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Facts
The appellant company claimed long-term capital gains exemption on sale of shares of JMD Films Co., which were held for fifteen years. The Revenue disallowed this exemption, treating the cash credit as unexplained under Section 68 of the IT Act, alleging the share price was artificially inflated by operators to convert unaccounted money.
Held
The Tribunal followed its earlier orders for similar assessment years and held that since the transactions were supported by bills, banking channels, and the Investigation Wing found no guilt, the addition made by the AO was not justified.
Key Issues
Whether the long-term capital gains claimed on sale of shares are exempt when the transaction is alleged to be a sham transaction for converting unaccounted money, and whether Section 68 addition is justified.
Sections Cited
68, 10(38), 271(1)(c)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Mumbai “E” Bench, Mumbai.
Before: Shri Rahul Chaudhary (JM) & Shri Omkareshwar Chidara (AM)
Per Omkareshwar Chidara (AM) :- The appellant company’s name in earlier years is Varesh Securities (P) Ltd. The issue to be decided in this Departmental Appeal is whether the addition made as unexplained cash credit under section 68 of the I.T. Act is correct and consequently, the claim of appellant company regarding exemption of capital gain under section 10(38) is not correct in the eyes of law.
The Revenue made the disallowance of claim under section 10(38) of the I.T. Act and added the same under section 68 of the Act. The facts in brief, are that the appellant company claims that they purchased shares of JMD Films Co., and retained them for fifteen years and sold the same in this assessment year and hence they are eligible to claim ‘long term capital gains’ which is exempt from taxation. The Revenue placed reliance on the report of Kolkata Investigation Wing where it was mentioned that the share price was artificially inflated only to allow the existing shareholders to exit at higher price and bring their unaccounted money into the system by claiming
1. 2 KS Distribution and Sales Pvt. Ltd. exempt capital gains and not paying the tax. The Investigation Wing of Kolkata recorded a statement from Mr. Jagdish Purohit, who had stated that he resorted to manipulation of the scrip JMD Telefilms and helped several assessees to convert their unaccounted money to bring into the books by booking belongs gains. The Ld. AO in the assessment order has stated as follows :- 2. Facts revealed that such trading transactions of purchase and sale of shares are not been effected, for commercial purpose but to create artificial gains, with a view to evade taxes- i. Transactions of shares were not governed by market factors prevalent at relevant time in such trade, but same were product of design and mutual connivance on part of assessee and the operators. ii. The assessee resorted to a preconceived scheme to procure long-term capital gains by way of price difference in share transactions not supported by market factors. iii. Cumulative events in such transactions of shares revealed that same were devoid of any commercial nature and fell in realm of not being bona fide and, hence, impugned long term capital gain is not allowable. iv. The order of SEBI referred above has also given the similar finding that the prices of the shares were determined artificial by manipulations and cannot be a product of market factors and commercial principals.
The facts and circumstances of the case, as recorded above, clearly suggest that the revenue cannot take or accept such make-believe transactions, as presented by the assessee. Truth or genuineness of such transactions must prevail over the smoke screen, created by way of pre- meditated series of steps taken by the assessee, with a view to imparting a colour of genuineness and character of commercial nature, to such share transactions. Needless to say that one has to look at the whole transactions and a series of steps taken to accomplish such share transactions, in an integrated manner, with a view to ascertaining the true nature and character of such purchase and sale of shares.
Thus considering the findings of the search/survey, inquiries conducted in the case of assessee, brokers, operators and the entry
3 KS Distribution and Sales Pvt. Ltd. providers and the nature of transaction entered into by the asssessee the LTCG of Rs.2,01,54,008/- claimed exempt u/s 10(38) by the assessee cannot be allowed and is required to be added back towards taxable income under section 68 of the Act. Penalty proceeding u/s 271(l)(c) is initiated for furnishing inaccurate particulars of income with a view to concealment of income.
Aggrieved by the order of Ld. AO, an appeal was filed before Ld. CIT(A) who deleted the addition stating that the transactions are done on the floor of stock exchange and payments/receipts were through banking channels. The shares were purchased by appellant company almost fifteen years back and held them since then. Now, that the share price went up, the appellant company sold and claimed long term capital gains. In view of the same, the Ld. CIT(A) deleted the addition made by Ld. AO.
Then, the Revenue being aggrieved, filed an appeal before the ITAT with the following grounds of appeal :-
i. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is light in deleting the addition made as unexplained cash credit u/s.68 of the Act ignoring that case falls in exception case as per Circular No.O5/2O24 dated 15.03.2O24?" ii "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has justified in deleting the addition made as unexplained cash credit u/s.68 of the Act ignoring the fact that entry operator in his statement recorded, had accepted that he resorted to manipulation of scrip JMD Telefilms and converted the unaccounted money into the books in the form of Bogus gains via jacking up of the prices and booking bogus gains?" iii. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has justified in allowing LTCG claimed as exempted u/s.10(38) of the Act by ignoring that net worth of the company and the business activity of the company was negligible and the share price was artificially rigged by the group of operators to accommodate beneficiaries seeking LTCG and STCL?" iv. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in allowing relief to assessee ignoring the findings of the Directorate of Investigation of Mumbai and Kolkata which established
4 KS Distribution and Sales Pvt. Ltd. that entry operators and the assessee had worked out an arrangement in which the shares were acquired by the assessee, share prices were rigged?
The Ld. AR of the appellant company has submitted that for A.Ys. 2010-11 and 2012-13, in its own case, the case is covered in their favour by ITAT and a copy of ITAT order was filed. At para 6 of ITAT order, the Tribunal, operating portion was mentioned. The Tribunal concurred with the view of Ld. CIT(A) stating that all transactions are supported by bills, banking channels, the Investigation Wing of Kolkata did not find any guilt on the part of appellant and in fact the appellant company held these shares for last 15 years and the addition made by Ld. AO was deleted.
The Ld. DR relied on the assessment order and submitted that the order of ITAT was not accepted by Department and further appeal to High Court was preferred by Revenue.
Heard both sides. Since the facts and circumstances are similar and as no fresh evidences were filed by Revenue to distinguish their case, the Bench decides to respectfully follow the order of ITAT rendered in earlier and subsequent year.
The Revenue’s appeal is dismissed.
Order pronounced in the open Court on 21/11/2025.