LTCG Exemption Cannot Be Disallowed Based Solely on Investigation Wing Report — ITAT Mumbai

Background and Overview

The Mumbai Bench of the Income Tax Appellate Tribunal recently adjudicated an appeal filed by the assessee, Kiran Bhanwarlal Jogani, challenging the order passed by the National Faceless Appeal Centre (NFAC)/CIT(A) which arose from an assessment framed under Section 143(3) of the Income Tax Act, 1961 for Assessment Year 2014-15. The core dispute revolved around whether the exemption claimed under Section 10(38) on long-term capital gains (LTCG) earned from the sale of shares of Shree Shaleen Textiles Ltd. could be legitimately denied, and whether additions made under Section 68 and Section 69C were sustainable in law.

The assessee had originally filed a return of income declaring total income of ₹3,39,920. During the course of scrutiny proceedings, the Assessing Officer (AO) identified that the assessee had claimed exempt LTCG of ₹31,22,986 under Section 10(38) on account of sale of listed equity shares. The AO, relying primarily on information received from the Investigation Wing, Kolkata, treated the entire sale proceeds as unexplained cash credit under Section 68 and additionally estimated commission expenditure of ₹93,690 under Section 69C, thereby assessing total income at ₹35,76,600.

Facts of the Case

Share Transaction Details

The assessee's position before the Tribunal was that:

  • 500 equity shares of Shree Shaleen Textiles Ltd. (face value ₹10 per share) were purchased on 29.02.2012 for ₹10,000
  • Subsequently, the company issued bonus shares in a 1:19 ratio, increasing the holding to 10,000 shares
  • On 07.03.2013, the company effected a stock split at ₹2 per share, resulting in a total holding of 50,000 shares
  • These 50,000 shares were sold during Financial Year 2013-14 through the Bombay Stock Exchange (BSE) via a SEBI-registered stock broker
  • Securities Transaction Tax (STT) was duly paid on all sale transactions
  • The aggregate sale proceeds amounted to ₹31,22,986
  • After deducting the cost of acquisition, the net LTCG of ₹31,22,986 was claimed as exempt under Section 10(38) of the Income Tax Act, 1961

Documentary Evidence Produced

The assessee placed extensive documentary evidence on record to substantiate the genuineness of the transactions, including:

  • Copies of physical share certificates evidencing transfer of shares in the assessee's name
  • Demat account statements reflecting credits and debits corresponding to purchase and sale transactions
  • Contract notes issued by the SEBI-registered stock broker confirming STT payment
  • Bank statements evidencing receipt of sale proceeds through normal banking channels under T+2 settlement
  • Allotment letters, bonus share certificates, and records of the stock split
  • Ledger accounts and financial statements
  • Evidence that the purchase of shares was duly disclosed in the Income Tax Return filed under Section 139 for Assessment Year 2012-13, which was accepted by the Department in the assessment order passed under Section 143(3) for that year

Stand of the Assessing Officer

Despite the comprehensive documentary evidence, the AO remained unconvinced about the genuineness of the transactions. The primary basis for the AO's adverse conclusion was:

  1. Reliance on Investigation Wing Report: The AO placed heavy reliance on information received from the Investigation Wing, Kolkata, which flagged shares of Shree Shaleen Textiles Ltd. as a penny stock with allegedly rigged prices
  2. Circumstantial Analysis: The AO drew inferences from the weak financial position of the company and the disproportionate rise in its share price on the BSE
  3. No Independent Inquiry: The AO did not conduct any independent inquiry, did not examine the assessee's broker, and did not bring any contrary material on record to disprove the documentary evidence furnished by the assessee
  4. **Addition Under Section 68😗* The entire sale proceeds of ₹31,22,986 were treated as unexplained cash credit
  5. **Addition Under Section 69C😗* Commission at the rate of 3% on gross sale proceeds, amounting to ₹93,690, was estimated and added as unexplained expenditure

The assessment order under Section 143(3) was passed on 29.12.2016, assessing total income at ₹35,76,600.

First Appellate Stage — CIT(A)/NFAC

The assessee filed an appeal before the CIT(A), raising both jurisdictional grounds (challenging the validity of the assessment itself) and substantive grounds (challenging the additions on merits). The CIT(A) considered the submissions but ultimately upheld the AO's findings and dismissed the assessee's appeal. The CIT(A) reportedly relied upon certain orders passed by SEBI in third-party cases and drew support from the Calcutta High Court judgment in the case of Swati Bajaj & Others.

Grounds Raised Before ITAT Mumbai

Before the Tribunal, the assessee raised the following substantive grounds:

Jurisdictional Challenge