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2025 (6) TMI 320 - AT - Income TaxAddition of sale consideration from sale of Equity shares of alleged penny stock company - Addition u/s 68 - denial of exemption u/s. 10(38) - HELD THAT -We find merit in the contention of assessee and observe that it is not a case of claiming exemption u/s. 10(38) of the Act and in the instant case assessee has not made purchases through offline mode. CIT(A) has not confirmed the addition u/s. 68 and treated it as Income from Other sources . Revenue authorities have failed to controvert the fact that the purchases were made through banking channel and the source of the purchases has not been disputed at any stage and therefore deduction of purchase is allowable against the alleged sale consideration. Assessee s claim of having earned short term capital gain is genuine and needs to be allowed because the assessee has transacted through registered stock broker purchased/sold through recognised stock exchange and transactions have been routed through banking channel and lastly there is no finding/investigation by Revenue authorities which could prove that assessee was directly involved with the promoters/entry operators managing the price of Equity shares of alleged penny stock company. Grounds of appeal raised by the assessee.
The core legal question considered in this appeal is whether the addition made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]-treating the entire sale consideration from the sale of equity shares of an alleged penny stock company as income under section 68 of the Income Tax Act, 1961-is justified, or whether the short-term capital gains declared by the assessee from such sale should be accepted as genuine and exempt from such addition.
Closely related to this primary issue are subsidiary questions concerning the genuineness and mode of purchase and sale of shares, the applicability of section 68 or other provisions such as section 10(38) of the Act, the nature of transactions in penny stock shares, and the relevance of precedents dealing with similar facts. Another issue implicitly considered is the treatment of the addition either as unexplained cash credit under section 68 or as income from other sources, and the evidentiary burden on the Revenue to disprove the genuineness of transactions routed through recognized stock exchanges and banking channels. Regarding the principal issue of addition under section 68, the relevant legal framework involves the provisions of the Income Tax Act, 1961, particularly section 68 which deals with unexplained cash credits, and section 10(38) which exempts long-term capital gains arising from transfer of equity shares on which Securities Transaction Tax has been paid. Precedents cited by the CIT(A) included the decision of the Hon'ble Calcutta High Court in CIT v. Swati Bajaj, which upheld additions relating to transactions in penny stock companies, especially where such shares were not traded on recognized exchanges or were subject to manipulative practices. The CIT(A) also relied on SEBI's list of penny stock companies to support the addition. However, the Tribunal distinguished these precedents on the basis that the assessee's transactions were limited to short-term capital gains rather than claims for exemption under section 10(38), and that the shares were purchased and sold through recognized stock exchanges via registered brokers, with transactions routed through banking channels and dematerialized accounts. The Tribunal noted that the AO had accepted the assessee's claim of exemption under section 10(38) for other long-term capital gains, indicating recognition of the genuineness of the assessee's investments in equity shares generally. Key evidence included contract notes evidencing purchase of 16,000 shares in two tranches through registered brokers on recognized stock exchanges, Demat account statements confirming receipt of shares, and bank statements showing routing of funds through banking channels. The assessee also furnished a voluminous paper book of 711 pages to substantiate the genuineness of transactions. The Tribunal observed that there was no evidence from the Revenue to establish any direct connection between the assessee and the counterparty or promoters of the penny stock company, nor any proof of manipulation or sham transactions. It was also noted that at the time of transactions, SEBI had not imposed any restrictions on trading in shares of Blazon Marbles Limited. On the other hand, the Revenue relied on decisions such as ITO v. Splice Biotech Pvt. Ltd. and Abhishek Ashok Lohade, where additions were upheld due to offline preferential allotments and direct connections between buyers and sellers, as well as claims of exemption under section 10(38). The Tribunal found these decisions inapplicable due to factual differences: the assessee's purchases were through online recognized stock exchanges, and the issue did not concern exemption claims under section 10(38). The Tribunal also noted that the CIT(A) had not confirmed the addition under section 68 but had treated it as income from other sources, yet the Revenue failed to contest the source of purchase money or the banking channel evidence. Applying the law to the facts, the Tribunal concluded that the assessee's short-term capital gains were genuine, as the transactions were conducted through proper channels, and there was no material to suggest that the transactions were sham or fabricated. The burden to prove otherwise, resting on the Revenue under section 68, was not discharged. Competing arguments regarding the nature of penny stock transactions and the risk of manipulation were considered but found unsubstantiated in the present case. The Tribunal emphasized the absence of any direct link between the assessee and promoters or entry operators managing the stock price, which had been a significant factor in adverse decisions relied upon by the Revenue. Consequently, the Tribunal reversed the CIT(A)'s confirmation of addition and deleted the impugned addition, allowing the appeal. Significant holdings include the following legal reasoning preserved verbatim: "Considering these facts, we find that assessee's claim of having earned short term capital gain is genuine and needs to be allowed because the assessee has transacted through registered stock broker, purchased/sold through recognised stock exchange and transactions have been routed through banking channel and lastly there is no finding/investigation by Revenue authorities which could prove that assessee was directly involved with the promoters/entry operators managing the price of Equity shares of alleged penny stock company." The core principle established is that in cases involving alleged penny stock transactions, the mere fact that shares belong to such companies does not justify additions under section 68 or treating sale consideration as unexplained income, if the assessee can demonstrate that transactions were conducted through recognized stock exchanges, via registered brokers, with funds routed through banking channels, and there is no evidence of collusion or manipulation. The final determination is that the short-term capital gains declared by the assessee from sale of equity shares of Blazon Marbles Limited are genuine and cannot be subjected to addition under section 68 or treated as income from other sources without substantive evidence. The appeal is accordingly allowed, and the addition deleted.
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