Bogus Long-Term Capital Gains From Transaction In Penny Stocks: ITAT Upholds Addition

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the addition of bogus long-term capital gains from transactions in penny stocks.

The bench of T.R. Senthil Kumar (Judicial Member) and Annapurna Gupta (Accountant Member) has observed that the assessees' failure to show how they were prejudiced by not providing the report cannot be held to be an infraction of the principle of natural justice to invalidate the order of the AO.

The appellant/assessee has challenged the order in which long-term capital gains returned by it to tax on the sale of shares were held to be bogus and mere accommodation entries by the department. The shares sold in both years were of the same company, and the basis for holding them to be bogus was that the shares were found by the Investigation Directorate, Kolkata, to be penny stocks whose prices were artificially manipulated and rigged to provide gains or losses to entities as per their requirements in return for cash. It was a scam unearthed by the Investigation Wing, revealing that through the collusive involvement of entry operators, brokers, and beneficiaries, the accommodation has been provided to beneficiaries by artificially rigging the prices of the shares.

The AO found the shares dealt with by the assessee to be such shares identified as penny stock by the Investigation Wing, Kolkata, and as per the AO, the Investigation Wing revealed the assessee as one of the beneficiaries. The long-term capital gain returned by the assessee was treated as bogus, and all documentary evidence filed by the assessee to prove the genuineness of its claim was rejected as not sufficient to discharge the onus cast on the assessee.

The assessee contended that the finding of the department that the transaction of the sale of shares was bogus was flawed since the assessee had discharged its onus of proving the genuineness of the transactions.

The department contended that the mere filing of documentary evidence did not discharge the onus cast on the assessee to prove the genuineness of the transaction, more particularly since the huge price rise in the shares sold was not shown to be supported by the financials of the company. There was no justification, considering the large-scale scam unearthed by the department, where entry operators and brokers involved had admitted accommodation entries through bogus long-term capital gain on the sale of shares.

The court held that the burden in the cases where the facts showed a phenomenal and fanciful rise in shares in a short span of time and thereafter a steep fall, all unsupported by the financials of the companies, was heavy and could not be discharged by filing mere documentary evidence of the sale and purchase of shares.

Case Title: Hemil Subhashbhai Shah Versus DCIT

Case No.: ITA No.1121/Ahd/2018

Date: 12/06/2023

Counsel For Appellant: S.N. Soparkar, Parin Shah, Urvarshi Sodhan

Counsel For Respondent: Purushottam Kumar

Click Here To Read The Order