Section 68 Addition on Penny Stock Trades Set Aside by ITAT Mumbai in Case of Same-Day Net Settlements

Background of the Dispute

In Hemant Devji Thakkar HUF Vs Assessing Officer (ITAT Mumbai), the Mumbai Bench of the Income Tax Appellate Tribunal examined whether the entire stated sale value of shares in a penny stock could be brought to tax as unexplained cash credit under Section 68 of the Income Tax Act 1961 for assessment year 2012-13.

The core controversy centred on an addition of Rs. 2,23,345 relating to trades in shares of Aarya Global Shares and Securities Ltd. (also referred to as Pee Jay International Ltd. and Kuvam International Fashions Ltd.). The Investigation Wing had classified this scrip as a penny stock allegedly used to provide accommodation entries in the form of capital gains or losses. Relying primarily on this background, the Assessing Officer treated the entire sale value of the assessee’s trades as unexplained under Section 68.

The Tribunal, however, concluded that the addition was unsustainable because:

  • The Assessing Officer had not identified what actual sum was credited to the assessee, and
  • The explanation that a substantial part of the trades were same-day speculative transactions settled only for net differences had not been properly examined or disproved.

Consequently, the ITAT directed deletion of the full addition of Rs. 2,23,345.

How the Assessment Was Reopened

Original Return

  • The assessee, a Hindu Undivided Family, filed its original return on 30.07.2012, declaring total income of Rs. 1,82,391.
  • The return disclosed income from:
    • House property,
    • Short term capital gains, and
    • Other sources,
      along with deductions under Chapter VI-A.

Information from Investigation Wing

Subsequently, the Assessing Officer received information by letter dated 22.10.2018 from the office of DDIT (Investigation), Unit-8(2), Mumbai, in respect of dealings in the scrip Aarya Global Shares and Securities Ltd., scrip code 531731. The communication described:

  • The company as a penny stock, and
  • Its alleged use as a platform for accommodation entries (artificial capital gains or losses).

On this basis, the Assessing Officer formed a view that the assessee had entered into suspicious trades in this scrip during financial year 2011-12, with a figure of Rs. 2,23,454 mentioned as sale value in the reopening reasons.

Reopening Under Section 147

  • After obtaining sanction under Section 151(1), a notice under Section 148 dated 29.03.2019 was issued.
  • The assessee responded by filing a return on 24.04.2019, offering the same total income of Rs. 1,82,391 as in the original return.

The reassessment proceedings then focused on the assessee’s transactions in Aarya Global Shares and Securities Ltd.

AO’s Approach: Treating Entire Sale Value as Unexplained Credit

Findings in the Assessment Order

In the order passed under Section 144 read with Section 147 dated 18.12.2019, the Assessing Officer:

  • Discussed the financials of Aarya Global Shares and Securities Ltd.,
  • Referred to trading volumes, price movements, and alleged SEBI-related observations, and
  • Narrated the generic modus operandi typically associated with penny stock accommodation entries.

On the basis of the material and the assessee’s submissions, the Assessing Officer recorded that:

  • The assessee had purchased 17,548 shares of the scrip during FY 2011-12 for Rs. 4,07,900, and
  • Sold 9,048 shares for Rs. 2,23,345 during the same year.

Despite these detailed background discussions, the substantive reasoning for the addition was largely that:

  • The scrip itself was flagged as a penny stock in investigations, and
  • The assessee had dealt in that scrip.

Accordingly, the Assessing Officer:

  • Treated the entire sale value of Rs. 2,23,345 as unexplained cash credit under Section 68,
  • Without segregating:
    • Same-day speculative trades, and
    • Delivery-based transactions,
  • And without specifically identifying any individual unexplained credit or recording that any purchase or sale entry was fictitious.

Total income was finally assessed at Rs. 4,05,740 (after rounding).

First Appeal Before CIT(A): Addition Confirmed

The assessee challenged this addition before the CIT(Appeals) by emphasizing the composition of the supposed sale figure and the manner in which the trades were settled.

Assessee’s Main Contentions Before CIT(A)

The assessee pointed out that the aggregate figure of Rs. 2,23,345 comprised two distinct segments:

  1. Same-Day Speculative Trades

    • Shares purchased and sold on the same day had:
      • Purchase value: Rs. 2,03,119
      • Sale value: Rs. 2,14,862
    • Result: Speculation profit of Rs. 11,743.
    • These deals were explained as speculative transactions settled through the broker, where only the net profit/loss was received or paid, not the entire gross sale value.

  2. Delivery-Based Transaction

    • A separate delivery-based trade in 500 shares:
      • Purchase: Rs. 12,174
      • Sale: Rs. 8,483
    • Result: Short term capital loss of Rs. 3,691.

The assessee contended that: