The two member bench of the Income Tax Appellate Tribunal ( ITAT ) in Ahmedabad, denied the exemption under Section 10(38) of the Income Tax Act, 1961, for long-term capital gains ( LTCG ) on share sales, citing the alleged conversion of unaccounted money.
The assessee, Shailesh Subodhchandra Jhaveri, filed a return of income on September 28, 2011, declaring a total loss of Rs. (-) 10, 08,593. On March 25, 2015, a notice under Section 148 of the Income Tax Act was issued, directing the assessee to file the return of income within 30 days. The assessee responded on April 30, 2015, requesting that the original return be considered as the response to the notice and sought the reasons for reopening the case for the Assessment Year ( A.Y ) 2011-12. The reasons were provided on May 11, 2015. The assessee objected to the reopening, and this objection was disposed of on September 14, 2015. Subsequently, the assessee filed a writ petition before the Gujarat High Court on October 29, 2015, challenging the reopening. The petition was dismissed on June 14, 2016.
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On August 1, 2016, a notice under Section 142(1) was issued, followed by a show cause notice on September 20, 2016, regarding the proposed disallowance of Rs.1, 99, 01,199 related to trading in Chandni Textiles Engineering Industries Ltd. shares. The assessee responded on September 29, 2016, and October 4, 2016. The Assessing Officer ( AO ) observed that a search and survey action on April 9, 2013, at the residence and offices of Shri Shirish Chandrakant Shah ( SCS ) revealed that SCS provided accommodation entries for various financial transactions, including share trading losses and gains. Statements from key individuals, such as Damodar Attal, confirmed SCS’s involvement in managing these activities through dummy companies and synchronized trading.
SCS was found to have created 212 companies used for layering funds and trading shares. The Managing Director/Directors of Prraneta Industries Ltd. stated that SCS controlled the company and provided a list of 143 companies involved in trading under his instructions. The AO concluded that transactions with Chandni Textiles Engineering Industries Ltd. were manipulated by SCS, resulting in a non-genuine loss of Rs.1, 99, 01,199. The assessee’s contention that all transactions were through banking channels and at market rates was rejected. The AO found that these trades were not genuine business transactions but part of accommodation entries. Consequently, a loss of Rs.1, 52, 20,891 on Chandni shares was disallowed and added to the total income.
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The Commissioner of Income Tax ( Appeals ) [CIT (A)] upheld the AO’s decision. Evidence collected during the search indicated that SCS managed 212 companies, which were used for accommodation entries. These companies’ registered offices were found to be professional arrangements for correspondence, with evidence such as cheque books and bank statements confirming SCS’s control. Statements from Damodar Attal and other evidence revealed that SCS manipulated share prices and provided bogus entries for capital gains and trading profits. The CIT (A) confirmed that the trading in Chandni Textiles Engineering Industries Ltd. shares was part of SCS’s accommodation entry business.
In the case of Satish Kishore v. ITO, the ITAT held that long-term capital gains on share sales claimed by the assessee were arranged through accommodation entries, and the claim under Section 10(38) was rightly disallowed. . In such circumstances, the tribunal held that assessee failed to prove genuineness of transaction and long-term capital gain on sale of shares by assessee was an arranged affair to convert its own unaccounted money and thus, exemption claimed under section 10(38) on sale of shares had rightly been disallowed.
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Further the bench comprising Makarand V. Mahadeokar ( Accountant member ) and Siddartha Nautical ( Judicial member ) observed that the CIT (A) did not err in confirming the addition related to bogus claims. For Gujarat Meditech Ltd., the AO noted that only a few entities traded shares, and the CIT (A) upheld the treatment of these shares as bogus. Thus, the loss of Rs.7, 89,230 was added to the assessee’s income. The appeal was consequently dismissed.
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