Bogus Capital Gains from Penny Stocks: Surrounding circumstances have to be taken note of & the test of human probabilities have to be applied. Though the shares were sold in the normal course of business through shares brokers in Demat Form in stock exchanges & payment were made through banking channel, the capital gains can be treated as bogus as the price was not supported by fundamentals & there was a pattern of trading between connected parties

(i) The pattern of purchases of Radford Global shows that the assessee purchased the shares at a high price of Rs. 79.85 and Rs. 79.95 per share on the same date, i.e. 18.04.2013 from two persons Dilip Chotalal Morzaria and Sureshkumar Sukalchand Lodha and sold the same on 30.10.2013 within about six months at a price of Rs. 14 per share to Runicha Merchants Private Limited about 10 shares sold to Sidhiman Vyapar Private Limited on the same day. So far as the Runicha Merchants Private Limited are concerned, the SEBI has passed an order against them for manipulation in shares of Radford Global, this order has been affirmed by the appellate tribunal and in the order passed by the learned tribunal, it has been held that the fund transactions and off market transaction between two entities are conclusive evidentiary proof which established direct connection between such entities and in certain cases, direct connections between counter parties/entitles may not have been established finding direct connections between entities may not be possible at all times.

(ii) Further it was found that the trades were executed among parties connected to each other directly or indirectly which resulted in manipulations of the price of the scripts of Radford Global and these entities contributed significantly to the market volume by trading among themselves and created false and misleading appearance of trading in the scripts. Further, the rise in the market volume of the scripts on Radford Global was not substantiated by underlying changes in Radford Global Economical Fundamental, corporate announcements, financial reports etc. In so far as the Sreenath Commercial, the appellate authority noted that the assessing officer has brought out in his order that the total assets of Sreenath Commercial till March 2011 was Rs. 11.28 crores which increase to Rs. 14.12 crores in March 2012 and Rs. 31.95 crores in the March 2013. The capital work in progress during those years was NIL, the reserves were negatives figures till March 2012 and Rs. 17.3 crores in March 2013. The said company Sreenath Commercial had turnover of Rs. 1.23 crores in March 2010, Rs. 28.75 crores and Rs. 14.26 crores in March 2011, March 2012 respectively which plummeted down to Rs. 7.66 crores in March 2013. The profit before tax in March 2010 was a negative figure as also for March 2012 and subsequent years and the earnings per share in March 2012 was (-) Rs. 0.04 crores which went down to (-) Rs. 7 lakhs in March 2013. Upon analysis of this data the appellate authority that there is no justification for the assessee for having purchased the shares of Sreenath Commercial in 2013. As pointed out by the Hon’ble Supreme Court in Sumati Dayal Versus Commissioner of Income Tax, Bangalore (1995) 214 ITR 801 (SC), the surrounding circumstances are to be taken note of that and the test of human probabilities has to be applied and if such tests are applied in the assessee’s case, the irresistible conclusion would be that the claim of long term capital loss was a bogus claim. The decision of this court in the case of Principal Commissioner of Income Tax-9, Kolkata Versus P L Goenka HUF in ITAT 241 of 2024 dated May 06, 2025 would also support the case of the appellant revenue.

Principal Commissioner of Income Tax Versus Swati Bajaj (2022) 446 ITR 56 (Cal) and Principal Commissioner of Income Tax Versus Smt. Krishna Devi (2021) 126 Taxman.com 80 (Del) referred.