Addition for bogus capital gain deleted as transaction took place before SEBI order

Addition for bogus capital gain in penny stock company deleted as shares were purchased and sold before order of SEBI and investigation report

ABCAUS Case Law Citation:
ABCAUS 3814 (2023) (11) ITAT

Important Case Laws relied upon by parties:
Karuna Garg and Others

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming denial of exemption claimed u/s 10(38) of the Income Tax Act, 1961 (the Act) in respect of long term capital gain earned on sale of listed equity shares


During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee had shown long term capital gain on sale of shares of a listed company which was claimed to be exempt u/s 10(38) of the Act.

From the report of the Directorate of Investigation, the Assessing Officer formed a belief that the impugned long term capital gains were result of transaction in penny stock.

The Investigation Wing had elaborately discussed the modus operandi adopted by the operators, which was to make the beneficiary buy some shares of a pre-determined penny stock company controlled by them. These shares were transferred to the beneficiary at a very nominal price, mostly offline through preferential allotment or offline purchase/sale to save STT. The beneficiary holds the share for one year and as soon as the holding becomes long term, shares are sold at a rigged high price, thereby generating long term capital gain, which is subsequently claimed as exempt u/s 10(38) of the Act.

Based on the aforementioned observations, the Assessing Officer denied the claim of exemption u/s 10(38) of the Act and made further addition towards hypothetical commission paid for procuring long term capital gains.

The Tribunal observed that undisputed fact was that shares were allotted to the assessee who has applied in the IPO of the company. On allotment, shares were credited in the demat account of the assessee and the payments have been made through regular banking channel. Purchase of shares was subject to security transaction tax.

The Tribunal opined that the Assessing Officer has proceeded by heavily relying upon the report of the Investigation Wing regarding list of companies engaged in providing accommodation entries in the garb of bogus long term capital gains, modus operandi being penny stock trading through recognized stock exchanges. Though the assessee furnished all details but the same were rubbished by the Assessing Officer.

The Tribunal further observed that the entire assessment had been framed by the Assessing Officer without conducting any enquiry from the relevant parties or independent evidence or source, but had merely relied upon the statement by the Investigation Wing.

Also, the ITAT noted that report of the Investigation Wing was much after the date of transaction when the assessee had already sold scrip. It was true that the shares of the company involved were suspended from trading in stock exchange but the shares were purchased and sold by the assessee much before the report of the Investigation Wing and also the order of the SEBI.

Further, the Tribunal observed that on identical set of facts the co-ordinate bench had considered the same shares and deleted the addition which was affirmed by the Hon’ble High Court.

On finding parity of facts, following the order of the Co-ordinate Bench the Tribunal directed the Assessing Officer to allow the exemption u/s 10(38) of the Act in respect of LTCGs and further direct the Assessing Officer to delete the hypothetical addition for commission.

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