LTCG from Sale of Equity Share of Penny Stock Companies listed with BSE is not eligible for exemption u/s10(38) of I.T Act :ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT )  Kolkata bench held that long Term Capital Gain (LTCG) from sale of equity shares of penny stock companies listed with Bombay Stock Exchange (BSE) is not eligible for exemption under Section 10(38) of Income Tax Act, 1961.

Assesee , Manoj Jain is a Hindu Undivided Family (HUF).While filing return assessee claimed exemption under section 10(38) of the Income Tax Act for long-term capital gain of Rs.47,25,995/- from sale of equity shares of Sulabh Engineers & Services Limited.

Thereafter  the case was selected for scrutiny.  During the course of assessment proceedings, the  Assessing Officer observed that during F.Y. 2014-15, the assessee purchased shares of Sulabh Engineers & Services Limited  and the assessee sold the share in that year  or a total consideration of Rs.62,23,703/- thereby earning long-term capital gain of Rs.47,25,995/-

After analyzing the records of the Sulabh Engineers & Services Limited observed that the company appears in the list of 84 penny stock companies listed with Bombay Stock Exchange.

Considering the facts AO denied the exemption claimed by the assessee because the assessee was buying the share of a penny stock company and held that receipt of sale consideration is liable to be added as unexplained cash credit under section 68 of the  Income Tax Act.

Aggrieved by the order assesee filed an appeal  before the CIT(A) ,who dismissed the appeal of the assessee . Thereafter the assessee filed an appeal against the CIT(A) order before the tribunal.

Miraj D. Shah. Counsel for the assessee argued that the assessee was not found to be engaged in the alleged manipulation of price nor has been involved in the price rigging with entry operators as alleged by the  Assessing Officer referring to the Investigation Wing report.

Further assessee has entered into this transaction as a normal investor and, therefore, even the SEBI did not find it important to take up the case of the assessee by way of issuing any notice.

B.K. Singh, Counsel for Revenue submitted that the issue raised in the instant appeal is squarely covered in favour of the assessee by the judgment of the High Court in the case of Swati Bajaj.

It was observed by the tribunal that long-term capital gain arising from sale of equity shares from the listed companies, which were found to be the penny stock companies by both the lower authorities and the long-term capital gain so claimed, was found to be bogus in nature.

As per the observation in Swati Bajaj & Others case it was found that “earning of long-term capital gain of penny stock companies as bogus based on the test of preponderance of probability gathered from various circumstances like volume from trade, period of persistence in trading in the particular scrip, particulars of buy and sale orders”

However no action could be taken against the assessee by SEBI because the assessee was not found to be engaged in the manipulation of price of the alleged penny stock companies.

Even Though the LTCG earn from  sale of share of penny stock companies are not not eligible for exemption under Section 10(38) of Income Tax Act

After considering  the facts submitted and circumstance, the two member bench of Dr. Manish Borad,(Accountant Member ) and  Sanjay Garg, (Judicial Member) dismissed the appeal of the assessee

To Read the full text of the Order CLICK HERE

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Manoj Jain (HUF) vs Income Tax Officer , 2023 TAXSCAN (ITAT) 2384 , Shri Miraj D. Shah , Shri B.K. Singh