Income Tax Act | Long Term Capital Gain On Shares Cannot Be Branded Bogus Without Evidence: ITAT Mumbai

The Income Tax Appellate Tribunal (ITAT), Mumbai has held that long-term capital gains (LTCG) arising from the sale of listed shares cannot be treated as unexplained cash credit under Section 68 of the Income Tax Act, 1961 merely on the basis of general allegations of penny-stock manipulation, when the assessee has supported the transactions with complete documentary evidence. A Division Bench comprising Vikram Singh Yadav (Accountant Member) and Anikesh Banerjee (Judicial Member) allowed the appeal filed by the assessee and set aside the additions of ₹2.41 crore made towards alleged bogus LTCG and ₹9.66 lakh towards estimated commission under Sections 68(Unexplained Credit Cash) and 69C(Unexplained Expenditure) of the Act. The appeal arose from an order passed by the National Faceless Appeal Centre (NFAC), which had affirmed the assessment framed under Section 143(3), treating the LTCG claimed on sale of shares of Sunrise Asian Ltd. (SAL) and Monarch Health Services Ltd. (MHSL) as accommodation entries. The assessee argued that he had purchased shares of Conart Traders Ltd., which were later issued as shares of SAL pursuant to amalgamation, and sold the resultant SAL and MHSL shares through a recognised stock exchange. The assessee had claimed exemption under Section 10(38) in respect of the LTCG. Section 10(38) provided exemption from income tax on Long-Term Capital Gains (LTCG) arising from the transfer of certain equity-related assets, subject to prescribed conditions. The Assessing Officer, however, relied on investigation reports and third-party statements to hold that the transactions were bogus and added the entire sale proceeds under Section 68, while also estimating commission as paid to entry operators under Section 69C. The ITAT noted that the Revenue had not disputed the fact of purchase and sale of shares through the stock exchange, nor the receipt of sale consideration through banking channels. It further observed that once the assessee has discharged the primary onus by producing all supporting documents, the burden shifts to the Revenue to establish that the transactions were sham or non-genuine. The Bench instead placed reliance on judgments of the Gujarat High Court in PCIT v. Divyaben Prafulchandra Parmar(R/Tac Appeal No. 812 of 2023) and the Madhya Pradesh High Court in CCIT v. Nilesh Jain (HUF)(ITA No. 56/2021), which had examined transactions in SAL and held that the scrip could not be treated as fictitious or sham. The Tribunal also relied on the Bombay High Court decision in CIT v. Shyam R. Pawar[Taxmann 256(Bom)], holding that mere suspicion or price rise is insufficient to treat share transactions as bogus in the absence of a direct nexus between the assessee and alleged operators. The Bench regarding the addition towards commission under Section 69C, held that no evidence had been brought on record to show that the assessee had actually paid any commission to entry providers, and therefore, ad-hoc estimation could not be sustained. In view of the above, the ITAT allowed the appeal in favour of the assessee, holding that the assessment did not raise any sustainable question of law. Case Title: Hareshkumar Mafatlal Shah v. ACIT, Mumbai Case No.: ITA No. 5439/Mum/2024 Appearance for Applicant/Assessee: Shri K Gopal a/w Shri Om Khandalkar Appearance for Respondent: Shri Hemanshu Joshi, SR DR Click Here To Read/Download Order

Income Tax Act | Long Term Capital Gain On Shares Cannot Be Branded Bogus Without Evidence: ITAT Mumbai

Rajnandini Dutta

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