ITAT: Unreasonable Rise in Price of Shares of ‘Penny Stock Companies’ Must be Proved Genuine to Claim Exemption under Income Tax Act

ITAT: Unreasonable Rise in Price of Shares of ‘Penny Stock Companies’ Must be Proved Genuine to Claim Exemption under Income Tax Act

The Income Tax Appellate Tribunal (ITAT), by its two-member bench comprising of Astha Chandra (Judicial Member) and Dr. BRR (Accountant Member) has observed that the onus is on assessee to lawfully prove the huge long-term capital gain claims to be genuine. If there is information and data available about an unreasonable rise in the price of shares of penny stock companies over a short period of time, the genuineness of such a steep rise in the prices of shares needs to be established, and the onus is on the assessee to do so.

In the present case, the appellant/assessee is an individual and derives income from salary, other sources, and capital gain, which she claimed was exempt under Section 10(38) of the Income Tax Act, 1961. For AY 2015-16, she e-filed her return declaring income, which was processed under Section 143(1).

Her case was selected for scrutiny through CASS for the reason of ‘suspicious sale transaction in shares and exempt long-term capital gain shown in return (penny stock tab in ITS).’

Statutory notices were issued and served. In response, the details called for were furnished. The Assessing Officer (AO) found that the assessee earned a long-term capital gain of Rs. 1,17,14,346 on the sale of shares of M/s. HPC Biosciences Limited, which the assessee claimed was exempt under Section 10(38).

The AO issued a show-cause notice. The SCN stated that M/s. HPC Biosciences Limited has been identified as a BSE-listed stock that has been used to generate bogus long-term capital gains. The exemption under Section 10(38) of the Act has been claimed on the capital gain against the sale of shares of M/s. HPC Biosciences Limited.

The assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT (A)] challenging the additions. The CIT (A) held that only the form of the transaction exists in the assessee’s case by creating the necessary documents, but the financial results of the company do not justify such a steep escalation in the price of its shares, and as such, there is no substance in the transaction undertaken by the assessee. The CIT (A) dismissed the appeal of the assessee and confirmed the additions made by the AO.

It was in this backdrop that the ITAT considered the assessee’s claim of earning the impugned long term capital gain and exemption thereof under section 10(38) of Income Tax Act, 1961 (the Act).

By noting the facts of the case, the ITAT opined that the assessee had utterly failed to discharge successfully the onus which lay upon the assessee to prove the genuineness of the transaction.

“Merely because the transaction is through account payee cheque alone which is the strongest plea of the assessee cannot convert a non-genuine transaction into a genuine transaction,” the bench added.

Therefore, the bench observed that the assessee cannot escape from the burden cast upon him, and unfortunately, the burden is heavy as the facts establish that the shares that were traded by the assessee had a phenomenal and fanciful rise in a short span of time, and more importantly, after a period of 17 to 22 months, there has been a steep fall, which has led to huge claims of short-term capital loss. Therefore, unless and until the assessee discharges such a burden of proof, the addition made by the AO cannot be faulted.

Accordingly, the ITAT held that the assessee had failed to discharge the onus cast upon her under Section 68 and rejected the exemption under Section 10(38) on the long-term capital gain.