No addition on account of sale of penny stock, if no direct involvement of the assessee: Bombay HC
Tag: Penny stock, Bombay HC in penny stock, Bombay HC in penny stock, Bombay HC in Indravan Jain
LTCG on Penny Stock: No addition if there is no direct involvement of the assessee in inflating the price of the shares
Here is an interesting decision by Bombay High Court on the issue of addition on account of penny stock shares sale. The court has held that addition cannot be sustained if there is no direct involvement of the assessee in the transaction. The issue was earlier decided in favour of the Assessee by the ITAT and the department has preferred an appeal before HC.
The case detail is as under:
Bombay High Court
PCIT Vs Indravadan Jain, HUF
Appeal Number: Income Tax Appeal No. 454 of 2018
Let us have a short overview of the case. The Facts of the case was as under:
- The Assessee had sold shares of Ramakrishna Fincap Ltd (RFL) and the long-term capital gains earned on the sale of said shares was claimed as exempt u/s 10(38) of the Act.
The shares were purchased by the Assessee at Rs. 3.12/- per shares in the year 2003 and had sold the same in the year 2005 for Rs. 155.04/- per share.
- The AO during the course of investigation has revealed that the scrip was as penny stock and that the capital gains declared by the Assessee were held to be accommodation entries.
- The learned AO did not accept the Assessee’s claim of long-term capital gain as exempt and held the same as accommodation entry and made addition u/s 68 of the Act.
Hon Bombay HC held as below:
- The decision of Hon’ble Mumbai Tribunal is upheld, wherein the Tribunal had held that since the shares were purchased on the floor of stock exchange and not from the accused broker, payment was made through banking channel, deliverables were taken in DEMAT account where the shares remained for more than one year, contract notes were issued and the shares were also sold on stock exchange, the long-term capital gains claimed as exempt cannot be treated as accommodation entry.
- No evidence was brought on record to prove that the assessee was also involved in inflating the price of the scrip.
- No infirmity in the order passed by the ITAT and no substantial questions of law as proposed in the appeal arises and so LTCG is not an accommodation entry.
The above observation is a path breaking judgment by Bombay High Court & is extremely positive for many pending penny stock cases. It indicates that in order to treat exempt long-term capital gain earned from sale of shares as accommodation entry under section 68, the Assessee’s direct involvement in price rigging of the scrip should be conclusively proved besides the broker’s involvement.
The copy of the order is as under: