LI Network
Published on: January 2, 2024 at 14:57 IST
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ruled that the taxpayer, acting as an unsuspecting investor in a ‘penny stock’ to gain quick profit, cannot be implicated in any dubious or pre-arranged transactions related to price manipulation or dealings with exit providers, absolving them of any connection to such schemes even if the stock lacked fundamental backing or financial performance.
The panel, comprising Narendra Kumar Choudhry (Judicial Member) and S. Rifaur Rahman (Accountant Member), noted that while the penny stock’s characteristics were present, the tax department failed to provide evidence linking the taxpayer to suspicious dealings, market rigging, or exit facilitators.
The taxpayer, an individual and partner in three firms, reported income from various sources, including salary, partnership firms, capital gains, and other sources, including agricultural income.
During assessment, the Assessing Officer scrutinized a long-term capital gain claim on STT-paid income, specifically on the sale of 7550 shares of the penny stock “Kappac Pharma.”
The officer suspected a pre-planned arrangement due to the substantial profit declared from the transactions. This suspicion was based on a Directorate of Investigation report suggesting an organized scheme generating bogus entries for tax-exempt long-term gains.
The Assessing Officer concluded that the transactions were non-genuine, linking them to the conversion of illicit money into legal funds. Consequently, the officer proposed adding the income from these transactions under “Income from other sources.”
However, the tribunal disagreed, viewing the taxpayer as an unknowing participant drawn into the investment without any substantial evidence against them. It criticized the use of presumptions and human probability concepts by the Assessing Officer to make such additions without concrete evidence.
