2020 (1) TMI 690 - AT - Income Tax

Bogus LTCG - Penny stock - Disallowance of exemption claimed u/s.10(38) - long term capital gain earned on sale of equity shares of PS IT Infrastructure Services Ltd. (PS IT I SL) - HELD THAT - PS IT I SL is a penny stock company and the assessee obtained only accommodation entries in the garb of long term capital gain from transfer of its shares, for which an appropriate addition has rightly been made and upheld by the authorities below. View above is fortified by the judgment of Sanjay Bimalchand Jain vs. Pr. CIT 2017 (5) TMI 983 - BOMBAY HIGH COURT which has been briefly referred to by the AO as held that the assessee did not tender cogent evidence to explain how the shares in an unknown company worth ₹ 5 had jumped to ₹ 485 in no time. The fantastic sale price was not at all possible as there was no economic or financial basis to justify the price rise. It was held that the assessee had indulged in a dubious share transaction meant to account for the undisclosed income in the garb of long term capital gain. The gain was accordingly held to be rightly assessed as undisclosed income. Similar view has been taken by the Hon ble Delhi High Court in Suman Poddar vs. ITO 2019 (9) TMI 1089 - DELHI HIGH COURT . In view of the foregoing discussion, accord imprimatur to the view adopted by the ld. first appellate authority on this score and accordingly countenance the impugned order. - Decided against assessee.

Summary

Issues: Disallowance of exemption claimed u/s.10(38) of the Income-tax Act, 1961 for long term capital gain earned on sale of equity shares of a company.

Analysis:
1. The appeal concerns the disallowance of exemption claimed under section 10(38) of the Income-tax Act, 1961, relating to long term capital gain on the sale of equity shares of a specific company.

2. The Assessing Officer (AO) flagged the transaction as suspicious due to the nature of the shares involved, which were linked to providing accommodation entries. The AO questioned the genuineness of the long term capital gain declared by the assessee.

3. The AO scrutinized the purchase and sale details of the shares, highlighting a significant increase in share price without corresponding financial justification. Various statements and official actions, such as SEBI's investigation and identification of the company as a shell company, further raised doubts about the legitimacy of the transaction.

4. The Tribunal noted the substantial price escalation of the shares in a short period, the lack of financial basis for the increase, and the involvement of the company in providing accommodation entries. Citing legal precedents, including judgments from the Supreme Court, the Tribunal emphasized the need to consider the substance of transactions over their apparent form.

5. Referring to the Supreme Court's decisions in CIT vs. Durga Prasad More and Sumati Dayal vs. CIT, the Tribunal reiterated the principle that transactions should be analyzed based on surrounding circumstances and human probabilities to uncover the actual nature of the transactions.

6. The Tribunal concluded that the company in question was a penny stock entity, and the assessee had obtained accommodation entries disguised as long term capital gain. The addition made by the authorities was upheld, supported by judgments from High Courts emphasizing the need for credible evidence to justify substantial price variations in share transactions.

7. Drawing parallels with similar cases where undisclosed income was camouflaged as long term capital gain, the Tribunal affirmed the decision of the lower authorities to disallow the exemption claimed by the assessee.

8. Ultimately, the Tribunal dismissed the appeal, endorsing the findings of the lower authorities regarding the non-genuineness of the transaction and the addition of the long term capital gain amount to the assessee's income.

This detailed analysis showcases the thorough examination of the issues related to the disallowance of exemption claimed for long term capital gain, incorporating legal principles and precedents to support the decision reached by the Tribunal.