Cost to previous owner disallowed for calculation of Capital gain in case of Bogus Share Gift Transaction

The assessee, an individual, sold shares worth Rs. 1.5 crore during AY 2009–10, claiming that such shares were received as a gift from his daughter and hence sought the benefit of cost of acquisition under Section 49 of the Income Tax Act. The case was reopened after a search revealed that the transaction was not disclosed in the original return, and the assessee himself admitted additional income during the investigation. Despite multiple notices, the assessee failed to participate in assessment proceedings, leading to an ex-parte assessment under Section 144.

The Assessing Officer treated the transaction as non-genuine, noting the absence of supporting documents, the lack of financial capacity of the donor, and suspicious back-to-back share transfers within a short span. Though the CIT(A) allowed relief by applying Section 49, the ITAT reversed the decision, holding the transaction to be bogus. The Madras High Court upheld the Tribunal’s findings, concluding that no substantial question of law arose. The assessee thereafter filed an SLP before the Supreme Court.

Central Issue: Whether the assessee was entitled to the benefit of Section 49 for determining the cost of acquisition of shares claimed to have been received by way of gift when the underlying transaction was held to be bogus.

SC’s Ruling: The Supreme Court, after condoning delay, dismissed the Special Leave Petition at the admission stage, thereby affirming the judgment of the High Court. By refusing to interfere, the Apex Court effectively upheld the concurrent factual findings that the alleged gift transaction was not genuine and that the assessee had failed to establish ownership of the shares through credible evidence. The Court thus accepted the position that Section 49 of the Income Tax Act applies only where a valid transfer results in the assessee becoming the lawful owner of a capital asset, which was not demonstrated in the present case.

The underlying ratio is that tax benefits relating to cost of acquisition under Section 49 cannot be claimed in cases involving sham or colourable transactions lacking evidentiary support. Where the assessee fails to substantiate the genuineness of a gift, particularly in circumstances involving suspicious, rapid share transfers and absence of financial capacity of the donor, the transaction can be disregarded as bogus. Thus, no capital gains computation benefit can be claimed on such basis, and findings of fact by lower authorities will not be interfered with in the absence of any substantial question of law.

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