PENNY STOCK LTCG CASES: THE EVOLUTION OF TAX LAW AND THE JUDICIAL REBUILDING OF SECTION 68 PRINCIPLES
The controversy over alleged “penny stock LTCG” cases has generated one of the largest volumes of reassessment and scrutiny proceedings in recent tax history. For nearly a decade, the Income Tax Department has relied on generalized Investigation Wing reports, SEBI alerts, and human-probability theories to tax long-term capital gains as unexplained credits under section 68. However, courts have consistently held that suspicion cannot substitute evidence, and that genuine transactions executed through stock exchanges with proper documentation cannot be disregarded without direct nexus showing assessee’s involvement in manipulation. The latest reaffirmation comes from the Raipur ITAT decision in Anju Parekh vs ITO [2025] 180 taxmann.com 653, which struck down additions based purely on SEBI and Investigation Wing reports.
I. The Factual Background and Core Legal Question
In Anju Parekh, the assessee purchased shares of NCL for Rs. 4,000 and sold them through the stock exchange for Rs. 11.84 lakh. STT was paid, demat records existed, banking channels were used, and the transaction was fully disclosed in the return. The Assessing Officer invoked section 68 solely because the scrip appeared in the Investigation Wing’s list of penny stock companies. No direct evidence linked the assessee with operators or rigging. The ITAT deleted both the LTCG addition and the estimated commission addition, holding them arbitrary and unsupported.
II. Evolution of Tax Law on Penny Stock LTCG Cases
1. Early Phase (2013–2015)
During the initial penny stock crackdown, AOs routinely treated high-value gains from low-value scrips as bogus. Human probability tests from Sumati Dayaland Durga Prasad Morewere mechanically applied even when documentation existed.
2. Mid-Phase (2016–2020)
Courts began rejecting generalized allegations. Landmark cases included:
• Pr. CIT v. Ziauddin Siddique(Bom HC, 2022)
• Pr. CIT v. Smt. Krishna Devi(Delhi HC, 2021)
• Pr. CIT v. Mamta Rajivkumar Agarwal (Guj HC, 2023)
These decisions held that a scrip being rigged does not prove the assessee participated in rigging.
3. Mature Phase (2021–2024)
Courts emphasized that the burden of proof shifts to the Revenue once the assessee files demat statements, contract notes, and bank statements. Courts also held that statements of entry operators cannot be used unless cross-examination is provided (SC in Kishore Kumar Mohapatraand Kuntala Mohapatra).
4. Current Phase (2024–2025)
Recent ITAT decisions, including Farzad Sheriar Jehani v. ITO(Mum ITAT, 2024), continue holding that unless the SEBI report specifically implicates the assessee, he is merely an unsuspecting investor. The Anju Parekh ruling reinforces this approach.
III. Key Legal Principles Established
1. Burden of Proof under Section 68
Once the assessee produces contract notes, demat statements, bank statements, and STT evidence, the burden shifts to the AO. This principle is backed by Adamine Construction (SC), Parasben Kochar (SC), and Divyaben Parmar (Guj HC).
2. SEBI/Investigation Wing Reports Not Sufficient
Generalized alerts cannot override direct documentary evidence unless specific involvement is proved.
3. No Addition Without Proving Conscious Involvement
Courts consistently rule that unless the assessee consciously arranged the manipulation, addition cannot be made.
4. Human Probability Cannot Replace Evidence
Mechanical application of human probabilities is not permitted unless contradictions exist.
IV. Why Penny Stock Additions Continue to Fail
Courts strike down additions where:
• No broker/operator is linked to the assessee
• No cash trail is established
• SEBI orders do not name the assessee
• All transactions are through stock exchange
• No evidence of fabricated documentation
• AO undertakes no independent enquiry
These failings were all present in Anju Parekh [2025] 180 taxmann.com 653.
V. Ad-Hoc Commission Additions Also Unsustainable
AOs often estimate a 2%–5% “commission” for arranging accommodation entries. In Anju Parekh, the Raipur ITAT deleted the 2% addition for lack of proof.
VI. The Unsuspecting Investor Doctrine
Recent decisions reiterate that retail investors cannot be penalized for market manipulation unless the Revenue proves collusion. The ITAT in Anju Parekh held the assessee to be an unsuspecting investor who acted through regulated channels.
VII. Conclusion: Current Legal Position
Additions under section 68 in penny stock LTCG cases cannot be sustained unless the Revenue produces direct evidence linking the assessee with operators, rigging, or cash introduction. Absent this, documentary evidence must prevail over suspicion or generalized findings. The Anju Parekh decision further strengthens taxpayer rights and clarifies the evidentiary standard under section 68.
The copy of the order is as under:
