ITAT Mumbai Rules Entire Penny Stock Sale Proceeds Cannot Face Section 68 Additions

The Mumbai bench of the Income Tax Appellate Tribunal upheld the deletion of an addition worth ₹1.93 crore related to penny stock transactions. The tribunal clarified that tax authorities cannot legally add the entire sale proceeds of shares under Section 68 without factoring in the corresponding purchase amounts incurred by the taxpayer. Under Section 68, when cash credits or unexplained sums are examined, the focus is on the nature and source of the credit, but taxing the gross proceeds without adjusting for genuine acquisition costs distorts the true income computation.

The established jurisprudence maintains that even if a transaction is viewed with suspicion, the taxable component cannot exceed the net benefit or the actual consideration received after accounting for legitimate outlays. This prevents arbitrary revenue assessments that disregard basic accounting principles during tax audits. Tax advisors and chartered accountants must ensure that computation schedules submitted during appellate proceedings clearly reflect net figures rather than gross sale values when challenging share-related additions.

Professionals should advise clients to maintain complete contract notes and ledger accounts proving both the purchase and sale legs of any disputed equity transactions. Bottom line: Net consideration, not gross sale value, must form the benchmark for any legitimate calculation under Section 68.