ITAT Mumbai Upholds LTCG Exemption on Alleged Penny Stock Transactions Absent Concrete Evidence

1. Background and Context

The batch of appeals before the Income Tax Appellate Tribunal, Mumbai Bench, arose from assessments framed on several assessees, with the lead matter being Yogesh P. Thakkar Vs DCIT for A.Y. 2014-15. All appeals involved a common controversy: whether Long-Term Capital Gains (LTCG) claimed as exempt under Section 10(38) of the Income Tax Act 1961 on the sale of certain listed shares—alleged by the Revenue to be “penny stock” arrangements—could be treated as bogus and taxed as unexplained cash credits under Section 68, with further addition under Section 69C towards alleged commission for accommodation entries.

With the consent of both sides, the appeal of Shri Yogesh Thakkar for A.Y. 2014-15 in ITA No. 1605/Mum/2021 was treated as the lead case, and the outcome was made applicable to connected appeals for subsequent assessment years and other assessees, as the underlying issues and factual pattern were substantially identical, differing only in figures and scrips.

2. Facts of the Lead Case

2.1 Assessee’s Profile and Returns

  • The assessee is an individual engaged as director/partner in certain entities and also involved in share trading and investment.
  • Original return for A.Y. 2014-15 was filed under Section 139(1) on 30/09/2014 declaring total income of Rs. 1,67,47,875/-.
  • A search under Section 132 was carried out on 09/04/2015, based on an allegation that the assessee had routed unaccounted income as exempt LTCG on listed shares.
  • In response to notice under Section 153A dated 08/08/2016, the assessee filed a return on 22/08/2016, declaring the same income as in the original return.

2.2 LTCG Claim and Share Transactions

The assessee reported LTCG of Rs. 8,10,79,859/- on the sale of shares of Radford Global Ltd. (“Radford”) and Blazon Marbles Ltd. (“Blazon”), claiming exemption under Section 10(38).

Purchase details:

  • Blazon – 97,000 shares (post-split figure) purchased on 26.05.2011 for Rs. 24,250/-.
  • Radford – 10,00,000 shares (post-split figure) acquired on 07.02.2012 for Rs. 30,00,000/-.

The actual mode of acquisition was:

  1. Radford Global Ltd.

    • 2,00,000 equity shares with face value Rs. 10 and premium Rs. 5 per share were allotted on preferential basis for Rs. 30,00,000/-.
    • Subsequently, the shares were split from face value Rs. 10 to Rs. 2, resulting in 10,00,000 shares credited to the assessee’s demat account.
    • These 10,00,000 shares were sold on the stock exchange between May 2013 and July 2013.

  2. Blazon Marbles Ltd.

    • 50,000 equity shares with face value Rs. 10 were purchased off-market on 26/05/2011 for Rs. 62,500/-.
    • After split (Rs. 10 to Rs. 2), 2,50,000 shares were credited to the demat account.
    • During F.Y. 2013-14, 97,000 shares were sold; 1,53,000 shares remained in demat as on 31/03/2014.

All purchase considerations were paid through account payee cheques from disclosed sources and duly recorded in the books for the relevant years.

2.3 Documentary Evidence Produced

To support the LTCG claim, the assessee furnished extensive documentation, including:

  • Bank statements evidencing payment for share purchases and receipt of sale proceeds.
  • Books of account showing investment entries at the time of purchase.
  • Demat statements for the relevant period indicating credit, holding and debit of the shares in question.
  • Contract notes and bills issued by registered stock brokers for sale transactions.
  • Details of Securities Transaction Tax (STT) paid.
  • Computation and working of LTCG claimed as exempt.

None of these documents were found to be fabricated or non-genuine by the Assessing Officer (AO).

3. Assessing Officer’s Approach and Additions

3.1 Show Cause and Rejection of LTCG

The AO issued a detailed show cause notice alleging that:

  • The scrips Radford Global Ltd. and Blazon Marbles Ltd. were penny stocks.
  • The assessee’s LTCG was merely a book entry arranged through operators who provided accommodation entries.
  • Share prices had increased disproportionately compared to the financials of the companies.

The AO relied substantially on:

  • Investigation reports of the Kolkata Investigation Wing.
  • An ad interim ex parte order of SEBI dated 19/12/2014 in the case of Radford Global Ltd., which had temporarily restrained various entities, including the assessee, from accessing the securities market.

Despite detailed rebuttal and supporting evidence from the assessee, the AO:

  • Treated the entire sale proceeds of Rs. 8,41,04,109/- as unexplained cash credits under Section 68.
  • Denied the exemption under Section 10(38).

3.2 Commission Addition under Section 69C

Taking the view that the LTCG was a colourable device for converting unaccounted cash into exempt income, the AO further:

  • Presumed that the assessee must have paid commission to entry operators.
  • Based on statements of certain accommodation entry providers in other matters that commission for LTCG entries typically ranged from 4% to 6%, the AO adopted 6%.
  • Added Rs. 50,46,247/- (6% of Rs. 8,41,04,109/-) as unexplained expenditure under Section 69C.

The AO heavily emphasized: