Bogus LTCG Claim on Penny Stock Dismissed: ITAT Ahmedabad Upholds Addition in Kunal Arvindbhai Patel Vs ITO

Overview of the Case

The Income Tax Appellate Tribunal (ITAT), Ahmedabad, recently pronounced its judgment in Kunal Arvindbhai Patel Vs ITO, dismissing the assessee's appeal and affirming the Assessing Officer's decision to treat the claimed exempt Long-Term Capital Gains (LTCG) as undisclosed income. The case revolves around the alleged bogus LTCG claimed by the assessee on sale of shares of M/s. Kushal Tradelink Ltd. for Assessment Year 2018-19, and raises significant questions around penny stock transactions, reassessment proceedings, and the genuineness of capital gains claims.

Material Background and Facts

The assessee, an individual, originally filed his return of income on 11.09.2018, declaring a total income of Rs. 64,28,580/-. Within the same return, he also disclosed exempt income of Rs. 1,67,46,187/- under Section 10(38) of the Income Tax Act, 1961, characterizing it as Long-Term Capital Gains (LTCG) arising from the sale of shares of M/s. Kushal Tradelink Ltd.

The assessee's case was subsequently reopened under Section 147 read with Section 148 of the Income Tax Act, 1961, and a notice under Section 148 was formally issued on 31.03.2022. In response, the assessee submitted a fresh return of income on 13.04.2022. Notices under Section 143(2) and Section 142(1) of the Income Tax Act, 1961 were thereafter issued by the Assessing Officer (AO).

Upon examination, the AO concluded that the LTCG claim was not genuine and made an addition of Rs. 1,67,46,187/- under Section 69A read with Section 115BBE of the Income Tax Act, 1961, treating the entire sale consideration as undisclosed income of the assessee.

Procedural Journey

  • The assessee filed an appeal before the CIT(A), National Faceless Appeal Centre (NFAC), Delhi, which was dismissed vide order dated 17.03.2025.
  • Aggrieved by the CIT(A)'s order, the assessee approached ITAT Ahmedabad, raising multiple grounds of appeal.

Grounds of Appeal Raised by the Assessee

The assessee raised the following key grounds before the Tribunal:

  1. Validity of reassessment proceedings — It was contended that the reassessment was based solely on information received from the Investigation Wing without any independent application of mind by the AO, amounting to "borrowed satisfaction" with no live link between the information and alleged income escapement.

  2. Applicability of Section 153C over Section 147— The assessee argued that since material was allegedly found during search operations on the premises of the Kushal Group, the proper course of action ought to have been proceedings under Section 153C, which overrides Section 147 in such situations.