ITAT rejects Price-Rigging Allegations on Penny Stock Transactions

Introduction

ITAT rejects price-rigging allegations in penny stock cases, ruling that suspicion alone can’t justify taxation. In a recent judgment, the Income Tax Appellate Tribunal (ITAT) provided much-needed clarity for taxpayers facing scrutiny over low-cap stock gains.

What Was the Case About?

• Taxpayers earned Long-Term Capital Gains (LTCG) from selling penny stocks.
• Income Tax Department accused them of manipulating prices to claim tax-free income under Section 10(38) of the Income Tax Act, 1961 (applicable at that time).
• The case lacked solid proof like money trail, insider trading evidence, or collusion documents.

ITAT’s Observations:

Why the Allegations Failed

• No direct evidence linking taxpayers to any rigging activity.
• Share trading was routed through recognised stock exchanges with proper documentation.
• Demat account statements, contract notes, and bank records all matched.
• Merely relying on “price rise patterns” is not enough to discredit genuine transactions.

Legal References

• Section 10(38) (now withdrawn): Exempted LTCG from sale of listed securities.
• CBDT Instruction No. 5/2016: Emphasises the need for evidence-backed assessments, not presumptions.
• High Court Precedents:
  • PCIT vs. Kruti Shah (2020): Mere abnormal profits without evidence ≠ bogus gains.
  • CIT vs. Lavanya Land Pvt Ltd (2017): Trading through SEBI-regulated platforms presumed genuine unless proven otherwise.

Quick Table: Genuine vs. Bogus Stock Gains

Why This ITAT Ruling Matters

• Reinforces that burden of proof lies with the Income Tax Department.
• Helps genuine investors defend against baseless tax additions.
• Encourages proper record-keeping among taxpayers dealing with volatile stocks.