The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has restored a ₹1.94 crore addition concerning alleged bogus long-term capital gains from penny stock transactions to the Assessing Officer for fresh adjudication, observing that contract notes are primary documentary evidence directly relevant to verifying share purchases.
The Bench comprising Saktijit Dey (Vice President) and G.M. Doss (Accountant Member) held that the genuineness of the transactions should be examined only after considering all the primary documents, including the purchase contract notes that had not been furnished before the lower authorities.
The Tribunal was hearing an appeal filed by the assessee against an order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, for the Assessment Year 2013-14.
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The assessee’s assessment was reopened under Section 147 of the Income Tax Act, 1961. The reassessment was subsequently completed under Sections 147 and 144B of the Act.
During the proceedings, the Assessing Officer made an addition of ₹1,94,37,405 under Section 68, treating the long-term capital gains claimed by the assessee from transactions in certain Bombay Stock Exchange-listed penny stocks as unexplained income.
The addition was primarily based on information received by the Income Tax Department regarding the alleged use of certain penny stocks for generating artificial or bogus capital gains.
The transactions concerned shares of Finalysis Credit and Guarantee Company Limited and JRI Industries Infrastructure Limited.
The assessee challenged the assessment order before the CIT(A). However, the appeal was initially dismissed ex parte because the assessee failed to respond to the notices issued during the appellate proceedings.
In an earlier round of litigation, the ITAT found that the notices issued by the CIT(A) had been sent to incorrect email addresses. Consequently, the assessee could not effectively avail herself of the opportunity of being heard.
The Tribunal, therefore, restored the appeal to the CIT(A) with directions to decide it afresh after providing the assessee with a reasonable opportunity to present her case.
Following the ITAT’s directions, the CIT(A) issued a communication on June 1, 2025, stating that the appellate communication window had been enabled. Another notice was issued on January 22, 2026, requiring the assessee to submit her response within seven days.
In response, the assessee stated that she was filing an affidavit explaining the transactions in the two companies, along with the reasons for her earlier non-compliance.
She also claimed to have submitted a paper book containing documentary evidence relating to the share transactions and holdings, as well as correspondence exchanged during the assessment proceedings.
The assessee sought an additional four weeks to prepare and file detailed written submissions. She also specifically requested a personal hearing through video conferencing if the CIT(A) proposed to take an adverse view.
The CIT(A), however, proceeded to decide the appeal and confirmed the addition under Section 68.
While sustaining the addition, the CIT(A) concluded that the assessee had failed to satisfactorily explain various aspects of the transactions and had not produced sufficient documentary evidence to establish the genuineness of the purchase and sale of shares.
One of the material deficiencies noted by the appellate authority was the failure to produce the contract notes relating to the purchase transactions.
On the basis of the documents available on record, the CIT(A) upheld the Assessing Officer’s finding that the long-term capital gains were not genuine.
Before the ITAT, the assessee argued that substantial efforts had been made to explain the transactions. It was submitted that an affidavit and supporting documentary evidence had already been placed on record.
The assessee contended that, considering the serious allegation that the capital gains were bogus, she should be given an effective opportunity to produce all the primary documents relating to the transactions.
Significantly, the assessee’s authorised representative admitted before the Tribunal that the contract notes relating to the purchase of shares had not been furnished before the lower authorities.
The representative, however, submitted that the assessee was prepared to produce the contract notes and other relevant evidence necessary to establish the genuineness of the transactions.
The assessee accordingly requested the Tribunal to either decide the matter in her favour on merits or send it back to the Assessing Officer for a fresh examination.
The Department opposed granting substantive relief to the assessee. Nevertheless, the departmental representative stated that there was no objection to restoring the matter to the Assessing Officer because the assessee proposed to furnish new evidence.
The Tribunal observed that the addition under Section 68 was directly connected with the assessee’s claim of long-term capital gains from the disputed share transactions.
It noted that the CIT(A), while confirming the addition, had identified deficiencies in the evidence produced by the assessee, particularly the absence of contract notes relating to the purchase of shares.
Emphasising the evidentiary importance of these documents, the ITAT observed:
“The contract notes constitute primary documentary evidence having direct relevance to the purchase transactions and, therefore, their absence is a relevant factor which requires consideration while examining the genuineness of the transactions.”
The Tribunal further noted that the assessee had categorically expressed her willingness to produce the missing contract notes and other supporting evidence.
Since the foundation of the addition was the alleged lack of genuineness of the share transactions, the ITAT concluded that the matter should be decided only after examining all the relevant primary documents.
The Tribunal held that the failure to furnish the contract notes before the lower authorities, coupled with the assessee’s statement that the documents could now be produced, justified granting her one more opportunity.
Accordingly, the ITAT set aside the CIT(A)’s order and restored the entire issue concerning the ₹1,94,37,405 addition under Section 68 to the Assessing Officer.
The Assessing Officer was directed to examine the assessee’s claim afresh after considering the contract notes, supporting documents and explanations produced during the fresh proceedings.
The Tribunal also directed the Assessing Officer to provide the assessee with a reasonable and adequate opportunity of being heard. At the same time, the assessee was instructed to cooperate and furnish all relevant documents and explanations within the prescribed time.
The appeal was consequently allowed for statistical purposes. The Tribunal did not delete the addition on merits but reopened the issue for a complete factual examination.
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