Income from Penny Stock Transaction, Paid for Purchase of Shares could not be Deducted

The Income Tax Appellate Tribunal (ITAT),Mumbai bench held that income from penny stock transactions, paid for purchase of shares could not be deducted while computing undisclosed cash income from transactions in penny stock.

The assessee,HiralaxmiIshwarlal Mehta disclosed Rs. 16,20,156/- long term capital gain on penny stock transaction under Income Declaration Scheme. The Assessing Officer (AO) added the cost of the shares Rs. 30,673/- under section 68 of the Income Tax Act. The Commissioner of Income Tax (CIT) has erred in law as well as on the facts of the case in dismissing the appeal and confirming the disallowance of Cost of Purchase of Rs.30675.00 from Long Term Capital Gain as declared in Income Disclosure Scheme 2016 without adjudicating the case based the merits, documents filed, purchases were made by account payee cheques in earlier year. The appellant therefore being aggrieved by the order passed by the CIT filed an appeal before the ITAT.

Shamim Yahya, Accountant Member concluded that”the capital account amount capitalized is capital gain only and not the sale price hence the declaration in TDS is made of capital gain only and also the amounts of purchases of shares made in earlier year by cheque is a margin money and the same has been adjusted against the sales proceeds, hence undisclosed income, in long term capital gain and the sales proceeds as the cheque amount is out of disclosed income. At the time of sales of shares, amount of benefit which assessee achieve is a long-term capital gain as the amount parted is amount of long-term capital gain as this (i.e. undisclosed income) being the net of amount already paid by cheque and accordingly long term capital is gain is disclosed in TDS, 2016. If the sales proceeds are made taxable then it amounts to taxing the purchases made out disclosed sources. Hence purchase amount paid by cheque in earlier year out of disclosed. Hence, purchase amount paid by cheque in earlier year out of disclosed source cannot be charged to tax as cash credit under section 68”