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December 19, 2022

Exemption under Section 10(38) not applicable to LTCG for sale of bogus equity shares

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Exemption under Section 10(38) not applicable to LTCG for sale of bogus equity shares

Facts and issue of the case

The facts of the case are that the assessee is an individual and filed e-return of income on 16.03.2016 declaring total income of Rs.13,95,870/-. According to section 10(38) of the Income Tax Act, the assessee has claimed Rs. 37,96,000 from the sale of equity shares of CCL International Limited as exempt income. The assessee’s case was selected for scrutiny assessment under CASS. During the course of assessment proceeding, the ld. Assessing Officer based on the information received from the Directorate of Income Tax (Investigation), Kolkata examined the financial transactions of CCL International Limited and found that there was abnormal increase in the prices which was not supported by financials of the listed companies and came to the conclusion that with the help of entry operators and the promoters, there has been a systematic management of increase in the prices of equity shares found to be the penny stock companies through which bogus long-term capital gain entries were taken in large numbers by the beneficiaries.

The assessee failed to submit a convincing response to support the validity of the unexpected rises and falls in equity share prices The ld. Assessing Officer finally assessed the income of the assessee at Rs.52,43,090/- vide order dated 28.12.2017 dismissed the assessee’s claim of exempt income under section 10(38) of the Act and added under section 68 of the Act for a fictitious long-term capital gain as an unexplained cash credit. The addition also included an addition for an unexplained commission expense of Rs. 18,980/- and a disallowance under section 14A of the Act of Rs. 32,243/-. Appeal against this addition before the ld. CIT(Appeals) did not get any relief to assessee. Aggrieved, the assessee is now in appeal before the Tribunal.

Observation of court

The issue placed before Tribunal with regard to genuineness of the claim of exempt income under section 10(38) of the Act in respect of long-term capital gain arising from sale of equity shares from the listed companies, which were held to be the penny stock companies by both the lower authorities and the long-term capital gain so claimed being bogus in nature and additions for undisclosed commission expenditure incurred for arranging bogus LTCG. We find that recently this Tribunal has adjudicated the similar issue under identical facts (except change of figures)in the case of Shyam Sunder Bajaj in ITA No. 2552/KOL/2018 and others vide order dated 17t h October, 2022 and after placing reliance on the judgment of Hon’ble Jurisdictional High Court in the case of Swati Bajaj & Others

Conclusion

After hearing to the both party the Tribunal’s ruling on October 17, 2022, as well as the ruling made by the Jurisdictional High Court in the case of Swati Bajaj & Others Therefore, respectfully, we find no flaw in the orders of the CIT(Appeals) holding the alleged LTCG for sale of equity shares as bogus and not eligible to exemptions under section 10(38) of the Income Tax Act and also confirming the addition of commission expenses incurred for arranging bogus LTCG and dismiss the appeal of the assesses. 

Full Case Law given Below :

Rajendra-Kumar-Gupta-Vs-ITO-ITAT-Kolkata

Rajendra-Kumar-Gupta-Vs-ITO-ITAT-Kolkata

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