Doubtful share purchase and demat-credit timing can shift gains from exempt long-term treatment to short-term taxation.

Where the purchase of shares is doubted but the shares are credited to the assessee's demat account and later sold through regular market channels, the holding period may be reckoned from demat credit. On that basis, the claimed long-term capital gain exemption under section 10(38) is denied and the gain is taxed as short-term capital gain under section 111A. The sale transaction may still be accepted, but the questionable purchase side can prevent the transaction from qualifying for exempt long-term treatment.

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Issues: Whether the gain arising from sale of shares of VIP Industries Ltd. was eligible for exemption as long-term capital gain under section 10(38), or whether it was liable to be taxed as short-term capital gain on the footing that the purchase transaction was not genuine and the holding period was to be reckoned only from credit of the shares in the demat account.

Analysis: The assessee produced contract notes, bank payment details, demat records and sale documents to support the purchase and sale of shares. The sale transaction was accepted as genuine, but the purchase side was doubted because the broker's registration had been cancelled and the payment for purchase was made after a substantial delay. The shares were nevertheless credited to the assessee's demat account and later sold through a registered broker on a recognised stock exchange. In these circumstances, the transaction of purchase could not be wholly disregarded, but the disputed identity and status of the seller required the holding period to be examined from the date the shares were credited to the assessee's demat account.

Conclusion: The exemption under section 10(38) was denied and the gain was directed to be taxed as short-term capital gain under section 111A. The assessee obtained only partial relief.

Final Conclusion: The appeal succeeded only to the limited extent that the addition was recharacterised, but the assessee did not get the claimed capital-gain exemption.

Ratio Decidendi: Where the purchase side of a share transaction is doubtful though the shares are credited to the assessee's demat account and later sold through regular market channels, the holding period may be reckoned from demat credit and the gain taxed as short-term capital gain rather than allowed as exempt long-term capital gain.

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