Addition Under Section 68 Deleted as Penny Stock Finding Lacked Independent Enquiry and Transacted via Bank and Demat

By | August 18, 2026
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Addition Under Section 68 Deleted as Penny Stock Finding Lacked Independent Enquiry and Transacted via Bank and Demat

Issue

Whether an addition under Section 68 treating long-term capital gains from share transactions as non-genuine penny stock gains can be sustained when based solely on Investigation Wing reports without independent verification by the Assessing Officer.

Facts

  • Return Filed & Exemption Claimed: For Assessment Year 2016–17, the assessee (an individual) filed a return declaring income from salary, other sources, and commodity trading, while claiming tax exemption on long-term capital gains derived from the sale of shares of M/s Safal Herbs Ltd.
  • Reopening & Addition: The Assessing Officer (AO) reopened the assessment, characterized M/s Safal Herbs Ltd. as a penny stock, held the long-term capital gain to be non-genuine, added the amount under Section 68 as unexplained cash credit, and initiated penalty proceedings.
  • Basis of AO’s Order: The AO’s findings relied exclusively on generalized material and reports provided by the Investigation Wing without conducting any independent enquiry or verification.
  • Documentation Produced: The assessee substantiated the genuineness of the share transactions by producing valid banking channel records and DEMAT account statements.
  • Appellate Relief: Both the Commissioner (Appeals) and the ITAT deleted the addition made under Section 68.

Decision

  • Lack of Independent Enquiry: The High Court/Tribunal held that additions under Section 68 cannot stand if based purely on generic Investigation Wing reports without independent verification by the Assessing Officer.
  • Transaction Proven by Records: Since the assessee successfully substantiated the share transactions through verifiable banking and DEMAT channel records, the genuineness was established.
  • Addition Deleted: The order deleting the Section 68 addition was upheld, deciding the issue in favor of the assessee.

Key Takeaways

  • Independent Investigation Required: Tax authorities cannot treat capital gains as bogus penny stock transactions solely on third-party Investigation Wing reports; the Assessing Officer must independently examine and establish evidence of price manipulation.
  • Evidentiary Value of Banking & Demat Statements: Valid documentary proof—including bank statements showing proper money flow and DEMAT entries reflecting actual holding and transfer—serves as strong evidence to establish the genuineness of share transactions.
HIGH COURT OF MADHYA PRADESH
Principal Commissioner of Income-tax
v.
Aditya Agrawal*
VIVEK RUSIA and Pradeep Mittal, JJ.
IT APPEAL No. 12 of 2026†
APRIL  1, 2026
Siddharth Sharma, Adv. for the Appellant.
ORDER
Vivek Rusia, J.- This is an appeal filed against the order dated 30.09.2025 passed by the Income Tax Appellate Tribunal, Jabalpur, whereby the appeal filed by the Income Tax Officer, Ward-1, has been dismissed. The order passed by the National Faceless Appeal Centre (NFAC), Delhi, dated 30.10.2024, about the assessment year 2016-17 has been affirmed.
2. The respondent/assessee, an individual who filed his return of income through electronic mode declaring total income Rs.5,98,850/- on 26.07.2016 for the assessment year 2016-17, showing his income from the salary, income from other sources and trading of commodities. The Assessing Officer reopened the assessee’s case and issued a notice under Section 148 of the Income Tax Act, 1961 (“Act”, for short). He filed his return of income on 22.02.2020. Thereafter, a notice under Section 143(2) of the Act was issued and served upon the assessee.
3. The Assessing Officer, based on the available material held that the assessee had invested in shares of M/s. Safal Herbs Ltd., and declared and claimed exempt capital gain of Rs.1,24,465/- was not a genuine transaction and was treated as a penny stock and the same amount was added back to the income of the assessee. Vide order dated 27.09.2021, total transaction of Rs.2,20,137/- invested in the shares of M/s. Safal Herbs Ltd., has been added back to the total income of the assessee alongwith the initiation of penalty under Section 271(1)(c) of the Act. Being aggrieved by the aforesaid order, the respondent/assessee preferred an appeal before the NFAC, Delhi. Vide order dated 30.10.2024, the appeal was allowed by issuing a direction to the Assessing Officer to delete the additional amount of Rs.2,20,137/- made under Section 68 of the IT Act as the appellant has made out a case about the genuineness of the transaction to support the document.
4. Being aggrieved by the aforesaid order, the Department preferred an appeal before the ITAT, which came to be dismissed because under the identical facts, the Coordinate Bench of this Tribunal in the case of Smt. Sudha Agrawal v. ITO [IT Appeal No. 532 (JP) of 2024, dated 30.09.2024], had quashed the notice under Section 148 of the Act. Further, the Division Bench in the case of Sejal Jignesh Shah v. ITO [IT Appeal No. 444 (Mum.) of 2023, dated 20.01.2025] had taken a similar view. Hence, the present appeal before this Court. Admittedly, the total tax liabilities effect involved in this case is Rs.2,20,137/-, but an appeal is filed seeking it to be an exception under Clause 3.1(h) of the CBDT Circular No.05/2024.
5. Shri Siddharth Sharma, Advocate, has proposed the following substantial questions of law:-
1. Whether on the facts and circumstance of the case and in law the Ld. Tribunal erred in ignoring the direct and circumstantial evidence brought on records by the Assessing Officer to establish that the assessee had indulged in manipulation of the share prices of Safal Herbs Ltd. with a view to record fictitious Long Term Capital Gain?
2. Whether on the facts and circumstance of the case and in law the order of the Ld. Tribunal suffers from perversity as it ignores the facts brought on record establishing manipulation of shares price of Safal Herbs Ltd. as part of colourable device to generate fictitious Long Term Capital Gain with aim to evade taxes?
3. Whether on the facts and circumstances of the case and in law the Ld. Tribunal erred in deleting the addition of Rs.2,20,137/-made u/s 68, 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 Gain and claim bogus exemption?
4. Whether the finding of the Hon’ble ITAT that ‘the AO made no independent enquiry is perverse and contrary to the record, given that the Assessment Order explicitly records independent findings regarding the violation of SEBI Circular No. SMDRP/policy/Cir-32/99 (banning off-market negotiated deals) as evidenced by the defective purchase bills lacking Order No., Trade Time, and Client Code and details of STT paid?
5. Whether, on the facts and in the circumstances of the case, the Hon’ble ITAT was perverse in deleting the addition made u/s 68 by ignoring the ratio laid down by the Hon’ble Supreme Court in Sumati Dayal v. CIT (214 ITR 801), failing to appreciate that a 119% rise in the share price of a company (Safal Herbs Ltd)with negligible financials and no business activity defies all human probabilities?
6. Whether the Hon’ble ITAT erred in law in accepting the genuineness of the transaction solely on the basis of contract notes and bank payments, while totally disregarding the Assessing Officer’s specific finding that the initial purchase was an illegal ‘off-market’ transaction evidenced by a defective debit note and an ‘Inter-Depository Transfer’, thereby constituting a colourable device?
7. Whether the Hon’ble ITAT erred in holding that the onus u/s 68 was discharged by the assessee merely by proving the banking channel, when the surrounding circumstances and the independent verification by the AO revealed that the transaction was executed in violation of mandatory SEBI regulations and failed the statutory condition of STT payment u/s. 10(38)?
8. Whether the Hon’ble ITAT committed a substantial error and perversity in passing the impugned order without considering and adjudicating the ‘Revised Grounds of Appeal filed by the Revenue, thereby violating the principles of natural justice and rendering the decision legally unsustainable?
9. It is further submitted that the present appeal involves an organized tax evasion scheme concerning the claim of bogus Long Term Capital Gains (LTCG) via penny stocks.
6. There is a concurrent finding in favour of the assessee. The findings of the Assessing Officer were based solely on the record of the Investigation Wing. Therefore, there was a lack of independent inquiry. M/s Safal Herbs Ltd., had negligible profit from the year 2012-2016, but suddenly, it was increased in the year 2015-2016 up to 119% in share price that was not in the hands of the respondent/assessee, who is a small trader in the field of commodity trading.
7. The respondent has discharged his liabilities under Section 68 of the Act by submitting an investment in the shares through the banking transaction/DEMAT. The Department has not filed any document relating to the conclusion in the matter of Sanjay Shah and Jignesh Shah of Ahmedabad with whom the name of the appellant was connected by the Investigation Wing, Ahmedabad.
8. In view of the above, we do not find any ground to interfere with the order dated 30.09.2025 passed in ITO v. Aditya Agrawal [IT Appeal No. 200 (JAB) of 2024, dated 30.09.2025] by the Income Tax Appellate Tribunal, Jabalpur. Consequently, the appeal is dismissed.