ITAT Mumbai cancels Section 68 & 69C additions on alleged bogus LTCG in Pine Animation Ltd. shares

Background of the dispute

The Revenue’s appeal before the ITAT Mumbai arose from an order dated 15.05.2023 passed by the CIT(A), NFAC, Delhi for AY 2015–16. The central controversy concerned whether Long Term Capital Gain (LTCG) declared by the assessee on sale of shares of Pine Animation Ltd. (treated by the Department as a penny stock) was genuine, and whether the resultant exemption under Section 10(38) was rightly claimed.

The Assessing Officer (AO) had:

  • Treated the entire sale consideration from shares of Pine Animation Ltd. as unexplained cash credit under Section 68, and
  • Further estimated a commission expenditure under Section 69C on the assumption that such bogus gains could only be arranged through payment of commission.

The CIT(A) eliminated both additions. The Revenue carried the matter to the Tribunal, but the ITAT upheld the relief granted to the assessee.

Facts relating to the assessee’s share transactions

Return filing and reopening

  • The assessee filed her original income tax return declaring NIL income, which was processed under Section 143(1) of the Income Tax Act 1961.
  • Subsequently, based on information from the Investigation Wing, Kolkata, the AO reopened the assessment by issuing notice under Section 148.

Allegations by Investigation Wing

The Investigation Wing, Kolkata had prepared a general report on alleged manipulation in small-cap and penny stock scrips, stating that:

  • Certain operators and brokers were allegedly rigging prices of penny stocks,
  • Artificial LTCG/losses were being generated to facilitate accommodation entries.

In the assessee’s case, the Investigation Wing information indicated:

  • Sale of shares of Pine Animation Ltd. for a total of Rs. 4,39,75,148/-, and
  • Declaration of LTCG amounting to Rs. 4,37,82,238/-, claimed as exempt under Section 10(38).

Chronology of purchase and sale

The material on record, accepted as such by the AO, showed:

  1. The assessee had purchased 50,000 shares of Pine Animation Ltd. on 09.01.2013 for Rs. 1.50 lakhs.
  2. The company later carried out a share split, as a result of which the assessee’s holding increased to 5,00,000 shares.
  3. These 5,00,000 shares were sold through a recognized stock exchange between 05.06.2014 and 15.09.2014 for an aggregate sale consideration of Rs. 4,39,75,148/-.
  4. Since the shares were held for more than twelve months, the assessee treated the gain of Rs. 4,37,82,238/- as LTCG and claimed exemption under Section 10(38).

AO’s reasoning and additions

Reliance on Investigation Wing report and penny stock theory

During reassessment, the AO relied extensively on the generic Kolkata Investigation Wing report, and on related material, to conclude that the assessee’s LTCG was bogus. The AO observed:

  • The financial statements of Pine Animation Ltd. did not justify the extraordinary appreciation in share price.
  • The company’s profits were meagre, inconsistent with the market capitalization implied by the share price.
  • The price movement charts showed sharp and patterned fluctuations perceived as indicative of price manipulation.
  • Certain identified parties (classified as “Exit Providers”) had been repeatedly purchasing the shares, allegedly in a concerted manner to facilitate accommodation entries.
  • Statements recorded from some brokers and exit providers in other matters allegedly showed a broader scheme of arranging bogus LTCG through penny stocks.

Though no direct involvement of the assessee with these specific persons was established, the AO extended the suspicion to the assessee’s case solely because Pine Animation Ltd. figured in the general penny stock investigation.

Examination of assessee and her husband

  • The assessee appeared in response to summons under Section 131 and her statement was recorded. She stated that investment decisions in shares were made based on the advice of her husband, Shri Narpat Kumar Chopra, a Chartered Accountant.
  • The AO also recorded the statement of Shri Narpat Kumar Chopra.
  • While no incriminating material or contradiction emerged from either statement, the AO nonetheless rejected the assessee’s explanation, giving overriding weight to the Kolkata Investigation Wing report.

Denial of cross-examination and reliance on human probabilities

The assessee specifically requested an opportunity to cross-examine:

  • The brokers, and
  • The alleged exit providers

whose statements had been relied upon in the Investigation Wing report and referenced by the AO.

The AO declined this request on the grounds that:

  • Copies of the statements had already been provided, and
  • The Indian Evidence Act does not strictly govern income-tax proceedings.

The AO invoked the “test of human probabilities”, heavily relying on the Supreme Court judgment in Sumati Dayal vs. CIT (214 ITR 801), and held that:

  • The quantum of LTCG claimed was beyond what would ordinarily occur in normal market conditions,
  • The pattern was consistent with a “colourable device” to convert unaccounted money into tax-exempt LTCG.

Computation of additions

On this premise, the AO:

  1. Rejected the assessee’s claim for exemption under Section 10(38), and
  2. Treated the entire sale consideration of Rs. 4,39,75,148/- as unexplained cash credit under Section 68.
  3. Further, the AO estimated commission expenses at 5% of the sale value, i.e. Rs. 21,98,757/-, alleging that this amount represented unexplained expenditure incurred to obtain bogus LTCG. This was added under Section 69C.