Bogus LTCG Addition u/s 68 Not Sustainable: ITAT Validates Demerger-Allotted Shares Transaction Citing Genuineness of Documentary Evidence [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ruled that the long-term capital gains (LTCG) from sale of shares allotted pursuant to a demerger scheme were genuine, as the assessee proved genuineness by comprehensive documentary evidence.

Heaven Mahendra Shah (assessee) filed return of income for Assessment Year (AY) 2015-16, claiming exemption on LTCG of Rs. 26,02,806 from sale of shares in Pearl Agriculture Ltd (PAL) and Pearl Electronics Ltd (PEL).

These shares were allotted in January 2011 pursuant to a Bombay High Court approved demerger scheme of the Pearl Vision Pvt Ltd, in respect of the assessee's holding of 4,000 shares.

The Assessing Officer (AO) treated the LTCG as bogus and alleged that price manipulation based on a report from the Investigation Wing of the Income tax Department and added the amount under Section 68 as unexplained cash credit.

The AO issued notices under Section 133(6) to purchasers, which returned unserved, and denied the assessee cross-verification. Aggrieved by the AO’s order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)].

The CIT(A) upheld the addition, relying on judicial precedents like Principal Commissioner of Income tax v. Nand Kishore Agarwala, and held the transactions as sham penny stock dealings intended to claim bogus exempt LTCG.

Aggrieved by the CIT(A)’s order, the assessee appealed to the ITAT. The assessee’s counsel argued that the shares were acquired through a legitimate demerger process, and all transactions were conducted on the BSE platform via banking channels.

The assessee furnished demat statements, bank statements, sale bills, allotment documents, and client master data from the depository participant. The counsel contended that the revenue's addition was solely based on the Investigation report without discrediting the assessee's evidence.

The Counsel relied on the coordinate bench decisions like Poornima Ramesh Shenoy v. ITO and the jurisdictional High Court in PCIT v. Indravadan Jain (HUF).

The two-member bench, comprising Anikesh Banerjee (Judicial Member) and Renu Jauhri (Accountant Member), observed that the assessee had discharged the primary onus by submitting unchallenged documents proving the genuineness of the demerger and sales.

The bench noted that the shares were credited to the demat account, proceeds received through banking channels, and no evidence linked the assessee to price manipulation.

The bench held that the addition under Section 68 was not sustainable, as the demerger followed a legal process, and the revenue failed to bring adverse material on record. It relied on the cited precedents and deleted the Rs. 26,02,806 Bogus LTCG addition. The appeal of the assessee was allowed.

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