Exemption u/s 10(38) of Income Tax Act shall be denied when Assessee enters into Sham Transaction with Paper Companies: ITAT upholds Order of CIT(A) [Read Order]

The Pune bench of the Income Tax Appellate Tribunal (ITAT) held that the exemption under Section 10(38) of the Income Tax Act, 1961 shall be denied when the assessee enters into a sham transaction with the paper companies.

The assessee is an individual who derives income from farming and rents. The assessee claimed exemption of Long-Term Capital Gains from the sale of shares of Greencrest Financial Services Limited under Section 10(38) of the Income Tax Act. The statement of the assessee was recorded under Section 131 of the Income Tax Act during the assessment proceedings.

The Assessing Officer observed that the shares of Greencrest Financial Services Limited were jacked up by using the technical method of splitting. It is noted the share price of the company hovered around Rs.7.26 per share in May 2009 and jacked up to around Rs.264.30/- in June 2014.

The assessee purchased 5,00,000 shares for Rs.12/- and the same has been split to the ratio of 1:10 which according to the Assessing Officer the number of shares increased from 5,00,000 to 50,00,000. Further, it is noted that the assessee sold 2,00,000 shares for Rs.62.31/- and 22,000 shares for Rs.63.11/-. The Assessing Officer held that the assessee is the beneficiary and took the entry of Rs.1,35,63,573/- as an exemption.

According to the Assessing Officer, the Accountant of the said company namely Shri Soumen Sen stated the name of some accommodation entry provider in the form of bogus capital gain through BSE-listed companies. It was further stated that Greencrest Financial Services Limited is one of the companies used for providing bogus long-term capital gain to various beneficiaries.

From the assessment order, a statement under Section 131 of the Income Tax Act was recorded from the assessee, wherein, he stated that he purchased shares on the advice of his friends. It is pertinent to note that information gathered from the purchasers who bought shares from the assessee, the Assessing Officer intimated the concerned jurisdictional Assessing Officers of the said purchasers, and on an enquiry the said jurisdictional Assessing Officers found the said purchasers were also paper company, which clearly shows the transactions between the assessee and these paper companies are not genuine.

The Two-member bench comprising of S.S. Viswanethra Ravi (Judicial member) and G.D. Padmahshali (Accountant member) held that the transactions between the assessee and paper companies are suspicious sale transactions in shares and Long-Term Capital Gain as claimed by the assessee is not allowable under Section 10(38) of the Income Tax Act.

The bench completely agreed with the reasoning recorded by the Commissioner of Income Tax (Appeal) [CIT(A)] in holding the transaction entered by the assessee with paper companies a sham transaction and denial of exemption under Section 10(38) of the Income Tax Act was justified. Thus, the appeal of the assessee was dismissed.

To Read the full text of the Order CLICK HERE

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