ITAT Deletes Additions Against Unsuspecting Investor In A 'Penny Stock' To Make Quick Profit

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that the assessee was an unsuspecting investor who transacted in a 'penny stock' with a view to earning a quick profit, and since his involvement in any dubious transaction relating to price rigging or connection with exit providers could not be shown, the transaction could not be treated as a 'pre-arranged' one even if there were no underlying fundamentals in or financial performance by the company whose shares were sold.

The bench of Narendra Kumar Choudhry (Judicial Member) and S. Rifaur Rahman (Accountant Member) has observed that even though all the characteristics of penny stock exist in the present case, the department has not brought on record any materials linking the assessee to any dubious transactions relating to entry, price rigging, or exit providers.

The assessee/appellant is an individual and partner in 3 firms, namely Leopold Cafe & Stores, New York Cafe, and Leos Boulangerie, and the assessee has derived incomes under the head salary, income from a partnership firm, capital gains, other sources, and agricultural income. e.

During the course of assessment proceedings, the Assessing Officer observed that the assessee has claimed exempt income of Rs. 82,52,616 on account of long-term capital gain on payment of STT under Section 10(38). Based on the information available on record, he observed that the assessee has sold 7550 shares of Penny Stock "Kappac Pharma" (suspected scrip) during the current assessment year. The sale value of the entire shares was Rs. 52,27,792, and the assessee had purchased the shares of Parixit Gas Company Ltd. in physical form on October 9, 2012, for Rs. 83,050 and demated the same on January 10, 2013 with Balance Equity Broking (India) Private Limited.

The assessing officer has observed that the assessee has declared a huge profit in this scrip; hence, he is of the opinion that all these transactions are pre-arranged. The Assessing Officer relied on the report of the Directorate of Investigation, Kolkata, to unearth the organized racket of generating bogus entries for long-term capital gains that are exempt from tax.

After reproducing the sale of shares by the assessee in the open market in his order in which the Assessing Officer has listed the various quantities, various rates, and to various buyers in his order, for the total sum of ₹.52,27,792/-, considering the fact that SEBI, after thorough investigations in such penny stock cases, has certified that such transactions are rigged and are carried out to convert black money into white money, Accordingly, he considered the transaction to be non-genuine and represented undisclosed income of the assessee liable to be added under the heading “Income from other sources.”.

The tribunal held that the assessee is one of the beneficiaries in this transaction merely as an unsuspecting investor who has entered the investment fray to make a quick profit. Even the assessing officer has applied the presumptions and concept of human probabilities to make the additions without their being any material against the assessee.

Counsel For Appellant: Rahul Sarda

Counsel For Respondent: Ujjawal Kumar Chavan

Case Title: Farzad Sheriar Jehani Versus ITO

Case No.: ITA NO. 2065/MUM/2023

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