ITAT Indore Restores Capital Gain Matter to AO for Fresh Factual Enquiry: Vijay Kothari Vs DCIT
Case Overview
The Income Tax Appellate Tribunal, Indore Bench, in the matter of Vijay Kothari Vs DCIT, examined a dispute arising from the assessment year 2015-16, where the assessee's claim of exempt long-term capital gain on sale of shares was rejected by the lower authorities and treated as income from undisclosed sources. The Tribunal, after detailed deliberation, allowed the appeal for statistical purposes and directed the matter back to the Assessing Officer for limited but focused factual verification on two critical points.
The appeal originated from the assessment order dated 21.12.2017 passed by the DCIT, Central-1, Indore under Section 143(3) of the Income Tax Act, 1961 for AY 2015-16, which was subsequently upheld by the Commissioner of Income-Tax (Appeals)-3, Bhopal, vide order dated 23.12.2022.
Background: The Transaction in Question
The assessee, an individual, filed his return of income for AY 2015-16 declaring total income of Rs. 9,79,790/- from various sources. As part of the return, the assessee also declared exempt long-term capital gain of Rs. 26,04,470/- under Section 10(38) of the Income Tax Act, 1961, arising from the sale of 6,000 shares of Sunrise Asian Ltd.
The key financial details of the transaction were as follows:
- Total sale proceeds declared: Rs. 27,54,470/-
- Total cost of acquisition: Rs. 1,50,000/-
- Capital gain claimed as exempt: Rs. 26,04,470/-
The case was picked up for scrutiny assessment, and the AO issued statutory notices under Section 143(2)/142(1) of the Income Tax Act, 1961, which were duly complied with by the assessee.
AO's Findings and Addition Made
During the course of scrutiny proceedings, the Assessing Officer examined the transaction in considerable detail. The AO took into account:
- The modus operandi typically associated with bogus exempt capital gains arranged through stock exchanges
- Investigations conducted by SEBI and the Kolkata Investigation Wing of the Income Tax Department concerning shares of Sunrise Asian Ltd. and related brokers
- Financial parameters and sudden price escalation in shares of Sunrise Asian Ltd.
- The manner in which the assessee had acquired the impugned shares
Relying on the landmark decisions of the Hon'ble Supreme Court in Sumati Dayal Vs. CIT and Durga Prasad More Vs. CIT, the AO concluded that the capital gain declared by the assessee was bogus and had been arranged as an accommodation entry. Accordingly, the exemption claim was rejected and an addition of Rs. 26,04,470/- was made as income from undisclosed sources. The CIT(A) confirmed these findings.
Assessee's Case Before ITAT: Full Transaction Trail
Before the Tribunal, the assessee's Authorized Representative laid out a detailed factual narrative backed by documentary evidence:
Purchase of Shares
- The assessee purchased 6,000 shares of Conart Traders Ltd. at Rs. 25/- per share, aggregating to Rs. 1,50,000/--, from M/s P. Saji Textiles Limited, Mumbai (the Seller).
- A Debit Note dated 16.01.2012 was issued by the Seller, copies of which were included in the Paper-Book.
- Payment of Rs. 1,50,000/- was allegedly made through an account payee cheque on 22.10.2011, with the corresponding debit entry appearing in the assessee's bank passbook.
Physical Share Certificate and Demat Conversion
- The shares purchased were in physical form, with the transfer being duly endorsed in the assessee's name on 16.01.2012 in the Memorandum of Transfers on the reverse of the share certificate.
- These physical shares were subsequently converted into dematerialised (demat) form, with the demat account held with Stock Holding Corporation of India Ltd. reflecting an opening balance of 6,000 shares of Conart as on 01.04.2013.
Amalgamation into Sunrise Asian Ltd.
- Conart Traders Ltd. and Santoshine Tradelinks Ltd. subsequently amalgamated into Sunrise Asian Ltd. under a scheme of amalgamation approved by the Hon'ble Bombay High Court vide order dated 22.03.2013.
- Consequent to this amalgamation, the assessee received 6,000 shares of Sunrise Asian Ltd. in lieu of his original 6,000 shares of Conart Traders Ltd., as reflected by corresponding debit and credit entries in the demat account on 26.06.2013/28.06.2013.