The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ruled that share transactions backed by DEMAT statements and executed through stock exchanges cannot be treated as bogus income without concrete proof.
Tejash Ramesh Shah HUF, the assessee, purchased 10,000 shares of Midland Polymers Ltd. (MPL) on March 30, 2012, through the Bombay Stock Exchange (BSE). Due to a stock split and bonus issue, the shares increased to 200,000. The assessee sold the shares in a staggered manner over Assessment Years (AY) 2014-15 and 2015-16, earning a Long-Term Capital Gain (LTCG) of Rs. 61,75,355, which was claimed as exempt under Section 10(38) of the Act.
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The AO, relying on a report from the Kolkata Investigation Directorate on penny stock manipulation, denied the exemption, treating the LTCG as a bogus transaction and adding it to the assessee’s income under Section 68 of the Income Tax Act. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s order, rejecting the assessee’s submissions.
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On appeal before the ITAT, the assessee argued that the AO had not provided any direct evidence to substantiate the allegation of share price manipulation. The assessee furnished broker’s notes, DEMAT account statements, bank statements, and bonus declarations as proof of genuine transactions.
The two-member bench comprising Anikesh Banerjee (Judicial Member) and Padmavathy S. (Accountant Member) observed that SEBI had not issued any adverse remarks against the company’s shares and that transactions were conducted at market rates through proper banking channels.
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The tribunal held that mere reliance on a generalized investigation report without any specific evidence against the assessee was insufficient to discredit the transactions. The tribunal referred to similar judgments, including PCIT vs. Indravadan Jain (HUF) and ITAT Mumbai’s decision in Ramesh Rikhavdas Shah HUF vs. ACIT, where LTCG exemptions were upheld in similar circumstances.
The tribunal ruled that the AO failed to prove that the transactions were manipulated or that the assessee was involved in price rigging. The Tribunal deleted the addition of Rs. 61,75,355 under Section 68 of the Income Tax Act and allowed the assessee’s appeal.
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