ITAT Deletes Section 68 Additions on Penny Stock Gains, Says No Proof of Price Rigging Nexus
Tribunal Rules Suspicion Alone Cannot Justify Taxation Without Evidence of Manipulation
Judgment Provides Relief to Investors, Clarifies Burden of Proof in Penny Stock Cases
By Our Legal Reporter
New Delhi: November 29, 2025:
In a significant ruling, the Income Tax Appellate Tribunal (ITAT) has held that capital gains from penny stock transactions cannot be taxed under Section 68 of the Income Tax Act unless the tax department establishes a direct nexus between the assessee and alleged price rigging. The judgment provides relief to taxpayers facing scrutiny over penny stock gains and clarifies the evidentiary burden in such cases.
The ruling comes amid a series of disputes where the Income Tax Department has alleged that penny stock transactions were used to generate tax-free income through artificial price manipulation.
Background of the Case
- The assessee had purchased shares of a listed company at a low price and later sold them at a profit.
- The Assessing Officer (AO) treated the gains as unexplained cash credits under Section 68, citing investigation reports that flagged the company as a “penny stock” used for tax evasion.
- The AO alleged that the assessee was part of a larger scheme of price rigging and added the gains to taxable income.
- The assessee argued that all transactions were conducted through recognized stock exchanges, with proper documentation, and there was no evidence linking them to manipulation.
The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, and the Revenue appealed to the ITAT.
ITAT’s Observations
The Tribunal made several important observations:
- No direct evidence of nexus: The Revenue failed to show any link between the assessee and alleged operators of price rigging.
- Suspicion is not proof: Mere suspicion or reliance on investigation reports cannot justify additions under Section 68.
- Proper documentation: The assessee had furnished contract notes, demat statements, and bank records proving genuine transactions.
- Burden of proof on Revenue: The Tribunal emphasized that the onus lies on the department to prove collusion or manipulation, not on the assessee to disprove suspicion.
As noted in similar rulings, “Suspicion, however strong, cannot take the place of evidence.”
Wider Legal Context
This ruling aligns with several earlier ITAT and High Court judgments:
- Bombay High Court (2019): Held that gains from penny stocks cannot be taxed without evidence of manipulation.
- Delhi ITAT (2023): Clarified that genuine transactions backed by documentation cannot be treated as bogus merely because the company was flagged in investigation reports.
- Recent ITAT Mumbai case (2025): Deleted additions under Section 68, holding that the assessee’s purchase and sale of shares were genuine and no nexus was shown with price rigging.
Together, these rulings strengthen taxpayer rights and limit arbitrary additions by tax authorities.
Impact on Taxpayers and Market
The ruling has far-reaching implications:
- Relief for investors: Genuine investors who trade in small-cap or penny stocks will not face arbitrary taxation.
- Burden on Revenue: Tax authorities must now provide concrete evidence of manipulation before making additions.
- Market confidence: The judgment reassures retail investors that legitimate gains will be respected.
- Reduced litigation: Clear guidelines on evidentiary standards may reduce the number of disputes reaching appellate forums.
Expert Reactions
Tax experts and legal professionals welcomed the ruling:
- Tax lawyers: Emphasized that the judgment restores fairness by requiring evidence before penalizing taxpayers.
- Chartered accountants: Noted that the ruling will help clients facing scrutiny over penny stock gains.
- Market analysts: Said the judgment could improve confidence in small-cap trading, which often suffers from regulatory suspicion.
Conclusion
The ITAT’s ruling that Section 68 additions for penny stock gains cannot be sustained without proof of nexus with price rigging is a landmark in tax jurisprudence. By deleting additions based on suspicion alone, the Tribunal has reinforced the principle that evidence, not assumptions, must guide taxation.
For taxpayers, the judgment provides relief and clarity. For the Revenue, it sets a higher bar for proving manipulation. Ultimately, the ruling strengthens trust in India’s tax system and ensures that genuine investors are not unfairly penalized.
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