Penny Stock Loss Disallowance Remanded for Fresh Examination: ITAT Delhi in Vishwas Marketing Services Case
Overview of the Dispute
The Income Tax Appellate Tribunal (ITAT), Delhi Bench, recently adjudicated upon two appeals preferred by the assessee, Vishwas Marketing Services Pvt. Ltd., for Assessment Years 2014-15 and 2015-16. Both appeals revolved around the disallowance of short-term capital losses arising from share transactions in SRK Industries Ltd. and the denial of exemption claimed under Section 10(38) of the Income Tax Act, 1961. Given the overlapping factual and legal issues across both years, the Tribunal consolidated the hearings and designated AY 2014-15 as the lead case.
Background and Return Filing
For AY 2014-15, the assessee had filed its income tax return declaring a net loss of Rs. 21,119/-. The case was subsequently taken up for scrutiny assessment, during which the Assessing Officer noticed that the assessee had reported dividend income and had engaged in share market transactions during the relevant period.
The assessee had acquired shares of SRK Industries Ltd. in December 2013 and subsequently offloaded them in March 2014. These transactions resulted in a short-term capital loss of Rs. 1,71,72,155/-, which the assessee sought to set off in the return of income.
Assessing Officer's Findings and Additions
Inquiry Under Section 133(6)
To verify the legitimacy of the share transactions, the Assessing Officer issued notice under Section 133(6) of the Income Tax Act, 1961 to SRK Industries Ltd., seeking comprehensive information pertaining to share dealings. The Assessing Officer found the details furnished by the company to be incomplete and consequently shifted his reliance to investigation reports emanating from the Kolkata Investigation Wing.
Reliance on Investigation Reports
The Kolkata Investigation Wing report alleged that the scrip of SRK Industries Ltd. was being used as a vehicle for accommodation entries and fabricated long-term capital gains. The Assessing Officer additionally referred to statements recorded from several individuals, including:
- Shri Bidyoot Sarkar
- Shri Sanjay Vora
- Shri Jai Kishan
- Shri Anil Kedia
Treatment as Penny Stock
Armed with the investigation material and relying on the "human probability test" along with judicial precedents such as Mac Dowell & Company and Sumati Dayal, the Assessing Officer concluded that SRK Industries Ltd. was a classic penny stock whose price was artificially manipulated. On this basis, the loss claimed by the assessee was disallowed in its entirety.