Kolkata ITAT Strikes Down Fabricated LTCG Exemptions Under Section 10(38) Relying on Preponderance of Probabilities in Shyam Sunder Bajaj Vs ITO

The intersection of capital markets and tax exemptions has long been a battleground for the revenue authorities and the assessee. In a decisive ruling, the Income Tax Appellate Tribunal (ITAT), Kolkata, adjudicated on a consolidated batch of seven appeals, delivering a massive blow to the practice of utilizing penny stocks for tax evasion. The landmark case of Shyam Sunder Bajaj Vs ITO (ITAT Kolkata) revolved around the controversial disallowance of Long-Term Capital Gains (LTCG) exemptions claimed under Section 10(38) of the Income-tax Act, 1961, alongside additions made for unexplained cash credits and alleged commission payments.

The core issue across all seven appeals pertained to the Assessment Years (AY) 2014-15 and 2015-16. The Assessing Officers (AOs) had uniformly determined that the spectacular financial returns generated by the respective assessees were not the result of astute investment strategies but were, in fact, orchestrated penny-stock manipulations. Relying heavily on exhaustive reports from the Directorate of Income Tax (Investigation), the AOs classified these trades as sham transactions designed to launder unaccounted wealth. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld these assessments, prompting the assessees to approach the Tribunal.

Detailed Factual Matrix of the Consolidated Appeals

To comprehend the magnitude of the alleged manipulation, it is crucial to examine the specific mechanics of each appeal dismissed by the Tribunal. The modus operandi generally involved purchasing obscure shares at negligible prices, followed by an astronomical, operator-driven price hike, and subsequent tax-free liquidation.

1. Astronomical Returns in Surabhi Chemicals (ITA No. 2552/KOL/2018)

For AY 2014-15, the assessee declared a total income of Rs. 18,58,860 while claiming an LTCG exemption of Rs. 52,22,879. The underlying asset comprised 1,00,000 equity shares of Surabhi Chemicals & Investments Limited, acquired for a mere Rs. 2,00,000 across three dates: 16.03.2012, 14.08.2012, and 13.04.2013. Between 27.09.2012 and 04.12.2013, these shares were offloaded for Rs. 54,22,879. This represented an inexplicable price surge of approximately 2611% within a brief 16 to 18-month window. Consequently, the AO denied the Section 10(38) exemption, treating the gains as undisclosed income, and further added Rs. 26,114 as unexplained expenditure for the commission paid to syndicate operators.

2. The Unno Industries Merger Route (ITA No. 1122/KOL/2018)

In this appeal for AY 2014-15, the assessee reported an income of Rs. 7,44,340 and sought an exemption on LTCG amounting to Rs. 73,97,001. The transaction trail began on 19.10.2012 with the acquisition of 2,38,000 shares of Basukinath Real Estate Limited at Rs. 1.3 per share, totaling Rs. 3,00,000. Following a corporate merger, these holdings were converted into shares of Unno Industries Limited. During the assessment year, the assessee liquidated these holdings for a gross consideration of Rs. 77,28,050. The AO categorized the entire gross sale consideration as undisclosed income.