Tribunal Deletes Penny Stock Additions: SEBI Clearance and Document Trail Override Revenue Suspicion
1. The Core Dispute: Penny Stock vs. Genuine Investment
The Revenue challenged the legitimacy of Long-Term Capital Gains (LTCG) earned by the assessee. The Department characterized the transaction as a “Penny Stock” arrangement used to launder money.
AO’s Action: Treated the entire sale proceeds as Unexplained Cash Credit (Section 68) and added an estimated amount for “alleged commission” paid to entry operators under Section 69C.
The Basis: The AO relied primarily on a general report from the Investigation Wing regarding price manipulation in certain scrips.
2. The Tribunal’s Findings
The Tribunal deleted the additions, providing a detailed rebuttal to the AO’s “theory of suspicion” with the following factual evidence:
I. The SEBI Factor
The Tribunal noted that SEBI, the specialized regulatory body for capital markets, had already conducted a detailed inquiry into the scrip of Company ‘M’.
The Result: SEBI found no violation or evidence of price rigging by the company or the involved parties.
II. Robust Documentary Evidence
Unlike typical “sham” transactions, the assessee provided a complete paper trail:
Contract Notes: Proof of purchase and sale through a registered broker.
Demat Details: Evidence that shares were held in a dematerialized account for the requisite period.
Bonus Shares: Evidence of corporate actions (bonus issues) during the holding period, which added commercial logic to the investment.
III. Stock Exchange Integrity
The entire transaction was routed through the Bombay Stock Exchange (BSE).
Statutory Compliance: Security Transaction Tax (STT) was duly paid.
Broker Credibility: There were no adverse findings or allegations against the specific broker used by the assessee.
3. The Final Ruling
The High Court/Tribunal held that the Revenue cannot make additions based solely on “generalized reports” of the Investigation Wing when the specific facts of the assessee’s case demonstrate genuineness.
Outcome: The transactions were held to be genuine. The additions under Section 68 and 69C were deleted.
Exemption Restored: The assessee was allowed to claim the LTCG exemption under Section 10(38) (as applicable for AY 2015-16).
Key Takeaways for Taxpayers
Direct Evidence Trumps Reports: An Investigation Wing report is a starting point for inquiry, but it is not “evidence” in itself. If your specific documents (Demat, Contract Notes, Bank Statements) are clean, the report cannot be used to penalize you.
Regulatory Clearance: A “Clean Chit” from SEBI is a powerful defense in penny stock litigations. If the regulator finds no rigging, the Tax Department’s claim of “artificial price inflation” loses its foundation.
Section 10(38) Legacy: While Section 10(38) was replaced by Section 112A (taxing LTCG at 10%) from 2018 onwards, the principles of proving “genuine transactions” remain identical for modern-day assessments.
| “A. | Whether on the facts and in the circumstance of the case and in law, the Hon’ble ITAT was justified in deleting the addition of sale proceeds of the share of Rs.25,26,325/- on account of undisclosed income u/s 68 of the Act made by the Assessing Officer arising out of sale of shares of M/s Mishka Finance & Trading Ltd., a penny stock and without appreciating the findings of the Assessing Officer that the price movement of the company were not supported by financial fundamentals of the company? |
| B. | Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in allowing the appeal of the Assessee by holding that the investment in shares was genuine, simply placing reliance upon the decision of Hon’ble High Court in the case of Himani M Vakil (Gujarat)[2014] and overlooking the circumstantial evidences and preponderance of the probability in the case? |
| C. | Whether on the facts and circumstances of the case and in law the Hon’ble ITAT erred in deleting the disallowance of commission of Rs. 1,26,316/- purportedly incurred by the Assessee towards payment to brokers who allegedly entered into the share transactions at the behest of the Assessee overlooking the fact that the entire transactions were stage managed with the object to facilitate the Assessee to plough back its unaccounted income in the form of fictitious Long Term Capital Gains of Rs.25,26,325/- and claim bogus exemption u/s.10(38) of the Act? |
| D. | Whether on the facts and circumstances of the case and in law the order of the Hon’ble ITAT suffers from perversity as it ignores the facts brought on record establishing manipulation of share prices of M/s Mishka Finance & Trading Ltd as the upward movement of share price was not at all justified by the economic fundamental of company during the period 2011 to 2015?” |
“9. I have considered the submission of both the parties and perused the order of lower authorities carefully. I find that the Assessing Officer doubted the transaction of assessee on the basis of report of Investigation Wing Kolkata. I further find that SEBI has initiated investigation in respect of Mishka Finance & Trading Ltd. I find that merely because there was allegation and investigation was done by SEBI against the company and assessee cannot be said to have enter into in genuine transactions. So far as assessee is concerned, she has no control over the activities of the brokers or price manipulation. I further find that assessee has furnished complete evidence including contract note of shares, demat details, detail of bonus shares. However, no adverse evidence was brought against such evidence. Nor the assessing officer made adverse comment on such evidences. I further find that SEBI made a through inquiry against Mishka Finance & Trading Ltd. and vide order dated 05.10.2017 that no adverse materials were found in the investigation report with respect to prima facie violation.
10. I find that Hon’ble jurisdictional High Court in the case of Himani M. Vakil (supra) 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. I further find that Hon’ble jurisdictional High Court in the case of Parasben Kasturchand Kochar (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 by 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.
12. I find that assessee made sale of shares through BSE and paid security transaction tax and there is no allegation against the share broker through whom assessee has made sales that they were indulging any price manipulation. Therefore, I do not find any justification in treating the LTCG as unexplained cash credit in absence of any cogent evidence. In the result, the addition of undisclosed income under section 68 is deleted. Considering the fact that I have accepted the LTCG by deleting the addition made under section 68, therefore the addition of alleged commission payment is also deleted. This ground of assessee is also allowed.”