ITAT Mumbai Accepts LTCG on Pine Animation Shares as Genuine, Rejects Penny Stock Allegation

Background of the Dispute

In Jay Hansraj Chheda Vs ITO (ITAT Mumbai), both the assessee and the Revenue filed cross appeals against an order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre for A.Y. 2015-16. The core controversy revolved around:

  • Addition under Section 68 of the Income Tax Act 1961 on alleged bogus long-term capital gain (LTCG) from shares of M/s. Pine Animation Ltd., treated by the Department as a penny stock; and
  • Addition under Section 69C towards an estimated commission payment allegedly incurred to arrange such bogus gains.

The assessee, an individual, had filed his return of income on 06.10.2015, declaring a total income of Rs.3,92,540/-, comprising salary and business income.

During scrutiny, the Assessing Officer (AO) noticed that the assessee had reported a substantial LTCG of Rs.3,93,92,775/- from sale of shares, which was claimed as exempt under Section 10(38).

Based on investigation material and penny stock allegations, the AO framed the assessment under Section 143(3) and computed total income at Rs.4,10,07,180/- by:

  • Treating the full sale proceeds of shares of M/s. Pine Animation Ltd. amounting to Rs.3,98,18,275/- as unexplained cash credit under Section 68; and
  • Adding Rs.7,96,365/- under Section 69C as alleged 2% commission said to have been paid to accommodation entry operators.

The CIT(A) sustained the Section 68 addition on LTCG but deleted the Section 69C commission addition, leading to cross appeals before the ITAT Mumbai.

Transaction Details: Investment and Exit in Pine Animation

Purchase of Shares

The assessee had acquired shares of M/s. Pine Animation Ltd. through preferential allotment as under:

  • Date of purchase: 15.03.2013
  • Number of equity shares: 1,50,000
  • Face value at the time: Rs.10 per share
  • Consideration paid: Rs.15,00,000/-

These shares were allotted by the company and later came to be listed on the Bombay Stock Exchange (BSE) after necessary regulatory approvals.

Share Split and Subsequent Holding

The company later split its shares as follows:

  • Date of split: 20.05.2013
  • Split ratio: 1:10 (each share of face value Rs.10 became 10 shares of face value Rs.1)

Post-split, the assessee held:

  • 15,00,000 shares of face value Rs.1 each.

Sale and Claim of Exempt LTCG

Between 07.04.2014 and 10.07.2014, the assessee sold a portion of these shares through the stock exchange:

  • Total sale consideration: Rs.3,98,18,275/-
  • LTCG claimed: Rs.3,93,92,775/-
  • Exemption claimed under: Section 10(38)

The assessee furnished the following documentation to support the genuineness of the transactions:

  • Contract notes for purchase/sale routed through registered stock brokers
  • Demat account statements reflecting credit and debit of the shares
  • Bank statements showing payment for purchase and receipt of sale proceeds through normal banking channels

The assessee asserted that the primary onus regarding identity, genuineness, and source stood fully discharged.

Findings of the Assessing Officer

The AO did not dispute the existence of documentary evidence per se but rejected the LTCG claim on qualitative grounds. The assessment heavily drew on:

  1. Investigation Reports from the Directorate of Investigation, Kolkata, linked with search under Section 132 in the case of Anuj Agarwal and group entities, including M/s. Korp Securities Limited, alleged to control several “paper” companies;
  2. SEBI orders relating to M/s. Pine Animation Ltd. and its treatment as a penny stock; and
  3. Statements of alleged entry operators, brokers and intermediary entities, said to have facilitated bogus LTCG and accommodation entries.

AO’s Core Reasoning

The AO concluded that: