Penny Stock Addition: Genuineness must be tested on human probabilities and surrounding circumstances, not mere documentation- ITAT Ahemedabad
ITAT Ahmedabad in the case of Gitaben Dineshbhai Patel v. ITO-ITA No. 717/Ahd/2025 | Order dated: 4 November 2025 on penny stock matter has held that genuineness must be tested on human probabilities and surrounding circumstances, not mere documentation.
Let us have a Short Overview of the Case: –
The assessee declared income of Rs. 13.74 lakh for AY 2017–18. Based on information from the Investigation Wing about bogus Long-Term Capital Gains (LTCG) from penny stock scrips, the Assessing Officer (AO) reopened the case under section 147 and added Rs. 93.92 lakh as unexplained income under section 68. The addition related to alleged bogus LTCG claimed as exempt under section 10(38) from sales of Kushal Tradelink Ltd. shares.
Assessee’s Contentions
• The reopening was invalid, being mechanical and based solely on Investigation Wing information (borrowed satisfaction).
• All transactions were genuine, supported by contract notes, demat and bank statements, and carried out through recognized stock exchange channels.
• Relied on various Delhi and Gujarat High Court judgments supporting the need for independent application of mind by AO.
• Cited a coordinate NFAC/ITAT decision in Pranav Mahendrabhai Patel v. ITO (similar scrip) where addition was deleted.
CIT(A) Findings
• Reopening held valid under section 147 since AO had tangible material from Investigation Wing and verified details before forming belief. Relied on Backbone Projects Ltd. v. ITO (Guj. HC).
• On merits, held that SEBI’s order had confirmed price manipulation in Kushal Tradelink Ltd.. The assessee failed to justify the improbable price rise or show genuine investment intent.
• Applied the human probability test and upheld the addition under section 68, treating LTCG as accommodation entry.
ITAT Decision
1. Validity of Reopening (Section 147):
The Tribunal upheld the reopening, noting that:
• AO had received specific and credible inputs from Investigation Wing post-search on Kushal Group.
• The AO conducted inquiries, verified records, and independently formed belief of escapement of income.
• Hence, the reopening was not mechanical or borrowed satisfaction but a valid action in law.
• Relied on Gujarat High Court ruling in Backbone Projects Ltd. v. ITO 131 taxmann.com 80.
2. Addition under Section 68 (Bogus LTCG):
The Tribunal agreed with the lower authorities that:
The assessee failed to explain investment rationale or justify steep rise in scrip price.
Mere possession of demat statements, contract notes, or banking records did not establish genuineness when the scrip’s trading pattern showed manipulation through circular and synchronized trades.
The Tribunal reiterated that genuineness must be tested on human probabilities and surrounding circumstances, not mere documentation.
The reliance placed on Deval Pranav Patel (ITA No. 182/Ahd/2024, 17.12.2024) was rejected as factual distinctions existed, and precedents cannot be blindly applied without contextual parity.
Final Outcome
• Reopening under section 147 held valid.
• Addition of Rs. 93.92 lakh under section 68 sustained.
• Appeal dismissed in entirety.
The copy of the order is as under:
