ITAT Mumbai Upholds Section 10(38) Exemption on JMD Telefilms Share Sale

Background and Appeal Overview

In the case of Anirudh Anil Gaggar Vs ITO (ITAT Mumbai), the assessee challenged an order dated 16.06.2025 issued by the National Faceless Appeal Centre (NFAC), Delhi for A.Y. 2011-12. The dispute centred around:

  • Reopening of assessment under Section 147
  • Denial of exemption under Section 10(38) on alleged long-term capital gains (LTCG) from sale of shares of JMD Telefilms Ltd.
  • Addition of the entire sale proceeds as unexplained cash credit under Section 68
  • Further addition under Section 69C towards purported commission for arranging accommodation entries

The assessee, an individual involved in derivatives trading and share investments, had filed a return declaring income of ₹14,24,050. In that return, he claimed exemption under Section 10(38) for LTCG of ₹1,14,68,337 arising from sale of JMD Telefilms Ltd. shares.

The Assessing Officer (AO):

  • Branded the JMD Telefilms Ltd. shares as a “penny stock”
  • Treated the LTCG claim as bogus
  • Recharacterised the sale consideration of ₹1,18,08,337 as unexplained credit under Section 68
  • Further added ₹3,54,250 under Section 69C as alleged commission paid to obtain a bogus exempt LTCG entry

The Commissioner of Income Tax (Appeals), acting through NFAC [“Ld.CIT(A)”], confirmed the AO’s view on all issues. The assessee carried the matter to the Income Tax Appellate Tribunal (ITAT), Mumbai.

Grounds Raised Before the Tribunal

The assessee’s appeal contained both jurisdictional and substantive grounds. The key contentions included:

  1. The assessment pursuant to a “nonest” return was claimed to be void and illegal.
  2. The jurisdiction assumed by the AO under Section 147 was challenged as invalid.
  3. It was argued that the assessment was vitiated because:
    • Statements of third parties were used against the assessee
    • No opportunity for cross-examination was provided
    • No corroborative evidence was placed on record to support those statements
    • Principles of natural justice were allegedly violated.
  4. The assessee alleged that the AO proceeded with reassessment simultaneously with providing reasons for reopening, without first disposing of objections, allegedly contrary to:
    • Allana Cold Storage Co. Vs ITO, 287 ITR 1 (Bom)
    • Asian Paints Ltd. Vs. Dy.CIT, (2008) 290 ITR 90 (Bom)
    • Bayer Material Science (P) Vs. DCIT, 382 ITR 333 (B’bay HC)
  5. On merits, the assessee disputed:
    • Denial of exemption under Section 10(38) in respect of LTCG from JMD Telefilms Ltd.
    • Treatment of ₹1,18,08,337 as unexplained cash credit under Section 68
    • Characterisation of the scrip as a penny stock without concrete material
  6. The additional addition of ₹3,54,250 under Section 69C as unexplained expenditure (commission) was also assailed.

The assessee requested annulment of the assessment or, in the alternative, deletion of all additions.

Facts and Evidence Produced by the Assessee

Nature of Business and Investments

  • The assessee is an individual engaged in derivatives trading and share investments.
  • During the relevant financial year, he dealt in around 110 scrips generating capital gains/losses.
  • As on year-end, his investment portfolio comprised approximately 71 scrips.

Claim under Section 10(38)

  • The assessee reported LTCG of ₹1,14,68,337 from sale of shares of JMD Telefilms Ltd.
  • Exemption under Section 10(38) was claimed on the footing that:
    • The shares were held for more than 12 months, and
    • The sale was executed on a recognised stock exchange with payment of Securities Transaction Tax (STT).

Documentary Evidence Submitted

To substantiate the genuineness of the JMD Telefilms Ltd. transactions, the assessee filed extensive records, including:

  • Gift deed showing acquisition of JMD Telefilms Ltd. shares from his father
  • Capital account and balance sheet reflecting the investment
  • Demat account statements evidencing holding of the shares
  • Contract notes issued by a SEBI-registered broker for purchase and sale
  • Demat transaction statements tallying movement in and out of the demat account
  • STT payment details / certificates confirming that STT was actually paid
  • Bank statements / ledger accounts showing receipt of sale proceeds through regular banking channels
  • Stock exchange transaction details obtained from BSE data

The assessee asserted that these documents clearly established acquisition, holding and sale through normal market mechanisms.

Findings of the AO and Ld.CIT(A)

AO’s Approach