“Human probabilities” and the concept of penny stock may not justify additioni without assessee’s involvement
The ITAT Delhi in the case of Rachna Gupta vs. ACIT, Central Circle 29, New Delhi (ITA No. 5418/DEL/2018 & ITA No. 2531/DEL/2022, dated December 20, 2024) dealt with the issue of additions under Section 68 of the Income Tax Act, 1961, treating gains from shares as bogus.
Key Observations:
1. Nature of Capital Gains:
The Assessing Officer (AO) observed significant capital gains from the sale of shares of:
• M/s. CCL International Ltd.: ₹38,63,362
• M/s. Channel Nine Entertainment Ltd.: ₹28,12,941
The AO noted that the gains were disproportionate to the financials and market fundamentals of these companies, deeming the transactions as suspicious and terming the shares as “penny stocks.”
2. AO’s Basis for Addition:
• The AO analyzed the price movement and financials of both companies and concluded that the sharp rise in share prices was not justified.
• Statements under Section 131 of the Income Tax Act were recorded, but the AO remained unsatisfied.
• The AO relied on investigation reports and added ₹29,71,941 under Section 68 as unexplained income.
3. Appeal to CIT(A):
The Commissioner of Income Tax (Appeals) upheld the addition made by the AO.
4. ITAT Decision:
• The ITAT observed that the AO and CIT(A) relied on “human probabilities” and the concept of penny stock but failed to establish the assessee’s involvement in:
• Price manipulation,
• Direct association with entry/exit operators,
• Any fraudulent activity.
• Following judicial precedents, including Pr. CIT v. Krishna Devi (Delhi High Court, 2021) and Pr. CIT v. Ziauddin A Siddique (Bombay High Court, 2022), the tribunal held that mere suspicion or reliance on investigation reports cannot replace concrete evidence.
• The tax authorities could not substantiate that the transactions were non-genuine.
Ruling:
The ITAT allowed the appeal of the assessee, stating that the additions under Section 68 were unsustainable in the absence of concrete evidence.
Supporting Judicial Precedents:
1. Lalchand Bhagat Ambica Ram v. CIT (SC, 1959): Human probabilities must be based on material evidence, not mere conjecture.
2. Dhirajlal Girdharilal v. CIT (SC, 1954): Any addition must be based on definite findings, not surmises.
3. Pr. CIT v. Krishna Devi (Delhi HC, 2021): Unexplained gains from shares cannot be taxed under Section 68 without evidence of manipulation.
4. Ziauddin A Siddique (Bombay HC, 2022): Additions under penny stock allegations must establish the assessee’s role in price rigging or fraudulent activities.
Conclusion:
The ITAT Delhi quashed the addition under Section 68, reaffirming that tax authorities cannot rely solely on assumptions or investigation reports without corroborative evidence.
The copy of the order is as under:
