ITAT Upholds Deletion of Bogus LTCG Addition, Rules No Evidence of Tax Evasion in Share Transactions [Read Order]

The Income Tax Appellate Tribunal (ITAT), Nagpur Bench, has upheld the decision of the Commissioner of Income Tax (Appeals) to delete a ₹5.60 crore addition made under Section 68 of the Income Tax Act, 1961, in the case of Nagpur-based assessee Nandkumar Khatumal Harchandani. The assessing officer had treated long-term capital gains (LTCG) from share transactions as bogus, alleging accommodation entries, but the tribunal found no concrete evidence to justify the tax evasion claim.

In this appeal filed by the Assistant Commissioner of Income Tax, Central Circle–2(1), Nagpur, the Revenue challenged the CIT(A)’s decision to delete the addition related to LTCG claimed exempt under Section 10(38) of the Act for the Assessment Year 2015–16. The dispute centered around the sale of shares of Parag Shilpa Infrastructure & Services Ltd., previously known as Swift IT Infrastructure Ltd., which were originally purchased in physical form by the assessee in March 2012.

The Revenue relied heavily on a report from the Income Tax Investigation Wing, Kolkata, which included general observations and third-party statements indicating widespread misuse of LTCG exemptions through penny stock transactions. The assessing officer concluded that the assessee’s transactions were sham in nature, lacking economic substance, and made the addition under Section 68 for alleged unexplained cash credits.

However, during appellate proceedings, the assessee provided detailed documentary evidence to substantiate the genuineness of the transactions. These included copies of purchase invoices, share certificates, dematerialization confirmations, Client ID proofs, bank statements, contract notes from brokers, and stock exchange records showing the sale of shares through proper channels. The entire transaction was executed through registered stock exchanges and banking channels, with Security Transaction Tax (STT) duly paid.

The CIT(A) noted that while the investigation report flagged many cases of manipulation, there was no direct reference to the assessee or the company involved in this case. The appellate authority also observed that the department had failed to provide an opportunity to the assessee to cross-examine persons whose statements were used against him. The CIT(A) further emphasized that suspicions alone, without corroborating evidence, could not justify additions under Section 68.

In affirming this view, the ITAT agreed that the sale and purchase transactions were well-documented, backed by valid financial records, and did not indicate any involvement in accommodation entry operations. The Tribunal also noted that the shares in question had been held for over a year before being sold, making the assessee eligible for LTCG exemption under the provisions of the Act. The Tribunal cited the Supreme Court’s ruling in Andaman Timber Industries (2015) on violation of natural justice due to denial of cross-examination and referenced the High Court decision in Gopal Purohit (2011) which upheld the treatment of delivery-based share transactions as genuine capital gains.

Further, the ITAT also dismissed the Revenue’s challenge to the deletion of disallowance of ₹9.88 lakh under Section 14A, observing that the assessee had sufficient interest-free funds exceeding his investments and the interest expenditure related to non-investment activities like vehicle and LIC loans.

The order was pronounced by the Bench comprising V. Durga Rao, Judicial Member, and K.M. Roy, Accountant Member, who concluded that the assessing officer's addition was based on assumptions and lacked any direct incriminating evidence linking the assessee to the alleged modus operandi.

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