Shares Held for 33 Months, Sold on Recognized Exchange, and STT Duly Paid: ITAT Rejects Revenue’s Allegation of Bogus LTCG u/s 68 [Read Order]

The assessees had filed their returns declaring agricultural income, nominal taxable income, and LTCG of ₹2,23,95,400 earned on the sale of listed shares of M/s. Comfort Fincap Ltd., claiming exemption under Section 10(38) of the Act.

New Release: Taxation of Capital Gains – 2025 Edition - CLICK HERE

The case was picked up for scrutiny, and the Assessing Officer (AO) observed that the assessees had purchased shares of Parasnath Textile Ltd. (later renamed M/s. Comfort Fincap Ltd.) in March 2011 at ₹18 per share when the company was not listed on any recognized exchange. These shares were later listed on the BSE on 25.03.2013 at ₹387 per share and subsequently sold in December 2013 and January 2014 at prices going up to ₹450 per share.

According to the AO, such extraordinary price rise was not supported by the company’s business activities and was merely a pre-arranged accommodation entry to generate bogus LTCG. Relying on SEBI’s investigation reports against the scrip, the AO disallowed the LTCG claim and added ₹2.23 crore as unexplained cash credit under Section 68.

The CIT(A) upheld the assessment order, rejecting the assessees’ arguments that the transactions were genuine and carried out on the floor of a recognized exchange with payment of Securities Transaction Tax (STT).

The assessees, aggrieved by the dismissal, challenged the order before the Tribunal. It was submitted on their behalf that the shares were purchased through banking channels, duly dematerialized, held for 33 months, and eventually sold on the BSE.

Since the STT was paid, the transaction squarely qualified for exemption under Section 10(38). The appellants emphasized that they had no connection with the company, its promoters, or alleged entry providers, and there was no evidence on record to establish any live nexus. All supporting documents, including share certificates, demat statements, bank records, IPO documents, and allotment letters, were furnished during assessment proceedings.

They further contended that subsequent suspension of the scrip by SEBI in December 2014 could not affect their transactions completed during FY 2013-14. It was also argued that the AO taxed only the LTCG while allowing cost of acquisition, thereby contradicting the allegation of the entire transaction being bogus.

The Departmental Representative, however, defended the Revenue’s case, arguing that the assessees could not satisfactorily explain the rationale behind investing in such shares when the company was not engaged in substantial business activity. The AO’s reliance on investigation findings and unusual price movements justified the disallowance.

The bench of Narendra Prasad Sinha and Suchitra Kamble noted that the assessees had provided all necessary documents to substantiate their transactions. The purchase was made through banking channels, the shares were dematerialized, held for over 33 months, and sold through a recognized stock exchange with STT duly paid.

Complete practical guide to Drafting Commercial Contracts, CLICK HERE

The ITAT noted that the Revenue had failed to establish any evidence of the assessees’ involvement in manipulation or collusion with entry operators. The mere fact of price rise in the scrip could not be a ground to treat the transaction as bogus in the absence of direct evidence.

It held that the gains were genuine and merely an incidental benefit due to market fluctuations. Consequently, the additions under Section 68 were unsustainable.

Accordingly, the ITAT allowed the appeals, holding that the LTCG earned by the assessees was exempt under Section 10(38) of the Income-tax Act, and the treatment of the transactions as unexplained cash credit was unjustified.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates