Merely because share prices doubled, it may not have given rise to any doubt to disbelieve the transaction – High Court
In a recent judgment, Hon’ble High Court held that merely because the share prices have more than doubled that too over a long period of two years, it may not have given rise to any doubt to disbelieve the transaction.
ABCAUS Case Law Citation:
5138 (2026) (05) abacus.in HC
In the instant case, the Income Tax Department had challenged the order passed by the ITAT in deleting addition u/s 68 of the Income Tax Act, 1961 (the Act) denying the LTCG exemption u/s 10(38) of the Act treating the transaction as bogus.
The case of the assessee was selected for limited scrutiny, but, was converted into full scrutiny after due approval. The issue under examination was claim of capital gain exempt u/s 10(38) of the Act. During the year under consideration, the assessee had made transaction in shares resulting in large amount of long term capital gains which were claimed exempt.
The AO, taking into consideration the investigation report on bogus LTCG, concluded that the claim of the assessee was not genuine and made an addition u/s 68 of the Act. The AO observed that the assessee had revised computation of income in regard to exempt claim u/s 10(38) of the Act in respect of shares of on company and deposited the tax demand in that regard.
The assessee challenged the addition before the CIT(A) who dismissed his appeal.
The Tribunal observed that the AO denied the exemption claimed u/s 10(38) on the sale of shares of two companies as the explanation offered by the assessee that the transaction was through stock exchange & payment made by cheque was very general in nature and found unsatisfactory. The AO had observed that on analysis of price history of shares of one company it was found that price suddenly reached over more than 150% when assessee liquidated his holdings.
The Tribunal further observed that the AO observed that on going through the Annual report of the company, it was noticed that there was no operational activity during the concerned period and the said entity had earned very low income from operations.
The Tribunal further noted that the CIT(A) dismissed the appeal on the basis that the plea of appellant that name of said entity not mentioned in attached report was not acceptable as directorate of investigation had carried out a detailed probe into nation-wide scam. Scrips had been identified which have been used for conversion of black money. Even if specific name was not listed anywhere, the action of AO was justified. It was observed that there was no merit in the submission of appellant that the sale consideration has been received through banking channel and shares were sold in stock exchange.
The CIT(A) had concluded that the financial position of the said entities were very poor and do not seem to be carrying out regular business. The exponential rise in its share price was nothing else but a manipulation by the syndicate of operators involved in the scam.
The Tribunal noted that the appellant had submitted Contract notes, Bank statement and the Demat statement which the AO had acknowledged. The AO had not rejected or disapproved the authenticity or veracity of such documents. There was no finding in the assessment order that the transactions were non-genuine based on the appellant’s conduct or evidences. In fact the appellant had purchased the said scrip after holding them for a period of more than 2 years, which did indicate that there was no possible malice in acquiring shares to claim bogus income after two years.
The Tribunal further noted that during the F.Y. in which appellant sold the scrips, the company had a sound Net Worth and turnover reflecting a financially sound and operational entity. Merely because the scrip witnessed appreciation in market price does not by itself make the LTCG bogus especially when the entity had revenue generating activity.
The Tribunal further noted that the shares in which the appellant transacted did not appear in the list of the investigation wing. There was no material on record to link it with the entities mentioned in the report. As a matter of fact, there was no adverse findings from SEBI or from any other regulatory authority that the scrip involved had been flagged or declared as a penny stock or shell company by SEBI or any other authority. The Department could not dispute that the shares of entity were still actively trading on BSE. Thus, to allege it to be shell company was not justified.
Accordingly, the Tribunal allowed the appeal and the impugned addition was deleted.
Not satisfied, the Department challenged the order of the ITAT before Hon’ble High Court and argued that as held by Hon’ble Supreme Court human probabilities and surrounding circumstances must prevail over self-serving documents. It was contended that mere routing of transactions through banking/demat channels was not sufficient to establish genuineness under section 68 when surrounding circumstances clearly point to a sham transaction.
The Hon’ble High Court observed that primarily, the Tribunal had specifically found, on the strength of material and evidence, that not only the contract notes from registered brokers; bank statements evidencing payments made through banking channel were available with respect to the above investments made by the assessee but most crucially demat statement showing purchase and sale of the shares in issue were also existing. There was no material to doubt the scripts being listed and traded.
The Hon’ble High Court held that merely because the share prices have more than doubled that too over a long period of two years, it may not have given rise to any doubt to disbelieve the transaction. At most, the suspicion that arose to the assessing authority stood disapproved specifically on the strength of finding recorded by the Tribunal.
As a result, the appeal was dismissed as lacking in merit.
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