ITAT Deletes Addition on Bogus Long-Term Capital Gain Exemption [Read Order]

The assessee, Shrenik Kumar Virchand Mardia, filed his income tax return for AY 2015–16 under Section 139(1) of the Income-tax Act, declaring a total income of ₹3,70,480. Based on information from the Investigation Wing, the Assessing Officer (AO) discovered that the assessee had traded shares of Appu Marketing & Manufacturing Ltd. (AMML), identified as a penny stock/shell company. The assessee earned ₹2,04,42,976 as Long-Term Capital Gain (LTCG) from the sale of shares and claimed exemption under Section 10(38). The AO reopened the assessment under Section 148 and treated the LTCG as bogus, relying on the statement of Mr. Prakash Jajodia, alleged controller of AMML and similar companies, and added it to the total income. A further addition of ₹4,08,860 under Section 69C was made, presumed as commission paid to entry providers. The CIT(A) upheld the AO’s order, prompting the present appeal before the ITAT.

Petitioner submitted that all shares were purchased and sold through proper banking channels; sale transactions were through a SEBI-registered broker on BSE. STT was duly paid; transactions were recorded in demat and bank accounts. He also submitted detailed evidence, including contract notes and broker ledger, Demat account statements and Bank statements for purchase/sale consideration.

The petitioner further complained that he sought cross-examination of Mr. Jajodia and access to the documents used against him, but no such opportunity was given. He argued that SEBI had later revoked its suspension order on AMML.

The revenue assessment completely relied on the investigation report and SEBI’s interim findings.

Court’s Decision & Rationale

The ITAT noted that the AO’s conclusion was solely based on the report of the Investigation Wing without any independent verification or inquiry. The assessee had filed a detailed response to the SCN under Section 148A(b), requested cross-examination and relied upon documents, which the AO ignored.

ITAT emphasized that:

• The transactions were duly supported by contract notes, demat statements, and bank evidence.
• The exemption under Section 10(38) was valid as STT was paid, and the sale was made on BSE.
• There was no finding of the assessee’s involvement in price rigging or other fraudulent activities.
• SEBI’s revocation of AMML’s suspension was material and not accounted for by the AO.

Finally, Additions under Section 147 (₹2,04,42,976 as LTCG) and Section 69C (₹4,08,860 as commission) were quashed by the ITAT.