Income Tax Act | ITAT Mumbai: Long-Term Capital Gains on Listed Shares Cannot Be Treated as Bogus Without Concrete Evidence
Pranav B Prem
The Income Tax Appellate Tribunal (ITAT) Mumbai has held that long-term capital gains (LTCG) derived 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 generic allegations surrounding penny-stock manipulation. The Tribunal observed that once the assessee substantiates the share transactions with complete documentary evidences, the burden shifts to the Revenue to prove with cogent material that the transactions are sham. In the absence of such proof, additions under Sections 68 and 69C cannot be sustained.
The Division Bench comprising Vikram Singh Yadav (Accountant Member) and Anikesh Banerjee (Judicial Member) allowed the appeal filed by the assessee, setting aside additions of ₹2.41 crore made towards alleged bogus LTCG and ₹9.66 lakh towards purported commission payment under Sections 68 and 69C of the Act. The appeal arose from an order of the National Faceless Appeal Centre (NFAC), which had affirmed the assessment order passed under Section 143(3) for A.Y. 2014-15.
The assessee had declared LTCG on the sale of shares of Sunrise Asian Ltd. (SAL) and Monarch Health Services Ltd. (MHSL) and claimed exemption under Section 10(38). It was explained that the assessee had originally purchased shares of Conart Traders Ltd. off-market through Santoshima Tradelink Pvt. Ltd., and pursuant to amalgamation, received equivalent shares of SAL. The shares of SAL and MHSL were thereafter sold through a recognised stock exchange, with the proceeds received through normal banking channels, accompanied by contract notes, STT payment and corresponding Demat statements.
The Assessing Officer rejected the claim solely on the basis of investigation reports alleging widespread penny-stock manipulation and treated the entire sale proceeds as bogus accommodation entries. The AO further estimated commission expenditure at 4% and made an addition under Section 69C, without bringing any direct evidence suggesting the assessee’s nexus with alleged entry operators.
The Tribunal noted that the Revenue did not dispute the fact that the shares were purchased and sold through the stock exchange platform, nor did it bring any material to rebut the documentary evidences filed by the assessee. The Bench emphasised that the assessee had discharged the primary onus by producing all relevant records, and therefore, the Revenue was required to establish with positive material that the transactions were merely accommodation entries. The AO, however, failed to provide any corroborative evidence linking the assessee to alleged operators or suggesting that the share prices were artificially rigged for the assessee’s benefit.
The Tribunal also recorded that the NFAC placed reliance on the ruling of the Delhi High Court in Udit Kalra, which concerned a different scrip (Kappac Pharma Ltd.), making the decision factually distinguishable in the present case. In contrast, the Bench referred to the decisions of the Gujarat High Court in PCIT v. Divyaben Prafulchandra Parmar and the Madhya Pradesh High Court in CCIT v. Nilesh Jain (HUF), both of which examined transactions involving Sunrise Asian Ltd. and held that the scrip could not be treated as fictitious in the absence of direct evidence. The Tribunal also relied on the Bombay High Court judgment in CIT v. Shyam R. Pawar, reiterating that a rise in share price by itself cannot be treated as proof of bogus capital gains unless the Revenue establishes a nexus between the assessee and alleged operators.
On the addition under Section 69C, the Tribunal held that there was no material to show that the assessee paid any commission to entry providers. It observed that ad-hoc estimation of commission without evidence is impermissible in law. Since the Revenue failed to demonstrate actual payment of commission, the addition of ₹9.66 lakh was also deleted.
Concluding that the assessment lacked legal sustainability, the Bench allowed the appeal, holding that the additions of ₹2,41,53,979 under Section 68 and ₹9,66,159 under Section 69C were unsupportable. The ITAT stated that once the assessee furnished genuine evidences, “there was nothing further brought on record by the AO to justify the allegation of non-genuine LTCG,” and accordingly ordered deletion of all additions.
Appearance
Appearance for Applicant/Assessee: Shri K Gopal a/w Shri Om Khandalkar
Appearance for Respondent: Shri Hemanshu Joshi, SR DR
Cause Title: Hareshkumar Mafatlal Shah v. ACIT, Mumbai
Case No: ITA No. 5439/Mum/2024
Coram: Vikram Singh Yadav (Accountant Member), Anikesh Banerjee (Judicial Member)
