Merely because share prices rose abnormally exemption u/s 10(38) can not be denied

Merely because share prices rose abnormally or other persons involved bogus transactions, Long Term Capital Gain exemption u/s 10(38) can not be denied – ITAT

ABCAUS Case Law Citation:
ABCAUS 2769 (2019) (02) ITAT

Important Case Laws Cited/relied upon by the parties
Jankinath Sarangi Vs State of Orissa
Smt. Sikha Dhawan Vs ITO

The sole issue in this case was the order of the CIT(A) confirming the action of the Assessing Officer (AO) in not accepting the claim of the assessee for exemption of Long Term Capital Gain for sale of shares u/s 10(38) of the Income Tax Act, 1961 (the Act).

The Directorate of Investigation had carried out a country wide investigation to unearth the organized racket of generating bogus entries of Long Term Capital Gain which is exempt from tax. The modus operandi adopted by the operators was to make the beneficiary buy some shares of a pre-determined Penny stock company controlled by them. The initial transfer of shares in the name of beneficiary can be an ‘off market transaction’ or ‘online transaction’ and thereafter, issue of ‘preferential shares’ at nominal rates or issue of bogus shares even though there is hardly any profit or business activity in these companies. The beneficiary holds the shares for one year, the statuary period after which Long Term Capital Gain is exempt u/s 10(38) of the Act. The operators raise its price many times, often 500 to 1000 times. This is done through low volume transaction indulged in by the dummies of the operator at a pre-determined price. When the price reaches the desired level the beneficiary who bought the shares at a nominal price, is made to sell to a dumpy paper company of the operator. For this unaccounted cash is provided by the beneficiary which is routed through a few layers of paper companies by the operator and finally is parked with the dummy paper company that will buy the shares.

The AO studied the profile of the company whose shares were sold by the assessee and observed that was driven by the fact that its EPS was in negative. In spite of this, the assessee purchased the shares.

The AO further noted that the assessee had earned returns approximately 236 times on his investments without any supporting financial results which according to the AO was an evidence to show that the assessee’s claim for Long Term Capital Gain was not genuine one.

Also, from the statement recorded of the assessee, it was clear that assessee had no knowledge about the investment in share market and no knowledge of the company whose shares were involved and he relied on his friend circle. The assessee sis not remember from whom the physical certificates of the shares were acquired nor did he know the key personnel of the company from whom he had apparently purchased physical certificate of shares.

Finally, the AO concluded that surrounding circumstantial evidences did not satisfy the test of human probabilities as defined by Hon’ble Supreme Court, Hon’ble High Court and Tribunal in various case laws. Hence, he concluded that the Long Term Capital Gain shown by the assessee was a sham to introduce black money into the books of accounts of the assessee and therefore, held that the same is to be treated as undisclosed income of the assessee.

The CIT(A) confirmed the action of the AO observing that documents submitted as evidences to prove the genuineness of transaction were mere smoke screen to cover up the true nature of transactions.

The Tribunal observed that sale of said shares were transacted in a recognized Stock Exchange through an authorized share broker and were supported by contract note. Further, it was also not in dispute that the sale proceeds of the shares were received through proper banking channel from the said share broker and on sale of shares, the share were gone out of the Demat account of the assessee.

It was noted that the entire transaction of purchase and sale of shares were supported by documentary evidences which were placed before both the lower authorities and no defect in the documentary evidences produced could be brought on record by the revenue.

The Tribunal opined that the addition in question was made merely on the basis of suspicion and surmises. No material had been brought on record to show that the assessee was involved in the racket which was unearthed by the Investigation Wing of the department. The revenue could not point out that in anywhere in the statement of the stock broker, the name of the assessee was stated. Therefore, simply because some persons were involved in generation of bogus Long Term Capital Gain cannot lead to conclusion that the assessee was also involved in it without cogent material.

Further, it was noted that after making inquiries from the person, from whom, the assessee purchased the shares in question and/or from the share broker through whom the assessee sold the shares, no material could be brought on record by the Assessing Officer to show that the transaction of the assessee was not genuine and the assessee actually paid any amount in cash to any person in consideration of cheque received by him from the authorized share broker.

Theredore the Tribunal opined that the transaction of the assessee supported by overwhelming documentary evidences could not be impeached merely because share prices rose abnormally or other persons were involved in generation of bogus Long Term Capital Gain.

Accordingly, the Tribunal set aside the orders of the lower authorities and deleted the addition.

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