The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that long-term capital gains (LTCG) from share transactions cannot be treated as unexplained income under Section 68 of the Income Tax Act without concrete evidence. The Tribunal deleted an addition of ₹3.98 crore after finding that the assessee had substantiated the transactions with proper documentary proof.
A Bench comprising Justice Kavitha Rajagopal, Judicial Member, and Prabhash Shankar, Accountant Member, was hearing the Revenue’s appeal against the order of the Commissioner (Appeals), which had removed the additions made by the Assessing Officer.
Background of the Case
The assessee, Jay Hansraj Chheda, reported LTCG arising from the sale of shares of Pine Animation Limited. He claimed exemption under Section 10(38) of the Income Tax Act.
The shares were acquired through preferential allotment and were sold after being held for more than one year through recognised stock exchange mechanisms.
Assessment Proceedings
During the assessment, the Assessing Officer relied on investigation reports alleging penny stock manipulation. Based on these reports, the Officer treated the LTCG of ₹3.98 crore as bogus.
Accordingly, the amount was added as unexplained cash credit under Section 68. Additionally, an estimated commission expenditure was added under Section 69C.
However, the Commissioner (Appeals) deleted both additions. Aggrieved by this, the Revenue approached the ITAT.
Arguments Before the Tribunal
The Revenue argued that the sharp rise in share price indicated a pre-arranged transaction. It alleged that the assessee used a colourable device to convert unaccounted income into exempt LTCG. It also relied on investigation reports identifying the scrip as a penny stock.
On the other hand, the assessee submitted that all transactions were genuine and executed through recognised stock exchanges. He produced contract notes, demat statements, bank records, and proof of payment of Securities Transaction Tax (STT).
The assessee further argued that the Department failed to produce any evidence linking him to price manipulation or accommodation entries.
Tribunal’s Findings
The Tribunal dismissed the Revenue’s appeal and held that suspicion cannot substitute evidence.
It observed that the assessee had discharged the burden under Section 68 by producing complete documentary proof. Therefore, the transactions could not be treated as unexplained.
The Bench also noted that no adverse findings were recorded by SEBI against the assessee. Further, the Revenue failed to establish any direct nexus between the assessee and alleged price manipulation.
Relying on judicial precedents, the Tribunal held that genuine share transactions cannot be recharacterised as unexplained income merely due to abnormal price rise.
Final Decision
The ITAT upheld the order of the Commissioner (Appeals). As a result:
- Addition of ₹3.98 crore under Section 68 was deleted
- Estimated commission addition under Section 69C was also deleted
