ITAT Mumbai Confirms Genuine LTCG in Penny Stock Case: Detailed Analysis of ITO Vs Sunita Chaudhary

1. Background and Context

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT), “G” Bench, in the case of ITO Vs Sunita Chaudhary, has once again addressed the contentious issue of alleged bogus Long Term Capital Gain (LTCG) arising from so-called penny stock transactions.

For Assessment Year (AY) 2014-15, the Revenue challenged the relief granted by the CIT(A) to the assessee in respect of:

• Addition of ₹2,92,12,400 treated as bogus LTCG under Section 68, and
• Addition of ₹78,931 treated as alleged commission under Section 69C.

The Tribunal ultimately dismissed the Revenue’s appeal, reaffirming that the LTCG from sale of shares of First Financial Services Ltd. was genuine, and that there was no material to justify characterization of the transaction as part of an accommodation entry racket.

A crucial aspect of the decision is the Tribunal’s reliance on:

• The binding precedent in the assessee’s own case for AY 2013-14, involving the same scrip and identical factual matrix, and
• The SEBI investigation and orders, including revocation of earlier restraints and the absence of any adverse finding against the assessee even in later adjudication proceedings.

2. Revenue’s Grounds of Appeal: Core Controversy

The Revenue raised multiple grounds (12 in total), broadly revolving around the following themes:

1. Challenge to reliance on ITAT order for AY 2013-14

   • Revenue argued that the CIT(A) wrongly followed the ITAT decision in assessee’s own case for AY 2013-14, especially since that order had not been accepted and an appeal under Section 260A had been filed before the Hon’ble High Court.

2. Dispute over deletion of LTCG addition under Section 68

   • The Assessing Officer (AO) had treated ₹2,92,12,400 as unexplained income, alleging that the LTCG from sale of M/s. First Financial Services Ltd. shares was a bogus entry generated through a penny stock route.

3. Dispute over deletion of commission addition under Section 69C

   • An alleged commission of ₹78,931, computed at 0.25% as supposed payment to “entry providers” or brokers, was added as unexplained expenditure.

4. Reliance on investigation reports on penny stocks

   • Revenue contended that the AO had acted based on credible material from the office of DGIT (Investigation), Mumbai, which had identified a list of penny stock scripts, including First Financial Services Ltd. (Scrip Code – 51136), used for generating artificial LTCG/STCL.

5. Alleged pre-arranged and non-genuine nature of transactions

   • According to the Revenue, the assessee’s dealings in the scrip of First Financial Services Ltd. were not genuine investments but were pre-planned, designed solely to convert unaccounted money into exempt LTCG.

6. Low fundamentals and alleged price rigging of the company

   • Revenue also claimed that the company’s net worth and business activities were negligible, and share prices were artificially rigged by exit operators to benefit beneficiaries of bogus LTCG.

7. SEBI proceedings as basis for suspicion

   • The grounds highlighted that SEBI had investigated abnormal price movement in the scrip and had, at one stage, found violations of the SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956, FUTP Regulations, and SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997, resulting in suspension of trading between 15.05.2012 to 31.03.2014.

8. Reference to SEBI adjudication order dated 30.09.2022

   • Revenue relied heavily on SEBI’s later adjudication order dated 30.09.2022, wherein M/s. First Financial Services Ltd. and certain brokers/entities were held to have engaged in price manipulation, and asserted that this validated the DGIT (Investigation) findings that led to reopening under Section 147.

9. Invocation of “human probabilities” doctrine

   • Revenue alleged that the CIT(A) ignored binding principles from Durga Prasad More (1971) 82 ITR 540 (SC) and Sumati Dayal (1995) 214 ITR 801 (SC), wherein courts are required to test evidence against human probabilities and surrounding circumstances.

10. Reliance on Calcutta High Court ruling in penny stock matters

    • Reference was made to Pr.CIT Vs. Swati Bajaj (I.A. No. GA/2/2022 in ITAT No. 6 of 2022 dated 14.06.2022) to contend that onus lies on the assessee to prove that such steep price rise is not manipulated.

The Revenue, therefore, urged that the CIT(A) had wrongly discarded the AO’s extensive analysis and investigation-based conclusions.

3. Factual Matrix: Investments and Transactions in Question

3.1 Profile of the Assessee