Facts of the Case:

The assessee, Ajay Gupta, purchased and sold shares of a listed company, resulting in substantial long-term capital gains. During assessment, the assessee furnished complete documentary evidence, including purchase and sale contract notes, demat account statements, bank statements evidencing payments, and proof of receipt of sale consideration through banking channels.

The Assessing Officer (AO) disregarded the evidence and treated the shares as penny stock based on Investigation Wing reports and the theory of human probabilities. Consequently, an addition of ₹1,03,37,458 under Section 68 and ₹2,86,724 under Section 69C of the Income Tax Act, 1961 was made.

Issues Involved:

Whether additions under Sections 68 and 69C can be sustained based solely on:

  1. Human probabilities,
  2. General penny-stock investigation reports,
  3. Suspicion of abnormal share price movements,

when the assessee has furnished cogent documentary evidence establishing the genuineness of the transactions.

Petitioner’s Arguments:

  1. Documentary Evidence: All share transactions were supported by purchase/sale contract notes, demat statements, and banking evidence.
  2. Absence of Adverse Material: Revenue failed to provide evidence linking the assessee to any penny-stock operators.
  3. Investigations Cannot Override Evidence: General reports and human probability theories cannot replace direct evidence.
  4. Burden of Proof Shifted: Having produced primary evidence, the onus shifted to Revenue to disprove genuineness.
  5. Natural Justice: No opportunity for cross-examination on third-party investigation material was provided.

Respondent’s Arguments:

  1. Transactions were part of an accommodation-entry penny-stock scheme.
  2. Abnormal share price rises indicated manipulation.
  3. Reliance on Investigation Wing reports tying the scrip to a larger network.
  4. Application of human probabilities to assess genuineness.
  5. Documentary evidence was self-serving and insufficient.
  6. Extraordinary gains could not be satisfactorily explained.

Court Order / Findings:

The ITAT Delhi held:

  1. Assessee Discharged Burden: Complete documentary evidence discharged initial onus under Section 68.
  2. Revenue Lacked Specific Material: No direct link between the assessee and alleged operators; general reports alone insufficient.
  3. Presumption and Suspicion Insufficient: Evidence cannot be replaced by human probability or suspicion.
  4. Doctrine of Human Probabilities Not Absolute: Citing Sumati Dayal v. CIT (1995) 214 ITR 801 and CIT v. Durga Prasad More (1971) 82 ITR 540, the court noted evidence must prevail over presumptions.
  5. Abnormal Share Appreciation Alone Insufficient: Extraordinary gains do not prove non-genuine transactions.
  6. Deletion of Additions: Addition under Section 68 of ₹1,03,37,458 and Section 69C of ₹2,86,724 were deleted.

Key Precedents Considered:

  • Rachna Gupta v. ACIT ITA No. 5418/D/2018
  • PCIT v. Smt Krishna Devi ITA 125/2020
  • PCIT v. Ziauddin A Siddique ITA 2012 of 2017

Outcome: Entire additions deleted in favour of the assessee (Assessment Year 2015-16).

Important Clarifications:

  • Investigation reports and human probability theories cannot substitute legally admissible documentary evidence.
  • Penny-stock characteristics alone do not establish non-genuineness.
  • Burden of proof under Section 68 shifts to Revenue once assessee furnishes credible evidence.

Sections Involved:

  • Section 68 – Unexplained Cash Credit
  • Section 69C – Unexplained Expenditure
  • Section 10(38) – Long Term Capital Gains Exemption

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