2025 (7) TMI 1430 - AT - Income Tax

Bogus LTCG - addition made in respect of the profit on sale of shares - Addition u/s 68 - scrips were allotted to the assessee in January 2013 pursuant to Hon ble Bombay High Court order in the demerger scheme in respect of his holding of 4000 shares Entire addition was confirmed solely on the basis of the report of the Investigation Wing of the Income-tax Department Kolkata which alleged that the rise in share price was manipulated and that the assessee had introduced unaccounted income in the guise of LTCG through a circular transaction. HELD THAT - During the assessment as well as appellate proceedings the assessee submitted all requisite documentary evidence including the demat account statement bank statement sale bill and share allotment documents. All such documents have been placed on record in the assessee s paper book. This demerger was carried out through a proper legal process. Importantly the documents submitted by the assessee during the assessment proceedings were neither challenged nor discredited by the revenue authorities. Therefore the assessee has discharged the primary onus of proving the genuineness of the transactions. The LTCG proceed was received by the assessee through regular banking channels. The purchased shares were credited to the assessee s demat account and the entire transaction was routed through the BSE. No evidence has been brought on record by the revenue to demonstrate that the assessee was involved in any price manipulation or rigging with respect to the shares of PAL PEL. We also note that the co-ordinate bench of the ITAT has taken a similar view in relation to the this transaction. Accordingly as respectfully rely on the decisions of Indravadan Jain 2023 (7) TMI 1091 - BOMBAY HIGH COURT and Poornima Ramesh Shenoy 2023 (9) TMI 795 - ITAT MUMBAI We setside the impugned appellate order. The additions made by the Ld. AO under Section 68 on account of LTCG is hereby deleted. Assessee appeal allowed.

Summary

ISSUES:

Whether long-term capital gains (LTCG) arising from sale of shares received pursuant to a court-approved demerger are eligible for exemption under section 10(38) of the Income Tax Act, 1961.Whether the sale proceeds of shares can be treated as unexplained cash credit under section 68 of the Income Tax Act on the ground of alleged bogus transactions involving penny stocks and price manipulation.Whether the assessee has discharged the onus of proving the genuineness of share transactions carried out through recognized stock exchanges and proper banking channels.The evidentiary value and effect of investigation reports alleging price manipulation and circular transactions on the assessment of capital gains and additions under section 68.The applicability and precedential value of judicial decisions regarding treatment of LTCG on shares and additions under section 68 in cases involving alleged sham transactions or price manipulation.

RULINGS / HOLDINGS:

The exemption claimed under section 10(38) was denied by the assessing officer on the ground that the shares were penny stocks and the LTCG was bogus; however, the appellate tribunal found that the shares were received pursuant to a legally sanctioned demerger and sold through the Bombay Stock Exchange (BSE) platform, with all transactions routed through proper banking channels, thereby discharging the primary onus of genuineness.The addition of Rs. 26,02,806/- under section 68 as unexplained cash credit was set aside by the tribunal, holding that the revenue authorities failed to discredit or challenge the documentary evidence furnished, including demat account statements, bank statements, and broker bills, and no evidence was brought on record to prove involvement in price manipulation or rigging.The tribunal relied on co-ordinate bench decisions and the jurisdictional High Court ruling which held that bona fide transactions conducted on recognized stock exchanges with proper documentation and banking trail do not justify additions under section 68 merely on suspicion or allegations of price manipulation.The tribunal concluded that the addition made by the assessing officer was not justified and deleted the addition under section 68, allowing the exemption under section 10(38) in respect of LTCG on shares received on demerger.

RATIONALE:

The legal framework applied includes provisions of the Income Tax Act, 1961, specifically sections 10(38) (exemption of LTCG on listed shares) and 68 (unexplained cash credits), alongside procedural safeguards under sections 139(1), 143(2), 143(3), 142(1), and 250.The tribunal emphasized the importance of documentary evidence such as demat account statements, broker bills, bank statements, and court-sanctioned demerger schemes to establish the genuineness of transactions.The tribunal noted that mere allegations or investigation reports indicating price manipulation or circular transactions, without direct evidence implicating the assessee, are insufficient to treat the LTCG as bogus or to make additions under section 68.The tribunal followed precedents where bona fide transactions executed on recognized stock exchanges with proper documentation and banking trail were held not to warrant additions under section 68, distinguishing such cases from those involving sham or staged transactions.The tribunal recognized the principle that the revenue bears the burden of disproving the genuineness of transactions and that the assessee's compliance with procedural and documentary requirements discharges the primary onus.