“circular trading”
The decision most relied on for circular trading is Sanjay Bimalchand Jain v. PCIT-1, Nagpur (89 Taxmann.com 196), cited in 251 judgments on BharatTax.
Leading authorities on circular trading
The exemption for long-term capital gains on share transactions is unavailable if the assessee fails to discharge the onus of proving the genuineness of gains arising from dubious share transactions designed to convert unaccounted income into tax-exempt capital gains. Courts will uphold an assessment based on the Revenue's evidence of price rigging or penny stock manipulation if the assessee cannot provide cogent evidence for the abnormal rise in share value.
Lease agreements are considered operating leases if they meet the criteria examined by the Tribunal, even when the Assessing Officer re-characterizes them as financial leases. The Tribunal's decision in Celestial Aviation Trading 15 Ltd. (supra) examined the terms and conditions of lease agreements and relevant circulars and precedents.
An ad hoc disallowance of purchases cannot be made if the corresponding sales have been accepted. Excluding both purchases and sales where transactions are fictitious would result in profits lower than the returned income.
Income earned on sale or redemption of investments made by an insurance company is not necessarily business income and may be eligible for exemptions, even if the department contends the investments are stock-in-trade. The applicability of CBDT Circular No. 528 needs examination in such cases.
Transactions in shares are considered genuine if conducted through a recognized stock exchange with payments via account payee cheques, and the addition of sale proceeds as undisclosed income under section 68 is unjustified without contrary evidence.
Gains arising on the sale of shares cannot be treated as sham solely because purchases were made in cash, if the surrounding facts and circumstances support the transaction.
