs.2,50,36,002/- on rejecting the appellant’s claim of Long term capital gain;

3. 0 The Ld. CIT-(A), before confirming the addition u/s 68 of entire sale consideration of STT paid listed shares of M/s Sanasa Tech Fab Ltd (earlier known as M/s Jeevo Motors Finance Co. Ltd) of Rs.2,50,36,002/-, ought to have considered the understated vital facts, being;

2. Vide application dated 01.09.2025, the assessee has raised following additional ground of appeal:

“1.0 On facts and circumstances of the case and in law, the re-assessment order passed u/s.147 dated 23/03/2022 by National Faceless Assessment Centre (NFAC) is bad-in-law, since the scheme for faceless assessment of income escaping assessment prescribed u/s.151A had been notified by the CBDT w.e.f. 29/03/2022;

2.0 On facts and circumstances of the case and in law, the re-assessment order passed u/s.147 r.w.s. 144B is bad-in-law, since the intimation to complete the assessment in accordance to the procedure laid u/s.144B has not been issued by the NFAC and no notice u/s 144B had not been served to the assessee.

The appellant craves leave to add, amend, alter and/or withdraw any of the grounds of appeal at the time of hearing.”

3. Brief facts of the case are that assessee is an in

dividual and claimed to have been engaged in investment in shares. The assessee filed his return of income for assessment year (A.Y.) 2016-17 on 15.10.2016 declaring income of Rs. 30,85,930/-. Return of income was processed under section 143(1). Subsequently, case was reopened under section 147. Notice under section 148 dated 31.03.2021 was served upon the assessee. In response to notice under section 148, the assessee filed his return of income on 16.04.2021 declaring same income as declared earlier. The case of assessee was reopened on the basis of information received from DDIT (Inv.) Ajmer that Sanasa Tech Fab Ltd. which was earlier known as Jeevo Motors Finance Company Limited was identified as penny stock script company, used for generation of bogus capital gain or loss. The assessee traded in the script of such company. On the basis of such information, case of assessee was reopened. During the assessment, the assessing officer find that assessee has claimed long term capital gain and claimed exemption under section 10(38) of Rs. 2.40 crore on sale of shares of Sanasa Tech Fab Ltd. During the assessment, the assessee furnished copy of allotment advice, contract notes from Swastika Investments Ltd (Share broker) and bank statement showing payment of consideration and receipt of sales of shares during the year. The assessing officer on the basis of details furnished before him recorded that assessee made application for allotment to 1,00,000/- preferential share of Sanasa Tech Fab Ltd. which were earlier known on Jeevo Motors Finance Company Limited. The shares were allotted on 07.10.2014 at a price of Rs. 10/- per share. The assessee acquired such share off market. The assessee held such share for more than one year and sold between 16.11.2025 to 31.03.2016. The assessing officer examined the financials of such company as recorded on page 2, 3 and 4 of assessment order and recorded that such company was not having tangible asset nor any substantial investment. The shares were artificially rigged from Rs. 10/- to Rs. 284/-. Such company has not paid any dividend to the shareholders. The assessing officer further recorded that share of this company was traded from Bombay Stock Exchange and limited number of brokerage firms have made trading of its share. The names of various brokers are recorded on page no. 5 to 7 of assessment order. On recording such discrepancies, the assessing officer issued show cause notice to the assessee. The assessee filed its reply and submitted name of certain companies wherein the price of shareswas increased substantially including of Suzlon Energy Ltd., Eicher Motors Ltd. and other companies in which share prices were increased over 100 times. The reply of assessee was not accepted. The assessing officer by referring the decision of Hon’ble Supreme Court in Durga Prasad More and Sumati Dayal, treated the sale consideration of Rs. 2.50 crore as unexplained and added under section 68 and taxed the same under section 115BBE in the assessment order dated 23.03.2022.

4. Aggrieved by the additions in the assessment order, the assessee filed appeal before ld. CIT(A). Before ld. CIT(A), the assessee challenged the validity of reopening as well as additions on merit. On the merits of the case, the assessee submitted that he has furnished sufficient documentary evidence to justify the genuineness of purchase and sales and long-term capital gain earned thereon. The shares were sold on recognised stock exchange on which security transaction tax (STT) was paid. The holding period is more than one year. The shares were held in Demat account. The assessee furnished contract bills, Demat statement, bank statement, rate list and confirmation of stock broker. The assessee requested the assessing officer to provide the contrary material and statement of third party for rebuttal and to allow opportunity of cross-examination.No such opportunity was provided nor statement of third party provided. The assessee also given comparative list of other shares which were increased drastically during the relevant period. On validity of reopening the assessee submitted that objection of assessee was rejected mechanically. There was no sufficient tangible material. The reopening was based on borrowed satisfaction.

5. The ld. CIT(A) on considering the submission of assessee and the assessment order upheld that validity of reopening by taking view that sufficient opportunity was given to the assessee during assessment. The assessing officer followed due process and there was tangible information in the possession of assessing officer. On merit, the ld. CIT(A) by referring various decisions held that he has no reason to interfere with the order of assessing officer. Further, aggrieved, the assessee has filed present appeal before Tribunal.

6. We have heard the submissions of learned Authorised Representative (ld. AR) of the assessee and the learned Senior Departmental Representative (ld. Sr. DR) for the Revenue. The ld. AR of the assessee submits that assessee purchased the shares of Sanasa Tech Fab Ltd. which were earlier known as Jeevo Motors Finance Company Limited. Such shares were allotted under preferential allotment scheme on 07.03.2014. The assessee purchased / were allotted 1.00 lac shares @ Rs. 10/- per share. The assessee made payment of consideration of Rs. 10 lacs by way of cheque on 20.02.2014 that is at the time of applying for preferential shares. The shares were held in Demat account. The shares were sold through registered broker of Bombay Stock Exchange on 10.11.2015 to 17.03.2016. The assessee received total consideration of Rs. 2.50 crore. The shares were sold at average rate of Rs. 250/- per share. The period of holding was ranging from 17 to 21 months. The assessee before the lower authorities furnished contract note cum sale bills, ledger account of a stock broker, bank statement, Demat statement and rate publication of Bombay Stock Exchange (BSE). In support of purchase of shares, the assessee furnished letter of company for allotment of shares, bank statement, Demat request form, Demat statement and his balance sheet of earlier years. The assessee is regularly investor in shares. There is no allegation that assessee or his brokers were involved in alleged price rigging. There is no investigation by Security and Exchange Board of India(SEBI) against the broker of assessee. STT was paid at the time of sale. The assessing officer simply relied upon the information from Investigation Wing without giving any finding on various evidence or bringing adverse material on record against the evidence furnished by assessee.

7. The ld. AR further furnished that he has also raised additional ground of appeal. In the additional ground of appeal, the assessee has challenged the validity of assessment order passed by faceless assessing officer. The ld. AR of the assessee submits that scheme of faceless assessment about reassessment that is income escaping assessment was brought on the statute book by taxation and other law (realization and amendment of certain provisions) Act, 2020 with effect from 01.11.2020 which were notified on 29.03.2022. Therefore, the assessment was taken by NFAC prior to 29.03.2022 is without jurisdiction as NFAC Scheme was not operational prior to 29.03.2022, hence, assumption of jurisdiction by assessing officer prior to that date is invalid. Assessment in the present case was completed on 23.03.2022, hence such assessment order is bad in law being without legal sanction. To support his submission on merit, the ld. AR of the assessee relied upon following decision:

Pr. CIT v. Renu Aggarwal ITR 249 (SC).

Pr. CIT v. Parasben kasturchand Kochar (SC) & Pr. CIT v. Parasben Kasturchand Kochar  (Guj).

Pr. CIT v. Indravadan Jain, HUF ITR 711 (Bom)/ITA No. 454 of 2018.

Pr. CIT v. Ziauddin Siddique [IT Appeal No. 2012 of 2017, dated 4-3-2022].

CIT v. Shyam R. Pawar (Bom).

CIT v. Smt. Jamnadevi Agrawal ITR 656 (Bom).

Pr. CIT v. Smt. Krishna Devi (Delhi).

Pr. CIT v. Sanjaykumar Damjibhai Gangani (Guj).

8. On the validity of reassessment order, the assessee relied upon the following decision:

Nabiul Industrial Metal (P) Ltd v. ITO (NFAC) [IT Appeal No. 1328 (Kol) 2024, dated 15-10-2024].

MD Mahimud SK v. ITO [IT Appeal Nos. 2229 and 2230 (Kol) of 2024, dated 4-3-2025].

9. On the other hand, ld. Sr. DR for the Revenue supported the order of lower authorities. The ld. Sr. DR for the Revenue submits that assessing officer has brought sufficient material on record that scrip on the sale of which the assessee has shown long term capital gain were penny scrip. The Investigation Wing carried out full-fledged investigation against such penny scrip company, Sanasa Tech Fab Ltd. is one of the penny scrip companies. Such penny scrip company was not doing actual business except providing accommodation entries. Three were very few brokers who were making transaction of such scrip. The assessee has shown abnormal profit. On the legal issue of assessment order passed by faceless assessment unit, the ld. Sr. DR for the Revenue submits that assessing officer acted in accordance with the faceless scheme framed by CBDT.

10. In short rejoinder submission, the ld. AR of the assessee submits that assessing officer on page 5, 6 & 7 has given the name of certain share broker, wherein the scrips were transacted through a very well-known brokers company which includes Aditya Birla Money Ltd., Mehta Equities Ltd. and Religare Broking Ltd. The action of assessing officer is simply based on the information of Investigation Wing which was not verified nor the assessing officer have brought any adverse material against the evidences furnished by assessee.

11. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We have also deliberated on various case laws relied by ld. AR of the assessee and the various evidences furnished by assessee.We find that during the assessment, the assessing officer noted that assessee has shown capital gain of Rs. 2.40 crore on sale of shares of Sanasa Tech Fab Ltd., the assessee claimed exemption of capital gain of under section 10(38). On show cause, the assessee furnished share allotment advice, contract note from Swastika Investments Ltd. (assesses broker), bank statement and details of shares. The assessing officer also recorded that preferential allotment of 1.00 lakh shares of Jeevo Motors Finance Company Limited were allotted. The name of Jeevo Motors was changed to Sanasa Tech Fab Ltd. The assessing officer also accepted the fact that shares were held for more than one year, though acquired off market. The assessing officer by referring certain financial of such company noted that such company was not having meaningful tangible assets and the price of shares were increased up to Rs. 284/-. The shares were transacted by limited brokers. The assessing officer on the basis of his observation was of the view that such company prepared a grand plan providing fictitious long term capital gain to the interested parties. The sale price realised by assessee is not possible in such a short span of period. The assessing officer treated the entire sale consideration of Rs. 2.50 crore as unexplained credit and added under section 68, without allowing the cost of investment in impugned shares. The ld. CIT(A) confirmed the action of assessing officer without giving any independent findings.

12. We find that before assessing officer, the assessee furnished letter of allotment, bank statement for payment of purchase consideration, Demat account request, Demat statement. To substantiate the sale, the assessee furnished sale bills cum contract note confirmation of his brokers, Swastika Investmart, bank statement and Demat statement. No comments were made by assessing officer or by ld. CIT(A) nor any adverse material was brought on record. We find that assessee has filed his balance sheet as on 31.03.2015 wherein he has sold investment in various other shares.

13. We find that Hon’ble Gujarat High Court in the case of CIT v. Himani M. Vakil (Mag) (Guj) held that where assessee duly proved genuineness of sale transaction by bringing on record contract notes of sale and purchase, bank statement of broker and demat account showing transfer in and out of shares, assessing officer was not justified in bringing to tax capital gain arising from sale of shares as unexplained cash credit. Further Hon’ble Gujarat High Court in the case of Parasben Kasturchand Kocher (supra), also held that when assessee discharged his onus by establishing that transactions were fair and transparent and all relevant details with regard to transfer furnished to Income Tax Authority and the Tribunal have also took the notice of fact that the shares remained in the account of assessee, the assessee also furnished demat account and details of bank transaction about the sale and purchase of shares, the addition was deleted. Further in Pr. CIT v. Mamta Rajivkumar Agarwal (Guj) also held that where the assessee had sold the shares and earned LTCG and the Assessing Officer alleged that transaction was penny stock deal aim at illegitimately claiming LTCG exemption under section 10(38), since there was no allegation on record suggesting the assessee or his broker involved in rigging up the price of scrips, the addition was rightly deleted by Tribunal.

14. Wealso find of Hon’ble Jurisdictional High Court in the case of Indravadan Jain, HUF (supra) also held that when assessing officer nowhere alleged that transactions made by assessee with a particular broker or share broker was bogus, merely because investigation was done by SEBI against the broker or its activities, the assessee cannot be said to have entered into ingenuine transaction.We find that assessee made sale of shares through BSE and paid security transaction tax and there is no allegation against the assessee or his share broker through whom assessee has made sales that they were indulging any price manipulation/ rigging. Therefore, we do not find any justification in treating the LTCG as unexplained cash credit in absence of any cogent evidence against the assessee specific. Thus, in view of aforesaid and factual and legal discussion, we do not find any justification on treating the long-term capital gain as fictitious and adding under section 68, particularly when the assessee has furnished sufficient evidence to discharge his primary onus. In the result, ground no. 2 and 3 of appeal are allowed.

15. Considering the fact that we have allowed appeal on merit, therefore, adjudication on other legal issue have become academic.

16. In the result, appeal of the assessee is allowed.