MP High Court Dismisses Revenue Appeal in Penny Stock Case: Section 68 Addition Deleted for Lack of Independent Inquiry
Background and Overview
The Madhya Pradesh High Court recently rendered a significant decision in the matter of PCIT Vs Aditya Agrawal, dismissing the Revenue's challenge against a concurrent finding in favour of the assessee concerning a penny stock addition made under Section 68 of the Income Tax Act, 1961. The case revolved around the assessment year 2016-17 and an addition of Rs. 2,20,137/- related to investment in shares of M/s. Safal Herbs Ltd., which the Assessing Officer had characterised as a penny stock transaction.
The ruling reinforces a growing body of jurisprudence establishing that the Income Tax Department cannot sustain additions under Section 68 solely on the basis of Investigation Wing reports, without conducting an independent, objective inquiry at the assessment stage.
Factual Matrix
Original Return and Reassessment
The assessee, an individual engaged in salary income, income from other sources, and commodity trading, originally filed his return of income electronically on 26.07.2016 for the assessment year 2016-17, declaring a total income of Rs. 5,98,850/-.
Subsequently, the Assessing Officer reopened the assessee's case by issuing a notice under Section 148 of the Income Tax Act, 1961. In response to the reopening, the assessee filed a fresh return on 22.02.2020, following which a notice under Section 143(2) of the Act was duly served.
Assessing Officer's Findings and Addition
After examining the available material, the Assessing Officer concluded that the assessee's investment in shares of M/s. Safal Herbs Ltd., through which the assessee had declared and claimed an exempt Long Term Capital Gain (LTCG) of Rs. 1,24,465/-, was not a genuine transaction. The Assessing Officer characterised the shares as a penny stock and treated the entire capital gain claim as fictitious.
By an order dated 27.09.2021, the Assessing Officer added back the total investment amount of Rs. 2,20,137/- to the assessee's total income under Section 68 of the Income Tax Act, 1961, and simultaneously initiated penalty proceedings under Section 271(1)(c) of the Act.
Journey Through Appellate Forums
National Faceless Appeal Centre (NFAC), Delhi
Aggrieved by the assessment order, the assessee preferred an appeal before the National Faceless Appeal Centre (NFAC), Delhi. Vide order dated 30.10.2024, the NFAC allowed the appeal and directed the Assessing Officer to delete the addition of Rs. 2,20,137/- made under Section 68, holding that the assessee had successfully established the genuineness of the impugned transaction with sufficient documentary support.
Income Tax Appellate Tribunal, Jabalpur
The Department, dissatisfied with the NFAC order, carried the matter in appeal before the Income Tax Appellate Tribunal (ITAT), Jabalpur. The ITAT dismissed the Department's appeal by order dated 30.09.2025 in ITA No. 200/JAB/2024, relying on coordinate bench decisions rendered under identical factual circumstances:
- The Coordinate Bench in Smt. Sudha Agrawal Vs. ITO, Ward-6(4), Jaipur — ITA No. 532/JP/2024, order dated 30.09.2024 — had quashed the notice issued under
Section 148of the Act on comparable facts. - The Division Bench in Sejal Jignesh Shah Vs. ITO, Mumbai — ITA No. 444/Mum/2023, order dated 20.01.2025 — had adopted a similar legal position.
Given the concurrent findings, the ITAT affirmed the NFAC's direction to delete the addition.