ITAT Jodhpur Upholds Section 10(38) LTCG Exemption and Deletes Section 69A Addition in Alleged Penny Stock Transaction

1. Background and Context

The Jodhpur Bench of the Income Tax Appellate Tribunal (ITAT) in ITO Vs Kaushal Chand Daga (HUF) examined whether alleged gains from shares of M/s ACI Infocom Ltd.—suspected by the Investigation Wing to be a penny stock—could be treated as bogus and taxed under Section 69A read with Section 115BBE, by denying exemption under Section 10(38) of the Income Tax Act 1961.

The focal issues were:

  • Whether the long-term capital gain (LTCG) of Rs.13,60,338/- claimed as exempt under Section 10(38) was genuine; and
  • Whether the entire gross sale consideration of Rs.16,21,960/- could be treated as unexplained money under Section 69A.

The Tribunal ultimately affirmed the order of the CIT(A) (NFAC, Delhi) deleting the addition and allowing the exemption, reiterating that suspicion about penny stock transactions cannot replace concrete, assessee-specific evidence.

2. Facts of the Case

2.1 Return of Income and LTCG Claim

  • The assessee is a Hindu Undivided Family (HUF).
  • Return of income for A.Y. 2013-14 was filed declaring total income of Rs.5,34,420/-.
  • The assessee disclosed long-term capital gain of Rs.13,60,338/- arising from the sale of shares of M/s ACI Infocom Ltd.
  • Exemption was claimed under Section 10(38) in respect of this LTCG.

2.2 Share Transactions in Focus

During reassessment, the Assessing Officer (AO) recorded the following:

  • Purchase of 10,000 shares of M/s ACI Infocom Ltd. on 25.08.2011 for Rs.2,58,739/-.
  • Sale of these shares during F.Y. 2012-13 for an aggregate consideration of Rs.16,21,960/-.
  • Resulting LTCG of Rs.13,60,338/-, claimed as exempt under Section 10(38).

2.3 Trigger for Reassessment

  • Based on information from DDIT (Investigation), Unit-8(2), Mumbai, the AO believed that M/s ACI Infocom Ltd. was a penny stock used for providing accommodation entries.
  • The AO treated the LTCG as a colourable device to launder unaccounted income as exempt capital gains.
  • Notice under Section 148 was issued on 18.03.2020, initiating reassessment under Section 147.

3. Stand of the Assessee Before the AO

3.1 Evidence Produced

The assessee explained and documented that:

  • Shares were purchased and sold through a registered stockbroker on a recognised stock exchange.
  • Purchase consideration was paid through banking channels.
  • Shares were credited to and later debited from the demat account of the assessee.
  • Sale proceeds were also received through banking channels.
  • Securities Transaction Tax (STT) was duly paid on the transactions.

To substantiate genuineness, the assessee furnished:

  • Bank statements;
  • Demat account statements;
  • Contract notes issued by the broker;
  • Particulars of STT paid.

3.2 AO’s Rejection of the Explanation

Despite the above, the AO:

  • Relied heavily on the Investigation Wing report outlining the alleged common modus operandi in penny stock dealings;
  • Referred to sharp price fluctuations in the shares of M/s ACI Infocom Ltd.;
  • Emphasised the weak financial fundamentals of the company vis-à-vis the price rise; and
  • Concluded that the assessee had entered into a prearranged arrangement to convert unaccounted income into LTCG.

Instead of merely disallowing the LTCG:

  • The AO treated the entire gross sale consideration of Rs.16,21,960/- as unexplained money under Section 69A read with Section 115BBE.
  • Total income was assessed at Rs.21,56,380/- vide order dated 21.09.2021 passed under Section 147 read with Section 144B.

4. Proceedings Before the CIT(A)

4.1 Assessee’s Contentions

Before the CIT(A), the assessee reiterated:

  • All transactions were duly supported by contemporaneous documents and routed through regular, regulated channels (banking system and recognised stock exchange).
  • Neither the bank entries, nor the demat transactions, nor the contract notes nor proof of STT were found to be fabricated or incorrect.
  • No statement of any entry operator, no cash trail, and no other documentary material was brought on record linking the assessee to any price manipulation or accommodation entry.