Mere Suspicion or General Investigation Reports Can’t Justify Treating Share Transactions as Bogus; LTCG Exemption Allowed: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that long-term capital gains (LTCG) from share transactions cannot be treated as bogus merely on the basis of general investigation reports or suspicion, particularly when the assessee has produced complete documentary evidence to substantiate the transactions. The bench of Anikesh Banerjee (Judicial Member) and Girish Agrawal (Accountant Member), allowed the appeal filed by the assessee for the Assessment Year 2014–15 and directed the deletion of an addition of Rs. 7.41 crore made by the Assessing Officer (AO) after denying exemption under Section 10(38) of the Income Tax Act. The assessee had originally purchased 15,000 shares of Conart Traders Ltd. in November 2011 through an off-market transaction at ₹20 per share, with payment made through banking channels. Subsequently, the company amalgamated with Sunrise Asian Ltd., a listed entity, and the shares were converted accordingly. The shares were held for about 22 months and were later sold during the financial year 2013–14 on the Bombay Stock Exchange (BSE) after payment of Securities Transaction Tax (STT). The sale resulted in proceeds of ₹7.41 crore, which the assessee claimed as exempt long-term capital gains under Section 10(38). However, during scrutiny assessment proceedings, the Assessing Officer treated the entire transaction as a bogus penny-stock transaction and denied the exemption, adding the entire sale amount to the assessee’s income. The addition was later upheld by the Commissioner of Income Tax (Appeals), prompting the assessee to approach the ITAT. Before the tribunal, the assessee argued that all relevant documents supporting the genuineness of the transactions had been submitted during the assessment proceedings. These included purchase bills and share certificates, bank statements reflecting payment for purchase, demat account statements showing share holdings, contract notes and broker confirmations, and bank statements reflecting receipt from sale of shares. The assessee contended that none of these documents had been rejected or proven false by the tax authorities, and therefore the transactions could not be treated as bogus. Reliance was also placed on several judicial precedents, including earlier ITAT decisions and High Court rulings where similar transactions involving the same scrip had been accepted as genuine. The Departmental Representative argued that the transactions were part of accommodation entries linked to manipulated penny stocks and supported the findings of the lower authorities. The revenue maintained that the unusually high price rise in the shares indicated manipulation. The ITAT observed that shares were purchased through banking channels. The holdings were reflected in the demat account. Shares were held for more than 22 months. The sale took place through the BSE platform with payment of STT. All documentary evidence relating to purchase and sale was placed on record The tribunal noted that none of the primary evidences submitted by the assessee were found to be false or fabricatedby the revenue authorities. It further held that the addition was based mainly on general investigation reports and suspicion relating to the scrip, without any material showing the assessee’s involvement in price manipulation or accommodation entries. The tax department also failed to establish any link between the assessee and alleged entry operators or exit providers. The tribunal reiterated a well-settled legal principle that “suspicion, however strong, cannot take the place of evidence.” Where share transactions are supported by documentary proof and executed through recognized stock exchanges with payment of STT, the claim of LTCG exemption cannot be denied merely due to general allegations about penny-stock manipulation. The ITAT held that the denial of exemption under Section 10(38) was unsustainable in law. The tribunal set aside the order of the Commissioner (Appeals) and directed the Assessing Officer to delete the addition of ₹7.41 crore made on account of alleged bogus LTCG. Case Details Case Title: Jayshree Haresh Shah Versus ITO Citation: JURISHOUR-235-ITA-2026(MUM) Case No.: ITA No.4206/Mum/2025 Date: 05/03/2026 Counsel For Appellant: K. Gopal a/w Shri Om Kandalkar Counsel For Respondent: Sushil B. Shendge (SR. DR) Click Here To Read Order Read More: LTCG From Sale of Shares Eligible for S. 10(38) Exemption for Insurers: ITAT

Mere Suspicion or General Investigation Reports Can’t Justify Treating Share Transactions as Bogus; LTCG Exemption Allowed: ITAT

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