Loading judgment…
Facts
The assessee claimed long-term capital gain of Rs. 5,60,611/- from the sale of shares as exempt income under Section 10(38) of the Income Tax Act. The Assessing Officer (AO) reopened the assessment under Section 148 based on information suggesting involvement in penny stock transactions and treated the gain as unexplained credit under Section 68. The CIT(A) deleted the addition made by the AO.
Held
The Income Tax Appellate Tribunal (ITAT) dismissed the Revenue's appeal, upholding the CIT(A)'s deletion of the addition, as the assessee proved genuineness of transactions with banking channel payments, D-MAT holdings for over five years, and online trading without evidence of price manipulation by the AO. The ITAT, however, dismissed the assessee's cross-objection, upholding the validity of the assessment reopening under Section 148, as the AO had prima-facie reasons based on information from the ADIT (Investigation).
Key Issues
1. Whether the long-term capital gain from share sales is exempt under Section 10(38) or constitutes unexplained credit under Section 68. 2. Whether the reopening of assessment under Section 148 was valid.
Sections Cited
10(38), 68, 147, 148
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DIVISION BENCH, ‘SMC’ CHANDIGARH
Before: SHRI RAJPAL YADAV & SHRI MANOJ KUMAR AGGARWAL
PHYSICAL HEARING O R D E R PER RAJPAL YADAV, VP The present appeal is directed at the instance of the Revenue against the order of the ld. Commissioner of Income & C.O. 1/CHD/2026 A.Y.2011-12 2 Tax (Appeals) in short ‘the CIT (A)’ dated 06.06.2025 passed in assessment year 2011-12. On receipt of notice in appeal of Revenue, assessee has filed Cross Objections bearing No.1/CHD/2026.
The Revenue has taken 7 grounds of appeal, however, its grievance revolves around a single issue, namely, ld.CIT (Appeals) has erred in deleting the addition of Rs.5,60,611/- which was made by the AO by disbelieving the claim of the assessee u/s 10(38) of the Income Tax Act.
The brief facts of the case are that assessee has filed his return of income on 29.09.2011 declaring total income at Rs.14,03,550/-. The assessee, at the relevant time was engaged in investment in shares, securities, derivatives etc. The AO, thereafter, issued a notice u/s 148 dated 29.03.2018 which was received by the assessee and in response to that, assessee has filed its return of income declaring the same income as was declared originally. Such return was filed on 26.04.2018. The assessee, thereafter, raised objection qua re- opening of assessment which was rejected by the AO.
& C.O. 1/CHD/2026 A.Y.2011-12 3
It emerges out from the record that assessee had purchased 24000 shares of M/s Swan Television Ltd. Subsequently its name was changed to M/s Swan Reality & Media Ltd. on 24.08.2005. These shares were purchased for total consideration of Rs.2,88,000/- which was paid through banking channel and copy of the bank statement was filed before the relevant Revenue Authorities. It is pertinent to note that during the course of assessment proceedings, it was pointed out by the assessee that these shares were purchased through banking channel and they were received in the D-MAT Account of the assessee. These were allotted in de- materialized form. Subsequently, there was a merger of the said company into M/s DMC International Ltd. as per the order of the Hon'ble Delhi High Court dated 03.12.2018. The assessee got 72000 shares of M/s DMC International Ltd. The assessee has sold part of his holding during the year under appeal after holding the shares for a period of five years. Copies of Contract Note issued by Members acting for Constituents as Brokers and Agents on different dates showing sale of equity shares are also enclosed. The assessee & C.O. 1/CHD/2026 A.Y.2011-12 4 entered other transactions of purchase and sale of shares during the year and resulted into both gain and loss as well as long term and short term. Whatever was the earning from the transaction of shares, the assessee has duly declared the same in its return of income. It has claimed long term gain/loss as an exempt income u/s 10(38) of the Income Tax Act. The STT was paid by the assessee. It was also pointed out by the assessee that entire sale of shares of M/s DMC International was made through online trading using the BOLT mechanism of a recognized Stock Exchange by the broker and the delivery of shares was given through D-MAT Account of the assessee. It is a web based online trading form in which the name of the counter party (Seller/Purchaser of shares) is not disclosed and hence not known to each other. The assessee was not knowing the persons/entity who has bought its shares. The entire trading of shares is based on matching of bids and offers. The trade is executed when the bid price offered by the buyer matches with the offer price of the seller and vice-versa.
& C.O. 1/CHD/2026 A.Y.2011-12 5
The ld. AO did not accept the contention of the assessee and failed to record any specific finding as to why he disbelieves the contentions of the assessee. He made reference to judicial precedents on penny stock and thereafter observed that reply of the assessee considered but not found to be acceptable. He failed to give any plausible logic as to why reply of the assessee cannot be accepted. The AO did not treat the long term gain as genuine and made addition of Rs.5,60,611/- with the aid of Section 68 on account of unexplained credit.
6. In appeal, ld. First Appellate Authority has set aside the finding of the CIT (Appeals). The brief findings reads as under : “5.2.2 The contention of the Appellant and submissions made by the appellant during appellate proceedings is duly perused. The Appellant has purchased shares through the registered broker and has duly paid the STT on the same. It is further observed that all the shares were purchased through banking channel and there is no physical delivery of shares and no cash has been used for the purchase and sales of shares. The AO in the assessment order as well has not brought out any fact to show that the purchase of the shares of M/s. DMC Education Ltd. was made in cash or though undisclosed income of the Appellant. The Appellant is a regular trader in shares and securities. This fact gets established from the detail of his share transaction carried out during the year under consideration which shows that he has traded in scrips of more than 16 companies through a registered broker and has not traded only in the share of M/s. DMC Education Ltd. for manipulation of funds. The Appellant has initially purchased the shares of M/s. Swen Television Ltd as per allotment advice on 06/10/2005. The Appellant had not purchased the shares of M/s.
& C.O. 1/CHD/2026 A.Y.2011-12 6 DMC Education Ltd. but the same were allotted to the Appellant upon merger of M/s. Swen Television Ltd. with M/s. DMC Education Ltd. The Appellant sold 36000 shares of M/s. DMC Education Ltd. for a sale consideration of Rs. 5,60,611/-. As the Appellant has made the sale and purchase of shares through banking channel, therefore the stand of AO treating the sale receipts as unexplained cash credits under the provisions of section despite of explaining the source of credits, is not justified. The Addition of Rs. 5,60,611/- under the provisions of section 68 made by the AO is hereby deleted. 5.2.3. Besides, the AO is directed to allow the cost of acquisition of shares of M/s. DMC Education Ltd. of Rs. 1,44,000/- to the Appellant and calculate the Long-Term Capital Gains of the sale of shares M/s. DMC Education Ltd in the order giving effect. The AO should also verify that If the Appellant has already declared the LTCG on the sale of M/s. DMC Education Ltd in the return of income, the same should not be double taxed. The Appeal filed on this ground is allowed.
In the result, the appeal is partly allowed.”
With the assistance of ld. Representative, we have gone through the record carefully. A perusal of the record would indicate that these shares were acquired by the assessee on 24.08.2005. The purchase price was paid through banking channel. Shares were allotted in de-materialized form. These shares remained in D-MAT account of the assessee for more than five years. In between, M/s Swan Realty & Media Ltd. got merged into M/s DMC International on 03.12.2008 by the order of Hon'ble Delhi High Court as noticed by the ld.CIT (Appeals). The assessee has sold the shares on an online platform i.e. BOLT Mechanism. It is a web based online & C.O. 1/CHD/2026 A.Y.2011-12 7 trading form in which name of the counter party i.e. seller/purchaser is not disclosed. Therefore, ld. First Appellate Authority has taken into consideration all these details and position of law declared in various authoritative pronouncements exhibiting on page 10 to 14 of the impugned order and observed that AO failed to bring any evidence on the record that these prices were manipulated by the assessee. The ld.CIT (Appeals) has observed that assessee has retained the share for quite long period, hence, transaction cannot be treated as non-genuine by simply referring to some details where fluctuation in the share price is being reflected. After going through the well-reasoned finding of the ld.CIT (Appeals), we do not find any merit in this appeal of the Revenue, hence it is rejected.
As far as the Cross Objection of the assessee is concerned, the assessee has challenged the re-opening of assessment by issuance of a notice u/s 148 of the Income Tax Act. The reasons for re-opening have been produced before us, which read as under :
& C.O. 1/CHD/2026 A.Y.2011-12 8
The ld. counsel for the assessee has pointed out that these reasons do not reflect the material on the basis of which AO has believed that income of the assessee has escaped assessment. He has merely made reference to a letter written by ADIT (Investigation) Unit, Mumbai. The AO himself did not cross-verified those deals with the assessment record of the assessee. He has simply treated the details as gospel truth & C.O. 1/CHD/2026 A.Y.2011-12 9 and reopened the assessment. On the other hand, ld. DR relied upon orders of revenue authorities.
On due consideration of the record, we are of the view that AO has received an information from ADIT (Investigation) Mumbai exhibiting the fact that M/s DMC International was not having sufficient assets or activities, hence a doubt was raised about the price of shares it fetched in the open market. In our opinion, at the time of recording reasons, the AO has to prima-facie form an opinion. He has not to establish with firm evidence that income has escaped assessment. Therefore, we do not find any merit in the contentions of the ld. counsel for the assessee. Re-opening of assessment is upheld.
In the result, Cross Objections is dismissed.
In the result, appeal of the Revenue and Cross Objections filed by assessee are dismissed.