ITAT Shields Investor from Tax, Says Documented Stock Exchange Trades Trump Tax Dept's Presumptions [Read Order]
The bench observed that the Assessing Officer had heavily relied on a generalized investigation report and statements from third-party brokers
Stock Exchange
Stock Exchange
In a significant ruling that reinforces the primacy of documentary evidence over general allegations, the Income Tax Appellate Tribunal (ITAT) in Mumbai has shielded an individual investor from a substantial tax demand. The tribunal held that when share transactions are conducted through the stock exchange, supported by verifiable documents and banking channels, the tax department cannot arbitrarily treat the resulting capital gains as bogus based on mere suspicion and unsubstantiated presumptions.
The case involved Mumbai-based real estate developer Pavankumar Bachhraj Chandan. The heart of the dispute was a Long-Term Capital Gain (LTCG) of Rs. 92,19,830 that Chandan earned from the sale of shares of Shree Shaleen Textile Ltd (STL) and claimed as exempt under the Income Tax Act. The Assessing Officer (AO) had dismissed these gains as fictitious. Relying on a general investigation report from Kolkata that labelled STL a "penny stock," the AO alleged the gains were a pre-arranged scheme to convert unaccounted money into tax-free income. He subsequently added the entire sale proceeds to Chandan's income and made a further addition of Rs. 1,84,396 as alleged commission paid for this arrangement.
On appeal, the National Faceless Appeal Centre [CIT(A)] had ruled in the assessee's favour, leading the Revenue Department to file an appeal before the ITAT. The department argued that the CIT(A) had ignored evidence of price manipulation in the script and failed to appreciate the circumstantial evidence gathered by the investigation wing.
Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here
The ITAT bench, however, found the department's case lacking in concrete evidence against the specific taxpayer. The tribunal meticulously examined the facts and noted that Chandan had provided a complete paper trail for his transactions. This included the share application form, allotment letter, demat statements, contract notes from the broker Motilal Oswal Securities Limited, and bank statements showing the receipt of sale consideration. Crucially, all transactions were executed on the Bombay Stock Exchange (BSE) and were subject to Securities Transaction Tax (STT).
The bench observed that the Assessing Officer had heavily relied on a generalized investigation report and statements from third-party brokers. However, the tribunal pointed out a critical flaw: these brokers had never named Chandan in their statements, and the department had failed to provide him with these documents or an opportunity for cross-examination, violating principles of natural justice as established by the Supreme Court in the Andaman Timber Industries case (Andaman Timber Industries v. Commissioner of Central Excise).
Furthermore, the ITAT emphasized that the department could not prove any direct cash trail linking Chandan to any entry operator or demonstrate his personal involvement in any price rigging. The fact that the company's financials were weak or that its shares were suspended by SEBI after Chandan had sold his holdings was deemed irrelevant to his specific, documented transactions.
Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here
The tribunal's decision was also guided by the principle of consistency. It noted that a coordinate bench of the ITAT had already decided the identical issue in favour of Chandan himself for the immediately preceding assessment year involving shares from the same company. Following this binding precedent and a catena of favourable judicial pronouncements, including the Bombay High Court's judgment in the case of Shyam R. Pawar, the bench found no reason to take a different view.
Since the primary addition of the capital gains was deleted, the consequential addition for alleged commission was also dismissed automatically.
The ruling was delivered by a bench comprising Narender Kumar Choudhry (Judicial Member) and Prabhash Shankar (Accountant Member). This decision provides a clear reminder to the tax authorities that while tackling evasion is paramount, additions must be based on specific, incriminating evidence linked to the assessee, and not on broad generalizations that overlook compliant transactional documentation.
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