Mere Payment By Account Payee Cheque Is Not Sacrosanct : ITAT Disallows Exemption On Penny Stock

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that mere payment by account payee check is not sacrosanct, nor can it make a non-genuine transaction genuine.

The bench of Astha Chandra (Judicial Member) and B.R.R. Kumar (Accountant Member) has observed that the assessee cannot escape from the burden cast upon him, and unfortunately, the burden is heavy as the facts establish that the shares that were traded by the assessee had a phenomenal and fanciful rise in a short span of time, and more importantly, after a period of 17 to 22 months, there has been a steep fall, which has led to huge claims of short-term capital loss. Therefore, unless and until the assessee discharges such a burden of proof, the addition made by the AO cannot be faulted.

The appellant/assessee is an individual and derives income from salary, other sources, and capital gain, which she claimed was exempt under Section 10(38) of the Income Tax Act, 1961. For AY 2015-16, she e-filed her return declaring income, which was processed under Section 143(1). Her case was selected for complete scrutiny through CASS for the reason of "suspicious sale transaction in shares and exempt long-term capital gain shown in return (penny stock tab in ITS)".

Statutory notices were issued and served. In response, the details called for were furnished. The AO found that the assessee earned a long-term capital gain of Rs. 1,17,14,346 on the sale of shares of M/s. HPC Biosciences Limited, which the assessee claimed was exempt under Section 10(38).

The AO issued a show-cause notice. The SCN stated that M/s. HPC Biosciences Limited has been identified as a BSE-listed stock that has been used to generate bogus long-term capital gains. The exemption under Section 10(38) of the Act has been claimed on the capital gain against the sale of shares of M/s. HPC Biosciences Limited.

The assessee filed an appeal before the CIT (A) challenging the additions. The CIT (A) held that only the form of the transaction exists in the assessee’s case by creating the necessary documents, but the financial results of the company do not justify such a steep escalation in the price of its shares, and as such, there is no substance in the transaction undertaken by the assessee. The CIT (A) dismissed the appeal of the assessee and confirmed the additions made by the AO.

The ITAT held that the assessee is lawfully bound to prove the huge long-term capital gain claims to be genuine. If there is information and data available about an unreasonable rise in the price of shares of penny stock companies over a short period of time, the genuineness of such a steep rise in the prices of shares needs to be established, and the onus is on the assessee to do so.

The tribunal held that the assessee failed to discharge the onus cast upon her under Section 68 and rejected the exemption under Section 10(38) on the long-term capital gain.

Case Title: Sangeeta Devi Jhunjhunwala Versus ITO

Case No.: ITA No. 747/Del/2022

Date: 18.05.2023

Counsel For Appellant: Rajiv Saxena

Counsel For Respondent: Amit Shukla

Click Here To Read The Order