The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that long-term capital gains (LTCG) from sale of shares cannot be treated as unexplained income under Section 68 of the Income Tax Act merely on suspicion or general investigation reports. The Tribunal deleted an addition of ₹3.98 crore after finding that the assessee had substantiated the transactions with documentary evidence.
A Bench comprising Justice Kavitha Rajagopal, Judicial Member, and Prabhash Shankar, Accountant Member, heard the Revenue’s appeal against the order of the Commissioner (Appeals), who had removed the additions made by the Assessing Officer.
Background of the Case
The assessee, Jay Hansraj Chheda, reported long-term capital gains arising from the sale of shares of Pine Animation Limited. He claimed exemption under Section 10(38) of the Act.
The shares were acquired through a preferential allotment and were sold after a holding period exceeding one year through recognised stock exchange mechanisms.
Assessment Proceedings
During assessment, the Assessing Officer relied on investigation reports concerning alleged penny stock manipulation. Based on these reports, the Officer treated the LTCG of ₹3.98 crore as bogus. He added the entire amount as unexplained cash credit under Section 68 of the Act. The Officer also made an estimated addition towards commission expenditure under Section 69C.
The Commissioner (Appeals) deleted both additions. Aggrieved by that decision, the Revenue filed an appeal before the ITAT.
Arguments Before the Tribunal
The Revenue argued that the abnormal surge in the share price indicated a pre-arranged transaction. It alleged that the assessee had used a colourable device to convert unaccounted income into exempt LTCG. According to the Revenue, the scrip had been identified as a penny stock in investigation reports, which cast doubt on the credibility of the transactions.
In response, the assessee submitted that all transactions were executed through recognised stock exchanges. He produced contract notes, demat statements, bank statements, and proof of payment of Securities Transaction Tax (STT). The assessee contended that the Department had not produced any evidence linking him to price manipulation or accommodation entries.
Tribunal’s Findings
While dismissing the Revenue’s appeal, the Tribunal held that suspicion, conjecture, or reliance on general investigation reports cannot replace evidence. The Bench observed that the assessee had discharged the burden under Section 68 by furnishing documentary proof establishing the genuineness of the share transactions.
The Tribunal also noted that the Securities and Exchange Board of India (SEBI) had not recorded any adverse finding against the assessee in relation to price rigging. Further, the Revenue failed to establish a direct nexus between the assessee and the alleged manipulation.
Relying on judicial precedents, the Bench held that genuine share transactions cannot be recharacterised as unexplained income solely because of an abnormal increase in price.
Final Decision
Accordingly, the ITAT upheld the order of the Commissioner (Appeals). The addition of ₹3.98 crore under Section 68 and the estimated commission addition under Section 69C both stand deleted.
