Income Tax Appellate Tribunal on Addition under Section 68 and Exemption under Section 10(38) for Penny Stock Transactions.

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) deleted an addition of ₹48,19,438 made under Section 68 of the Income Tax Act, 1961, treating Long-Term Capital Gains (LTCG) on sale of shares of Kappac Pharma Ltd. as unexplained income. The Tribunal held that mere suspicion arising from high appreciation in penny stock value, off-market purchase, or reliance on investigation reports is insufficient without concrete evidence linking the assessee to price manipulation or accommodation entry transactions.

1. The assessee, Anjali Gupta, filed her return of income for AY 2015–16, declaring LTCG of ₹48,19,438 on sale of shares of Kappac Pharma Ltd., claiming exemption under Section 10(38) of the Income Tax Act.
2. The Assessing Officer (AO) treated the gains as bogus, alleging that Kappac Pharma Ltd. was a “penny stock” company used for providing accommodation entries.
3. Consequently, the AO denied the exemption under Section 10(38) and made an addition of ₹48,19,438 under Section 68, read with Section 115BBE.
4. The CIT(A) upheld the addition, prompting the assessee to appeal before the ITAT.

1. The ITAT held that transactions carried out through banking channels, demat accounts, and stock exchange mechanisms could not be disregarded merely on suspicion.
2. The AO relied solely on an Investigation Wing report and failed to establish any direct link between the assessee and the alleged price manipulation.
3. The Tribunal observed that the assessee produced sufficient evidence such as contract notes, bank statements, and demat records to substantiate the genuineness of the transaction.
4. Suspicion, however strong, cannot replace proof. Without tangible evidence of the assessee’s involvement in manipulation, the addition under Section 68 cannot be sustained.
5. The ITAT, therefore, deleted the entire addition and allowed the appeal.

1. Section 68, Income Tax Act, 1961 – Unexplained cash credits.
2. Section 10(38), Income Tax Act, 1961 – Exemption on Long-Term Capital Gains from listed equity shares.
3. Section 115BBE, Income Tax Act, 1961 – Tax on income referred to in Section 68 at special rates.
4. Section 143(3), Income Tax Act, 1961 – Regular assessment.

Mere reliance on general investigation reports or market suspicion is insufficient for additions under Section 68.

Documentary evidence proving purchase, holding, and sale through legitimate channels must be given due consideration.

The burden of proof shifts back to the Revenue once the assessee establishes genuineness through verifiable records.

The decision reinforces the principle that tax authorities must rely on evidence, not presumptions, in cases involving alleged penny stock transactions.

Citation: 2025:ITAT:DEL:3605

Case: Anjali Gupta v. Income Tax Officer, Ward–1(2), Gurgaon

Court: Income Tax Appellate Tribunal, Delhi Bench

Coram: Shri G.S. Pannu (President) & Shri Chandra Mohan Garg (Judicial Member)