Bogus LTCG u/s 10(38): Subsequent Action by SEBI does not Affect Past Legitimate Transactions

The assessee filed a return of income on 31.01.2015, declaring total income at Rs. 2,45,750/- and agricultural income of Rs. 1,56,940/- and Long term capital gain (LTCG) amounting to Rs. 2,23,95,400/-. The said return was processed u/s.143(1) of the Act. The case of the assessee was selected for scrutiny, and notice u/s.143(2) of the Act was issued on 24.09.2015 and duly served upon the assessee. Subsequently, notice u/s.142(1) of the Act was issued and served upon the assessee.

The Authorised Representative of the assessee attended assessment proceedings and furnished the details. The AO observed that the assessee has earned an extra extraordinary long-term capital gain of Rs. 2,23,95,400/- by dealing with scripts, namely M/s.Comfort Fincap Ltd. The shares of M/s.Comfort Fincap Ltd. were purchased on 15.03.2011, and at that time, M/s. Comfort Fincap Ltd. was previously known as Parasnath Textile Limited and was not listed on BSE and NSE till 25.03.2013, and the assessee has purchased 75,000/- shares of Parasnath Textile Limited at Rs.18 (face value of Rs.10) on 14.03.2011. On 25.03.2013, the shares of the company M/s. Comfort Fincap Ltd. was listed on BSE at the rate of Rs.387/-.

During the questionnaire, the assessee it was found that the assessee has purchased only the shares of M/s.Comfort Fincap Ltd. during the said Financial Year. The assessee submitted before the AO that the payment was made in March 2011 through the banking channel and the shares were dematerialised in August 2011. The shares were listed at Rs.387/- and went up to Rs.450/- in May 2013.

Since there was no upward movement in the long term, the assessee sold the shares in December 2013 and January 2014, thereby claiming the long-term capital gain. After taking cognisance of the assessee’s reply and details, the AO observed that the assessee purchased 75,000 shares of the said company for a consideration of Rs. 13,50,000/-, about which no specific or vital information was available in the public domain, and thus it was pre-arranged to provide accommodation entry.

The AO further observed that in the instant case of M/s.Comfort Fincap Ltd, the price rose for a certain period of time and reached as high as Rs. 448/- per share when the company itself is not constantly active or engaged in any business ventures.

The AO has also cited the investigation conducted by the SEBI in respect of M/s. ComfortFincap Ltd. and M/s. Comfort Securities Ltd. The AO, therefore, made the addition of Rs. 2,23,95,000/- thereby disallowing the claim of LTCG in respect of the sale of the script of M/s. Comfort Securities Ltd. and added the same u/s.68 of the Income-tax Act 1961.

Being aggrieved by the assessment order, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A), dismissed the appeal of the assessee.

The Ld.AR submitted that the assessee has claimed exemption of Rs. 2,23,95,400/- u/s.10(38) of the Act in respect of LTCG. The Ld. AR further submitted that the assessee has purchased shares through off off-market transaction and subsequently the shares were credited to a Demat account. The shares were held for more than one year (33 months) and sold on the floor of the recognised stock exchange. The Ld. AR further submitted that the Security Transaction Tax (STT) was duly paid. The assessee was not aware of the final buyer, and therefore, the assessee was not at all involved in the manipulation of the price difference, as it is a mere incidental benefit gained by the assessee due to the rise in price of said script. The Ld.AR submitted that the assessee has furnished before the AO the details of the dematerialisation request form, a letter with respect to allotment of shares, share certificate, ledger of Parasnath Textile Ltd., bank statement, IPO documents of the scrip in question, and Demat holding statement. The Ld. AR further submitted that assuming without admitting that scrip in question was used by accommodation entry providers for providing entries in the form of bogus LTCG, then also LTCG earned by the assessee cannot be treated as bogus as there was no evidence to prove that there was any live nexus between the assessee and entry provider or company in question or its directors. There is nothing on record to even remotely demonstrate that the assessee has paid any cash to the buyer, broker or any other entry provider for taking entry in the form of LTCG. The Ld.AR further submitted that the AO has taxed only LTCG, which implies that the AO has allowed a deduction of the cost of acquisition from the total sale consideration of shares. The Ld.AR further submitted that suspension of trading in scrip vide order dated 19.12.2014 by SEBI, which is subsequent to the transaction conducted by the assessee for the Assessment Year 2014-15 and Financial Year 2013-14. The Ld. AR submitted that when the assessee sold the scrip, at that time, the transaction in said scrip was very much permissible on the floor of the stock exchange. Investigation report of the SEBI as well as the statement were not given to the assessee, and therefore, the AO as well as the Ld.CIT(A) was not right in disallowing the claim of LTCG.

The Ld.DR submitted that the AO, as well as Ld.CIT(A) has rightly disallowed the LTCG, as the assessee has not given details as to how the assessee acquired the knowledge while purchasing the said shares offline when the said company was not engaged in any business activity per se as mentioned in para 2.1 of the Assessment Order (show-cause notice dated 06.12.2016). The Ld.DR relied upon the Assessment Order and the order of the Ld.CIT(A).

ITAT Order

We have heard both parties and perused the material available on record. From the perusal of details of the offline purchase of the scrip of M/s Comfort Fincap Ltd., it can be seen that the dematerialisation of the said scrip was in January 2011. The payment was made through the banking channel. The shares were held for more than one year (33 months) and sold on the floor of the recognised stock exchange. It is an undisputed fact that the Security Transaction Tax (STT) was duly paid. The details of the dematerialisation request form, letter with respect to allotment of shares, share certificate, ledger of Parasnath Textile Ltd., bank statement, IPO documents of the scrip in question, and Demat holding statement. The Assessing Officer has not at all pointed out how the assessee was involved in the manipulation of the price difference at the time of purchase, as well as at the time of sale of the said scrip. The contention of the Ld. AR appears to be correct that it is a mere incidental benefit gained by the assessee due to the rise in price of said script. Therefore, the Assessing Officer as well as the CIT(A) was not correct in treating the same as a bogus transaction under Section 68 of the Act. Thus, the appeal of the assessee being ITA No.452/Ahd/2018 for AY 2014-15 is allowed.