AO Treats ₹36.8L from Share Sale as Bogus as Exemption u/s 10(38) : ITAT Upholds CIT(A)’s Deletion, Rules Sale Genuine [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal ( ITAT ) upheld the Commissioner of Income Tax(Appeals)[CIT(A)]’s deletion of an addition where the Assessing Officer (AO) had treated ₹36,85,075 exemption under section 10(38) of Income Tax Act,1961, on the sale of shares as bogus, ruling the sale genuine.

The Revenue-appellant appealed against the CIT(A) order. In this case,Manish Agarwal and Sons,respondent-assessee, filed its return of income for A.Y. 2013-14 on 29.07.2013, declaring a total income of ₹7,94,940. It had claimed an exemption of ₹35,75,075 under section 10(38) of the Income Tax Act, 1961, on account of long-term capital gains from the sale of shares of M/s CCL International Limited.

The Investigation Wing identified the assessee as one of the persons who had traded in penny stock scrips of the said company, prompting the reopening of the assessment under section 148.

As no return was filed in response to the notice, the assessment was completed under section 147 read with section 144. The AO held that M/s CCL International Limited was a penny stock company managed by entry operators and that the transactions were a means to introduce unaccounted money as exempt capital gains.

Accordingly, the AO treated the entire sale consideration of ₹36,85,075 as bogus and disallowed the exemption claim under section 10(38).

On appeal, the CIT(A) found that no material evidence was produced to show that M/s CCL International Limited was engaged in penny stock activities or share price manipulation. The addition was therefore deleted, and the appeal was allowed. The Department, being dissatisfied, challenged this decision before the tribunal.

The departmental counsel argued that the CIT(A)’s order was not acceptable, as it ignored the findings of the Investigation Wing and NSE. It was stated that the enquiries showed M/s CCL International Limited was a penny stock company managed by entry operators, and the assessee had used these transactions to route unaccounted income and claim exempt long-term capital gains under section 10(38). Hence, the exemption of ₹36,85,075 on the sale of shares was not justified.

In reply, the assessee’s counsel supported the CIT(A)’s order, stating that it was well reasoned and required no interference.

A single member bench comprising of Mahavir Singh (Vice President) examined the submissions and the material on record. It noted that the CIT(A) had carefully considered the issue and found no evidence to suggest that M/s CCL International Limited was involved in penny stock activities or share price manipulation.

The CIT(A) had therefore treated the sale of shares amounting to ₹36,85,075 as genuine and rightly eligible for exemption under section 10(38), directing the deletion of the addition made under section 68.

The tribunal agreed with the CIT(A)’s findings and observed that the Revenue had not produced any new material to dispute them. It further noted that the tax effect involved was ₹11,38,688, which was below the prescribed limit of ₹60 lakhs for filing appeals before the ITAT as per Central Board of Direct Taxes (CBDT) Circular No. 09/2024.

Considering these facts, the appellate tribunal upheld the CIT(A)’s order and dismissed the Department’s appeal.

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