The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that an unusual rise in the price of a penny-stock scrip, general investigation inputs and the test of human probabilities cannot, by themselves, justify an addition under Section 68 of the Income-tax Act, 1961, where the Revenue fails to establish a specific nexus between the assessee and the alleged price manipulation or accommodation-entry operation.
The Tribunal observed that circumstances surrounding a suspicious share transaction may justify closer scrutiny, but they cannot displace unrebutted documentary evidence unless the tax authorities bring material on record connecting the particular assessee with the alleged manipulation. It emphasised that “suspicion, however strong” cannot by itself sustain an addition under Section 68.
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Dispute Over ₹12.62 Lakh Long-Term Capital Gain
The controversy related to a long-term capital gain (LTCG) of ₹12,61,955, which the assessee had claimed as exempt under Section 10(38) of the Income-tax Act.
According to the Tribunal’s order, the assessee filed his return of income on August 26, 2015, declaring a total income of ₹10,48,560. The case was selected for scrutiny on account of the sale of shares and the claim of exempt long-term capital gain.
The assessee had purchased 10,000 shares of Shubham Granites Ltd., subsequently known as Blazon Marbles Ltd., on February 28, 2011 for ₹30,000. The consideration was paid through the banking channel.
Following a split in the face value of the shares from ₹10 to ₹2 on June 6, 2012, the assessee’s holding increased to 50,000 shares. During April and May 2014, he sold 27,000 shares through the stock exchange for a net consideration of ₹12,78,155 and claimed the resulting LTCG of ₹12,61,955 as exempt under Section 10(38). Importantly, the remaining 23,000 shares continued to be held in the assessee’s demat account.
AO Treated LTCG as Non-Genuine Penny-Stock Transaction
The Assessing Officer relied upon investigation inputs concerning alleged manipulation in penny-stock scrips, the substantial rise in the price of Blazon Marbles Ltd., the company’s financial position and the general modus operandi attributed to entry operators.
The AO also considered the fact that the assessee was not a regular share trader, had allegedly failed to satisfactorily explain the sharp rise in the share price and had sold part of the holding near the peak price while retaining the remaining shares.
Based on these circumstances, the AO concluded that the LTCG transaction was not genuine and added ₹12,61,955 under Section 68 of the Income-tax Act. The CIT(A) upheld the addition, holding that the investigation inputs and the test of human probabilities outweighed the documentary evidence produced by the assessee.
Assessee Relied on Documentary Trail
Before the ITAT, the assessee argued that the purchase consideration of ₹30,000 had been paid by cheque and that the shares were subsequently dematerialised. The 27,000 shares were sold through a recognised stock exchange on different dates during April and May 2014 after being held for more than three years.
It was further pointed out that securities transaction tax had been paid and that the sale proceeds were received through normal banking channels.
A significant part of the assessee’s defence was that 23,000 shares were retained even after the disputed sales. According to the assessee, retaining such a substantial portion of the investment was inconsistent with the Revenue’s allegation that the transaction represented a predetermined accommodation entry.
The assessee also submitted that he had not been named in any statement or other material as a participant in the alleged rigging of the price of Blazon Marbles Ltd. Nor was there any evidence showing cash changing hands between the assessee, the broker or an alleged entry provider.
Reliance was also placed on the coordinate bench ruling in Shri Yogesh P. Thakkar v. DCIT, which involved LTCG arising from the very same scrip of Blazon Marbles Ltd.
Revenue Invoked Test of Human Probabilities
The Revenue defended the addition by pointing to the abnormal increase in the share price of a company whose financial strength allegedly did not justify such appreciation.
According to the Department, the investigation inputs, surrounding circumstances and abnormal price movement justified application of the test of human probabilities and consequently supported the Section 68 addition.
The Tribunal, however, found that the Revenue had failed to bridge the gap between general suspicion surrounding the scrip and evidence specifically implicating the assessee.
Purchase, Demat Holding and Exchange Sale Not Disproved
Examining the evidence, the ITAT noted that several crucial elements of the transaction had not been disproved by the Revenue.
These included the purchase of 10,000 shares for ₹30,000 on February 28, 2011; their subsequent split into 50,000 shares; credit of the shares into the demat account; sale of 27,000 shares through the stock exchange in April and May 2014; payment of securities transaction tax; and receipt of the sale consideration through banking channels.
The Tribunal further recorded that the AO himself had acknowledged that the remaining 23,000 shares continued to be held by the assessee.
More importantly, there was no material in the orders of the lower authorities demonstrating that the purchase consideration had been paid in cash, that the assessee himself had funded the sale proceeds, or that any cash trail could be traced from the assessee to a broker, operator or purchaser.
General Penny-Stock Modus Operandi Not Enough
The ITAT observed that the addition substantially rested on a general description of the modus operandi normally associated with penny-stock cases, the company’s financial profile, movements in its share price and inferences drawn from the timing and quantity of the assessee’s sales.
While such circumstances could legitimately prompt close scrutiny, the Tribunal held that they could not, without a transaction-specific link, override documentary evidence or establish that the particular assessee was involved in price manipulation.
“No statement naming the assessee” had been brought on record, the Tribunal noted. Further, neither the assessee nor his registered broker had been shown to have been identified by the Securities and Exchange Board of India (SEBI) as being involved in manipulation of the scrip.
Retention of 23,000 Shares Weakened Accommodation-Entry Theory
The Tribunal attached significance to the fact that the assessee had retained 23,000 out of the total 50,000 shares.
According to the Bench, this circumstance “materially weakens” the inference that the entire arrangement had been pre-planned for introducing a predetermined amount of unaccounted money.
The finding was important because the Revenue’s case essentially proceeded on the premise that the share transaction was structured to generate an artificial exempt LTCG through an accommodation-entry mechanism.
ITAT Relies on Earlier Ruling Involving Same Scrip
The Bench also relied upon the coordinate bench decision in Shri Yogesh P. Thakkar, which had examined LTCG transactions involving Blazon Marbles Ltd.
The earlier bench had examined a SEBI order dated October 13, 2017 and found that it dealt with penalties imposed upon certain persons for procedural violations and non-appearance and did not allege the assessee’s involvement in manipulation.
The Tribunal noted that the earlier ruling had found that neither the assessee in that case nor his broker figured among the persons proceeded against. The shares had also been held for a substantial period and sold in the open market at prevailing prices.
The earlier bench had further observed, in substance, that absent a block deal, buyers and sellers in secondary-market transactions ordinarily do not know one another. It consequently treated the assessee in that matter as an investor who had not been shown to be connected with the alleged rigging.
“Human Probabilities” Cannot Substitute Proof of Nexus
The ITAT then addressed the Revenue’s reliance on the test of human probabilities.
It found that although the CIT(A) had relied on general investigation inputs and human probabilities, no admissible material had been identified connecting the assessee with an operator, exit provider, circular trade or cash trail.
In a significant observation, the Tribunal held that the test of human probabilities is an aid for appreciating evidence, but cannot substitute proof of the alleged nexus where the primary evidence establishing purchase, holding and exchange-traded sale remains unrebutted.
The Bench further observed that an unusual rise in a share price could certainly create suspicion. But price movement alone, without additional evidence connecting the assessee with manipulation, was insufficient to sustain an addition under Section 68.
The Tribunal categorically observed that “suspicion, however strong, cannot by itself sustain an addition under section 68 of the Act.”
The ITAT held that the assessee had discharged the burden of establishing the nature and source of the sale proceeds.
The department had failed to place cogent evidence on record demonstrating either that the disputed transaction was an accommodation entry or that the assessee was connected with any price-rigging activity.
The Tribunal deleted the ₹12,61,955 addition made under Section 68 and directed the Assessing Officer to allow the assessee’s exemption claimed under Section 10(38) of the Income-tax Act.
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