Tax Evasion Through Penny Stocks? ITAT Delhi’s Take on Puja Gupta’s Case

Tax Evasion Through Penny Stocks? ITAT Delhi’s Take on Puja Gupta’s Case

The Income Tax Appellate Tribunal (ITAT) Delhi recently adjudicated an appeal filed by Puja Gupta against the order of the Commissioner of Income Tax (Appeals)-6, New Delhi. The primary issue in this case was the addition of ₹1,69,12,820 to Puja Gupta’s taxable income under Section 68 of the Income Tax Act, 1961, which pertains to unexplained cash credits. The Assessing Officer (AO) alleged that the transactions involving shares of Dhanleela Investment & Trading Co. Ltd. were part of a pre-arranged scheme to generate artificial long-term capital gains (LTCG).

Background of the Case

Puja Gupta had filed her income tax return declaring her income and disclosed capital gains arising from the sale of shares of Dhanleela Investment & Trading Co. Ltd. The AO, during the assessment proceedings, scrutinized these transactions and concluded that they were not genuine. The primary allegations made by the AO included:

1. Unexplained Cash Credit: The purchase and subsequent sale of shares resulted in unusually high gains that were disproportionate to the financials and performance of the company in question.
   
   
2. Pre-arranged Scheme: The AO suspected that the entire transaction was orchestrated as part of a scheme to create fictitious LTCG, allowing the assessee to claim tax exemption under the erstwhile Section 10(38) of the Income Tax Act.
   
   
3. Lack of Justification: The assessee failed to provide substantive proof regarding the identity, genuineness, and creditworthiness of the parties involved in the transaction.

Findings of the AO and CIT(A)

After a thorough investigation, the AO made an addition of ₹1,69,12,820 under Section 68, treating the sum as unexplained income. Puja Gupta contested this addition before the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the AO’s decision. The main observations of the AO and CIT(A) were:

• The shares of Dhanleela Investment & Trading Co. Ltd. had shown an unnatural increase in price without corresponding financial performance.
  
  
• The pattern of transactions closely resembled cases flagged by tax authorities as part of a modus operandi used to generate tax-exempt LTCG through penny stocks.
  
  
• The parties involved in the transactions were either untraceable or had dubious financial credentials.

Dissatisfied with the decision of CIT(A), Puja Gupta approached the ITAT.

Contentions of the Assessee

Puja Gupta argued before ITAT that:

• She had acquired the shares through legitimate means and had furnished all relevant details, including bank statements, contract notes, and Demat account statements, to substantiate the transactions.
  
  
• The sale of shares was carried out on a recognized stock exchange and subjected to Securities Transaction Tax (STT), thus qualifying for LTCG exemption.
  
  
• The assessment order was based merely on suspicion and conjecture without any concrete evidence proving her involvement in any manipulative practices.

ITAT Delhi’s Observations and Decision

After examining the facts and legal contentions, the ITAT made the following key observations:

1. Genuineness of Transactions: The Tribunal analyzed whether the transactions had commercial substance. It was noted that similar cases involving penny stocks had been flagged by tax authorities as means of laundering undisclosed income.
   
   
2. Burden of Proof: Under Section 68, the burden to prove the genuineness of cash credits lies with the assessee. The Tribunal observed that merely providing documentation without satisfactorily explaining the nature and source of the credits does not discharge this burden.
   
   
3. Absence of Justification: The ITAT found that the price movements of Dhanleela Investment & Trading Co. Ltd. were not supported by its fundamentals and financial performance, raising doubts about the authenticity of the transactions.
   
   
4. Reliance on Judicial Precedents: The Tribunal referred to past judgments where similar artificial capital gains through penny stock manipulation were disallowed.

Final Ruling

After considering all aspects, the ITAT upheld the addition made by the AO under Section 68. It ruled that Puja Gupta failed to substantiate the legitimacy of her LTCG claims, and the AO was justified in treating the amount as unexplained income. Consequently, the appeal was dismissed in favor of the Revenue.

Implications of the Judgment

This ruling reinforces the Income Tax Department’s stance against tax evasion through artificial LTCG claims. It emphasizes that:

• Taxpayers must ensure the genuineness of transactions when claiming exemptions under capital gains provisions.
  
  
• Mere compliance with procedural formalities (e.g., trading on stock exchanges, paying STT) is insufficient if the underlying transactions lack economic substance.
  
  
• The ITAT is willing to scrutinize transactions involving penny stocks and reject suspicious claims to curb tax evasion.

Conclusion

The case of Puja Gupta Vs ITO serves as a crucial precedent in cases related to Section 68 and artificial LTCG claims. It underscores the need for transparency and substantiation in financial transactions to avoid adverse tax implications. Taxpayers engaging in share trading should maintain robust documentation and ensure their transactions reflect genuine economic activities to withstand scrutiny by tax authorities.