Case summary, Income Tax

Transactions in Penny Stocks: Applicability of Section 68/ Section 69

Case: Shri Sanjay Jain vs. DCIT, Cc-1, Chandigarh ITAT

Outcome: Assessee


  • The Assessee was an individual having salary income from M/s Royal Lifestyle Jewellers Pvt. Ltd. in the capacity of a director. The Assessee during the year earned long term capital gains from the sale of shares of M/s Presha Mettallurigical Ltd., company, amounting to Rs 26.68 lakhs and the same was claimed as exempt under section 10(38) of the Act in the return of income filed on 24.06.2013.
  • However, on 11.02.2016, a search action was carried out at the premises of Assessee and the Assessee was told that the share in which Assessee had traded was a penny stock and as per a report of Investigation Wing of Kolkata, price of the shares had been rigged manually to give bogus Long Term Capital Gains to the shareholders. The Assessee, under the above circumstances, agreed to surrender the Long Term Capital Gains claimed. The surrender was made with a condition that no penal action would be taken and right to contest the taxability of the surrendered income in view of any new development in the matter was reserved.
  • Though the Assessee agreed for taxation the surrendered income in the return of income, however, the Assessee during the assessment proceedings claimed that the said additional income was not taxable. The Assessee stated that during the search proceedings no incriminating evidence was found to show that the claim made by the assessee was not correct. Therefore, the assessee contested the claim as genuine during the assessment proceedings under section 153A of the Act.
  • However, the Assessing Officer relying upon the report of the Investigation Wing, Koltaka held that the patterns of investment of the Assessee in the shares of M/s Kappac Pharma Ltd and M/s Presha Metallurgical Ltd. resemble the character of the penny stock done by the bogus companies based at Kolkata. He, accordingly, made the additions under section 68 of the Act.

Key Points

  • The Tribunal placed reliance on various decisions, wherein it was concluded that if no incriminating material was found during the search action, the addition in the case of already concluded assessment cannot be made while framing assessment under section 153A of the Act.
  • In the present facts of the case, no incriminating material was found during the course of search action at the premises of the Assessee. What was found was the information/documents relating to the share transactions by the Assessee? The Assessee had already declared Long Term Capital Gains in respect of the share transactions of M/s Kappac Pharma Ltd and M/s Presha Metallurgical Ltd. The Assessee had also shown/ returned capital gains earned from the share transactions.
  • Further, the information discovered by the search party was already furnished by the Assessee in the return of income, which was processed under section 143(3) of the Act. The time period for issuing notice under section 143(2) had already expired and the return filed by the Assessee had attained finality.
  • The Assessing Officer relied upon the report of the Investigation Wing of Kolkata and the addition was made on the basis of the preponderance of probabilities. No incriminating documents directly reflecting the entries of the bogus share transactions were either found during search action or otherwise during the post search assessment proceedings.
  • So far as the reliance of the Assessing Officer on the statement made by the Assessee during the search action under section 132(4) of the Act was concerned, it was concluded by various Courts of law that such a statement recorded under section 132(4) of the Act on a stand-alone basis without reference to any other incriminating material found during search operation will not have evidentiary value and the same cannot be made the sole basis for making the addition into the income of the Assessee.
  • Therefore, the additions made under section 68 were to be deleted by the Assessing Officer.

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