ITAT Mumbai Sets Aside Section 68 Addition in Penny Stock Transaction – HUF's LTCG Claim Upheld on Basis of Documentary Proof
Overview of the Tribunal Proceedings
In the matter of Dilip Bhanverlal Dangi (HUF) Vs ITO, the Income Tax Appellate Tribunal, Mumbai Bench delivered a significant ruling pertaining to the treatment of long-term capital gains derived from trading in shares categorized as penny stocks. The Tribunal's decision underscores the fundamental principle that documentary evidence duly supported by banking channels and recognized stock exchange mechanisms cannot be disregarded merely on the foundation of suspicion or general investigation reports.
Factual Matrix of the Case
The assessee, constituted as a Hindu Undivided Family (HUF), had filed its return of income for Assessment Year 2014-15, declaring a total income of ₹1,72,590. Within this return, the assessee claimed an exemption under Section 10(38) of the Income Tax Act, 1961, amounting to ₹19,41,621, representing long-term capital gains arising from the disposal of equity shares.
Details of Share Transactions
The chronology of the share transactions undertaken by the assessee HUF is as follows:
Initial Purchase: The assessee acquired shares of Rosette Resorts Ltd. on 19th November 2011 at a price of ₹10 per share, making a total investment of ₹50,000.
Corporate Actions: On 2nd February 2013, the company effected a subdivision of its shares, splitting the face value from ₹10 per share to ₹2 per share.
Name Changes: The company subsequently underwent name changes, first from Rosette Resorts Ltd. to P.S. Global Ltd., and thereafter to Radford Global Ltd.
Sale Transaction: The assessee disposed of the shares of Radford Global Ltd. during the assessment year under consideration, realizing total sale proceeds of ₹19,97,200, which resulted in long-term capital gains of ₹19,41,621.
The holding period between purchase and sale exceeded one year, spanning approximately eighteen months, thereby qualifying the gains as long-term capital gains eligible for exemption under the provisions of Section 10(38) of the Income Tax Act, 1961.
Proceedings Before the Assessing Officer
The case was selected for complete scrutiny assessment. Notices under Section 143(2) read with Section 142(1) of the Income Tax Act, 1961 were duly issued to the assessee, requiring submission of relevant documentation and details pertaining to the capital gains claim.
Assessing Officer's Adverse Findings
Upon examination of the facts and circumstances, the Assessing Officer formed the opinion that the transaction was suspicious in nature. The AO's adverse conclusions were primarily based on:
- Information received from the Investigation Wing of the Income Tax Department
- Reports and findings issued by the Securities and Exchange Board of India (SEBI)
- Classification of Radford Global Ltd. as a penny stock
- Allegations of price manipulation and accommodation entry schemes
On the basis of these considerations, the Assessing Officer rejected the exemption claimed under Section 10(38) in its entirety. Furthermore, the AO proceeded to treat the entire sale consideration of ₹19,97,200 as unexplained cash credit liable to be added under Section 68 of the Income Tax Act, 1961. The AO's conclusion was that the purchase and sale transactions were not genuine and formed part of an accommodation entry arrangement designed to convert unaccounted money into tax-exempt long-term capital gains.
First Appellate Proceedings
Aggrieved by the assessment order passed by the Assessing Officer, the assessee HUF preferred an appeal before the Commissioner of Income Tax (Appeals). The assessee placed comprehensive submissions before the first appellate authority, including:
- Contract notes evidencing purchase and sale transactions
- Demat account statements reflecting holding of shares
- Bank statements demonstrating routing of payments through banking channels
- Confirmations from the registered stock broker
- Details of transactions executed through the recognized stock exchange platform of BSE
CIT(A)'s Decision
Despite the voluminous documentary evidence placed on record by the assessee, the Commissioner of Income Tax (Appeals) upheld the addition made by the Assessing Officer. The CIT(A) concurred with the reasoning adopted by the AO and sustained the treatment of the entire sale proceeds as unexplained cash credit under Section 68 of the Income Tax Act, 1961.
Appeal Before the Income Tax Appellate Tribunal
Being aggrieved by the adverse order passed by the Commissioner of Income Tax (Appeals) dated 13th August 2025, the assessee HUF filed an appeal before the Income Tax Appellate Tribunal, Mumbai Bench.
Assessee's Contentions
The Authorized Representative appearing on behalf of the assessee advanced the following substantive arguments:
1. Genuine Stock Exchange Transactions