ITAT Mumbai Rejects Section 69A Addition on Alleged Penny Stock Gains in Case of Smt. Rekha Modi Vs ITO
Background and Context
The Income Tax Appellate Tribunal, Mumbai Bench, in the case of Smt. Rekha Modi Vs ITO (ITAT Mumbai), dealt with a set of appeals concerning alleged bogus gains from penny stock transactions. The core dispute related to additions made under Section 69A of the Income Tax Act 1961 on the footing that sale proceeds from certain listed shares represented unexplained money.
The Tribunal considered three appeals pertaining to Assessment Years (AYs) 2013-14, 2015-16 and 2016-17. Since the factual matrix and legal issues were almost identical for all three years, the Tribunal examined AY 2013-14 as the lead case and applied the same reasoning to the remaining years.
For AY 2013-14, the assessee had filed a return declaring income of ₹3,12,520, which was initially processed under Section 143(1). Subsequently, reassessment was initiated under Section 147 based on inputs from the Investigation Wing concerning alleged price manipulation in the shares of M/s ACI Infocom Ltd. and M/s Safal Herbs Ltd.
Basis of Reassessment and Additions by the AO
Information from Investigation Wing
The Assessing Officer (AO) reopened the assessment after receiving intelligence that certain scrips, including those of M/s ACI Infocom Ltd. and M/s Safal Herbs Ltd., were allegedly used as vehicles for generating artificial long-term capital gains or unexplained income through rigged prices and accommodation entries. The Investigation Wing’s findings indicated:
- Abnormal escalation in share prices over a short duration
- Alleged synchronized and circular trading
- Involvement of specific operators and entry providers
- Adverse findings from search proceedings on some persons connected with similar arrangements
- Certain remarks and observations by SEBI in relation to these scrips
Relying heavily on this broad material, the AO proceeded on the premise that the assessee’s share transactions in these companies were not genuine.
Additions Made Under Section 69A
The assessee had reported sale consideration from shares of both companies, routed through the stock exchange and a registered broker. The AO, however, treated the entire receipts as unexplained money:
- Sale consideration from shares of M/s ACI Infocom Ltd.: ₹19,83,364
- Sale consideration from shares of M/s Safal Herbs Ltd.: ₹17,61,408
Total amount of ₹37,44,772 was brought to tax as unexplained money under Section 69A, on the ground that the assessee had allegedly received this amount without proving a genuine source.
In addition, an amount of ₹5,240 was taxed under the head “Income from Other Sources”, linked to a TDS entry for which, according to the AO, corresponding income was not satisfactorily explained.
CIT(A)’s Confirmation of Reassessment and Additions
On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld:
- The initiation of reassessment proceedings under
Sections 147and148, and - The substantive additions made by the AO under
Section 69Aand under the head “Income from Other Sources.”
In endorsing the AO’s conclusions, the CIT(A) leaned on:
- The principle laid down in CIT v. Durga Prasad More, emphasizing that apparent transactions may be tested against human probabilities rather than accepted at face value
- General market behaviour in penny stock cases, where improbable price movements are often treated as indicators of accommodation entries
- Broad findings of the Investigation Wing about the two scrips in question
The CIT(A) effectively concluded that such large gains from allegedly rigged scrips could not be treated as genuine, even though the assessee had produced documentation.
Assessee’s Arguments Before the ITAT
Before the Tribunal, the assessee contested both the reopening and the additions on merits, but the primary focus was on the unsustainability of the Section 69A addition.
Evidence Produced by the Assessee
The assessee relied on a set of contemporaneous documents to substantiate the genuineness of the share dealings: