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Facts
The assessee claimed exemption under section 10(38) on the sale of shares of Sunrise Asian Ltd., having purchased them through banking channels and held them for over 22 months before selling on the BSE platform with STT paid. The Assessing Officer (AO) disallowed the exemption, treating the entire transaction as bogus and adding the sale proceeds to the assessee's income.
Held
The Tribunal held that the assessee had provided sufficient documentary evidence for the purchase and sale of shares, and the revenue authorities failed to present cogent material to prove the assessee's involvement in price rigging or accommodation entries. Suspicion alone cannot substitute for evidence.
Key Issues
Whether long-term capital gains from share transactions are eligible for exemption under section 10(38) when the AO alleges the transaction is bogus based on suspicion rather than concrete evidence of the assessee's involvement.
Sections Cited
10(38), 139(1), 143(3), 68, 69C
AI-generated summary — verify with the full judgment below
The instant appeal of the assessee filed against the order of the NFAC, Delhi [for brevity ‘the Ld. CIT(A)], order passed under section 250 of the Income Tax Act 1961 (for brevity ‘the Act’) for assessment year 2014-15, date of order 16.06.2025. The impugned order emanated from the order of the Ld. Income Tax Officer Ward 19(2)(1), Mumbai (for brevity the ‘Ld. AO’) order passed under section 143(3) of the Act date of order 26.12.2016.
Jayshree Haresh Shah 2. The brief facts of the case are that the assessee filed the return u/sec. 139(1) of the Act. Scrutiny assessment was initiated and notice u/sec. 143(2) was duly issued. The Ld. AO found that the assessee had purchased 15,000 shares of Conart Traders Ltd. on 27.11.2011 through off market at the rate of Rs.20/- each and payment was made through proper banking channel. Later the company was amalgamated with M/s. Sunrise Asian Ltd (SAL) a listed entity. These 15000 Shares of SAL were held for around 22 months and were sold on various dates in FY 2013-14 on Bombay Stock Exchange Limited (BSE) platform by paying STT thereon on sale of these shares. Thus all the eligible conditions of u/sec 10(38) of the Act are duly complied with. The assessee was duly eligible to claim exemption and had claimed exemption thereon. The assessee made the total sale amount of Rs.7,41,59,400/-. The assessee claimed the deduction u/sec. 10(38) of the Act related to profit on sale of share of long term capital gain. During the assessment proceeding the Ld. AO made the entire transaction as a bogus transaction, disallowed the exemption u/sec. 10(38) of the Act and added back the entire sale proceeding amount to Rs.7,41,59,400/- with the total income of the assessee. Aggrieved assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) uphold the order of the Ld. AO . Being aggrieved assessee filed an appeal before us.
The Ld. AR argued and filed a paper book containing page 1 to 87 which has been placed on record. The Ld. AR contended that during the assessment proceeding the assessee has submitted all the relevant documents related to the purchase of shares, share certificates, bank statement, demat account and confirmation of the broker. But none of the documents are duly rejected by the revenue authorities. He further invited our attention in list of documents annexed
Page No. Sr. No. Particulars 4 Copy of the letter dated 19.10.2016 filed in response to the above notice 8 along with the following annexures:
9-11 a. Annexure 1: Copy of the ITR acknowledgement along with computation of income, Balance Sheet, Profit and Loss account and capital account for A.Y. 2013-14 b. Annexure 4: Copy of the statement of long-term capital gains for A.Y. 12-35 2014-15 along with holding statements and contract notes 5 Copy of the letter dated 01.11.2016 filed in response to the above notice 36-37 along with the following annexures: 38-42 a. Annexure 2: Copies of the Purchase Bills / Share Certificates for allotment of 15000 shares of Sunrise Asian Ltd. b. Annexure 3: Copy of the bank statement showing payment made for 43 purchase of 15000 shares of Sunrise Asian Ltd. 44-52 c. Annexure 4: Copy of the Demat statement showing holding of 15000 shares of Sunrise Asian Ltd. 53 d. Annexure 5: Copy of Global Report from selling broker reflecting sale transactions summary for sale of 15000 shares of Sunrise Asian Ltd. e. Annexure 6: Copy of the bank statement for A.Y. 2013-14 reflecting 54-62 receipts on account of sale of shares of Sunrise Asian Ltd.
The Ld. AR advanced his argument and contended that the same factual issue was duly examined & adjudicated by the Coordinate Bench of ITAT, Mumbai in case of Yogeshkumar Pravinkumar Shah vs ACIT date of pronouncement 22.10.2025. The relevant para no.8 of the order of the Coordinate bench is reproduced as below: “From the above findings we notice that various findings as reasons for making the addition is that the assessee unable to substantiate the price movement in the share market, failed to Jayshree Haresh Shah prove assessee's knowledge about the company etc. We further notice that the other findings of the AO are general pertaining to the scrip of M/s Sunrise Asian Ltd. Though the AO has recorded that the assessee has traded through exit providers who did not respond to notice under section 133(6), the AO did not record any specific finding with regard to the names of the exit providers and any evidence that the assessee has transacted through the exitproviders. Therefore, in our view, the reasons as recorded by the AO as above cannot be considered as only reason for treating the impugned transactions as bogus in the hands of the assessee without establishing assessee's involvement in the price movement or that the assessee has transacted through the exit providers. The findings of the AO with regard to SEBI report mentions a company name M/s. Monarch Health Services Ltd and its director without recording any finding regarding the assessee's connection with the brokers/entry operator. We in this regard further notice that the Co-ordinate Bench has considered the identical issue in the case of LalitabenPravin Shah (supra) where it has been held that.”
He further respectfully relied on the order of Coordinate Bench of ITAT Mumbai ‘E’ Bench in case of Haresh Dilip Vora vs ITO the date of order 10.09.2024. The Coordinate bench has adjudicated the same facts in following manner:- “7. We heard the rival submissions and considered the documents available in the record. The ld.AR respectfully relied on the order of the Hon’ble Gujarat High Court in the case of PCIT-1 vs Divyaben Prafulchandra Parmar 2024(1) TMI 800 date of order 02-01-2024and Hon’ble Gujarat High Court held that where the ITAT, Ahmedabad Bench has allowed the exemption under section 10(38) for dealing with the shares of “Sunrise Asian Ltd”, in which the assessee also dealt in this impugned assessment year. The Hon’ble Gujarat High Court has upheld the order of the ITAT and after detailed discussion, the scrip “Sunrise Asian Ltd” is duly accepted for transaction and claiming of deduction under section10(38) of the Act. The assessee in both appeal and assessment stages discharged its onus by submitting all the purchase and sale documents. He revenue was not able to bring any such fact whether the assessee is directly
Jayshree Haresh Shah involved in rigging of the share scrips and there is no such evidence that the SEBI has taken coercive action against “Sunrise Asian Ltd”. 7.1. For our observations and to arrive at the findings, we respectfully relied on the decisions of Hon'ble High Court of Bombay being a jurisdictional High Court: Pr. CIT v. Ziauddin A Siddique [Income-tax Appeal No. 2012 of 2017, dated 4-3-2022] held as under: - "1. The following question of law is proposed: "Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was justified in deleting the addition of Rs. 1,03,33,925/- made by AO u/s 68 of the I.T. Act, 1961, ignoring the fact that the shares were bought/acquired from off market sources and thereafter the same was DMATed and registered in stock exchange and increase in share price of Ramkrishna Fincap Ltd. is not supported by the financials and, therefore, the amount of LTCG of Rs. 1,03,33,925/- claimed by the assessee is nothing but unaccounted income which was rightly added u/s 68 of the I. T. Act, 1961?"
We have considered the impugned order with the assistance of the learned Counsels and we have no reason to interfere. There is a finding of fact by the Tribunal that the transaction of purchase and sale of the shares of the alleged penny stock of shares of Ramkrishna Fincap Ltd. ("RFL") is done through stock exchange and through the registered Stockbrokers. The payments have been made through banking channels and even Security Transaction Tax ("STT") has also been paid. The Assessing Officer also has not criticized the documentation involving the sale and purchase of shares. The Tribunal has also come to a finding that there is no allegation against assessee that it has participated in any price rigging in the market on the shares of RFL.
Therefore we find nothing perverse in the order of the Tribunal.”
Mr. Walve placed reliance on a judgment of the Apex Court in Principal Commissioner of Income-tax (Central)-1 v. NRA Iron & Steel (P.) Ltd. but that does not help the revenue in as much as the facts in that case were entirely different.
In our view, the Tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that question as pressed raises any substantial question of law.
The appeal is devoid of merits and it is dismissed with no order as to costs." the order of the Hon’ble Bombay High Court in the case of CIT vs Shyam R Pawar 229 Taxman 256 (Bom). The relevant paragraph is reproduced as below: -
“6. It is in that regard that we find that Mr.Gopal's contentions are well founded. The Tribunal concluded that there was something more which was required, Jayshree Haresh Shah which would connect the present Assessee to the transactions and which are attributed to the Promoters/Directors of the two companies. The Tribunal referred to the entire material and found that the investigation stopped at a particular point and was not carried forward by the Revenue. There are 1,30,000 shares of Bolton Properties Ltd. purchased by the Assessee during the month of January 2003 and he continued to hold them till 31 March 2003. the present case related to 20,000 shares of Mantra Online Ltd for the total consideration of Rs.25,93,150/-. These shares were sold and how they were sold, on what dates and for what consideration and the sums received by cheques have been referred extensively by the Tribunal in para 10. A copy of the DMAT account, placed at pages 36 & 37 of the Appeal Paper Book before the Tribunal showed the credit of share transaction. The contract notes in Form-A two brokers were available and which gave details of the transactions. The contract note is a system gene and prescribed by the Stock Exchange. From this material, in para 11 the Tribunal concluded that this was mere accommodation of cash and enabling it to be converted into accounted or regular payment-discrepancy pointed out by the Calcutta Stock Exchange regarding client Code has been referred to. Bi Tribunal concluded that itself, is not enough to prove that the transactions in the impugned shares bogus/sham. The details received from Stock Exchange have been relied upon and for the purpose faulting the Revenue in failing to discharge the basic onus. If the Tribunal proceeds on this line concluded that inquiry was not carried forward and with a view to discharge the initial or basic onus; then such conclusion of the Tribunal cannot be termed as perverse. The conclusions as recorded in para 12 of the Tribunal's order are not vitiated by any error of law apparent on the face of the record either.”
As/a result of the above discussion, we do not find any substance in the contention of Mr.Sureshkumar that the Tribunal misdirected itself and in law. We hold that the Appeals do not raise any substantial question of law. They are accordingly dismissed. There would no order as to costs.”
Hon’ble Delhi High Court in the case of Pr.CIT vs Smt. Krishna Devi 431 ITR 361 (Del). The relevant paragraph is enclosed here with: -
“12. Mr. Hossain’s submissions relating to the spike in the share price and other factors may be enough to show circumstances that might create suspicion; however the Court has to decide an issue on the basis of evidence and proof, and Jayshree Haresh Shah not on suspicion alone. The theory of human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by them. Respondent. With regard to the claim that observations made by the CIT(A) were in conflict with (he Impugned Order, we may only note that the said observations are general in nature and later in the order, the CIT(A) itself notes that the broker did not respond to the notices. Be that as it may, the CIT(A) has only approved the order of the AO, following the same reasoning, and relying upon the report of the Investigation Wing. Lastly, reliance placed by the Revenue on Suman Poddar case (supra) and Sumati Dayal case (supra) is of no assistance. Upon examining the judgment of Suman Poddar case (supra) at length, we find that the decision therein was arrived at in light of the peculiar facts and circumstances demonstrated before the ITAT and the Court, such as, inter alia, lack of evidence produced by the Assessee (herein to show actual sale of shares in that case. On such basis, the ITAT had returned the finding of fact against the Assessee, holding that the genuineness of share transaction was not established by him. However, this is quite different from the factual matrix at hand. Similarly, the case of Sumati Dayal (supra) too turns on its own specific facts. The above- stated cases, thus, are of no assistance to the case sought to be canvassed by the Revenue.
13.The learned ITAT, being the last fact-finding authority, on the basis of the evidence brought on record, has rightly come (o the conclusion that the lower tax authorities are not able to sustain the addition without any cogent material on record. We thus find no perversity in the Impugned Order.” 7.2. The ld. CIT(A) in impugned appeal order respectfully relied on the order of Hon’ble Calcutta High Court in the case of CIT vs Swati Bajaj [2022] 446 ITR 56 (Calcutta) where on same set of facts related taxability of LTCG on sale of shares considered as manipulated penny stock & the action of the ld. AO is confirmed. But the related to scrip “Sunrise Asian Ltd” the assessee is covered by the order of the Hon’ble Gujrat High Court.Accordingly, the same would prevail on the issue before this Bench. In the present case, the decision of the Hon'ble Non-Jurisdictional High Court carries only aninfluence. The law is very well settled by the Hon'ble Supreme Court in the case of Union of India vs Kamalakshi Finance Corporation Ltd reported in 55 ELT 43 (1991) that the decision of Hon'ble Jurisdictional High Court would have higher precedence value on the Tribunal than the decision of Hon'ble Non-Jurisdictional High Court.
Jayshree Haresh Shah Considering the impugned assessment order, the ld.AO has not provided any evidence even worth a name that assessee's own money has been routed back to him. There is no nexus with the assessee with price rigging and no adverse observation from stock exchange. The addition simply on third party statement is uncalled for. We respectfully relied on the order of Hon’ble Supreme Court in PCIT vs Smt. Renu Aggarwal [2023] 456 ITR 249 (SC).
We respectfully rely on the orders of the Hon’ble Apex Court, Jurisdictional High Court and Coordinate Bench of ITAT Mumbai which has similar in the factual matrix with the impugned issue.The grounds of appeal of the assessee are upheld. We set aside the impugned appeal order. The additions amount to Rs. Rs.47,51,164/- U/s 68 of the Act and amount to Rs.50,061/- U/s 69C are quashed.”
The Ld. DR vehemently argued and contended that entire transaction is accommodation entry. The revenue authorities have rightly treated as bogus transaction. The Ld. DR stands in favour of the order of the revenue authorities.
We have heard the rival submissions and perused the material available on record, including the paper book filed by the assessee. It is an undisputed fact that the assessee had purchased 15,000 shares through proper banking channels; the shares were duly reflected in the Demat account; the amalgamated shares of M/s. Sunrise Asian Ltd. were held for more than 22 months; and the sale was effected through the BSE platform upon payment of STT. The assessee has placed on record purchase bills, share certificates, Demat statements, contract notes, broker confirmations and bank statements evidencing both purchase and sale transactions. None of these primary evidences have been found to be false or fabricated by the Revenue authorities. The addition has been made primarily on the basis of general investigation reports and suspicion relating to the scrip,
Jayshree Haresh Shah without bringing any cogent material on record to establish the assessee’s involvement in price rigging, accommodation entries, or routing back of unaccounted money. No direct nexus has been established between the assessee and any alleged entry operator or exit provider. The Ld. AO has also not demonstrated that the consideration received on sale of shares represented the assessee’s own unaccounted funds. We find that the issue relating to exemption under section 10(38) of the Act in respect of shares of SAL. has been considered by various Coordinate Benches and upheld by higher judicial forums in favour of the assessee in similar factual circumstances. The ratio laid down by the Hon’ble Jurisdictional High Court and other Hon’ble High Courts, as relied upon by the Ld. AR, clearly establishes that suspicion, however strong, cannot take the place of evidence. Where transactions are supported by documentary evidence and carried out through recognised stock exchange with payment of STT, and no adverse material is brought on record to prove the assessee’s complicity, the claim cannot be denied merely on the basis of general allegations regarding penny stocks. In view of the above facts and respectfully following the judicial precedents cited hereinabove, we hold that the addition made by the Ld. AO by treating the LTCG as bogus and denying exemption under section 10(38) of the Act is unsustainable in law. Accordingly, the impugned order of the Ld. CIT(A) is set aside and the Ld. AO is directed to delete the addition made on account of alleged bogus LTCG amount to Rs.7,41,59,400/-.
Jayshree Haresh Shah 8. In the result, the appeal of the assessee bearing is allowed. Order pronounced in the open court on 05th day of March 2026. Sd/- Sd/- (GIRISH AGRAWAL) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai,िदनांक/Dated: 05/03/2026 SAUMYASr.PS