2023 (12) TMI 1422 - HC - Income Tax

Genuine long-term capital gains from penny stocks upheld after seven-year holding period distinguished from accommodation entries

Principal Commissioner of Income Tax 1 Versus Damodar Jajoo

Gujarat HC upheld ITAT's decision deleting addition made by AO for alleged bogus Long Term Capital Gain from penny stock sale. Assessee held shares for ... Bogus Long Term Capital Gain - sale of shares of Global Capital Markets Ltd., a penny stock - period of holding of shares - AO that the price movement of the company were not supporting by financial fundamentals of the company - ITAT deleted addition - HELD THAT:- Assessee has sold shares after seven years and therefore, the proximity of time between the buy and sale of shares cannot be considered as an accommodation entry in penny stock company within a short period of about one year to book bogus of Long Terms Capital Gain or loss to defraud the Revenue. AO and CIT(A) have ignored such facts which were considered by the Tribunal to arrive at a finding of fact that the assessee has to be treated as an investor and cannot be treated to have engaged in fraudulent activity or manipulation activity. Tribunal, therefore, considering the period of holding of shares by the respondent assessee, arrived at a finding that the Long Term Capital Gain earned by the assessee is not a significant amount and therefore, held that the assessee cannot be said to have taken an accommodation entry by entering into transaction of shares in the penny stock company. No error in the finding of facts and the conclusion arrived at by the Tribunal that the investment made by the assessee was longstanding and genuine and was not the penny stock company on the basis of which the Long Term Capital Gain was wrongly claimed. No substantial question of law. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court in this judgment were:(i) Whether the Tribunal was justified in deleting the addition on account of bogus Long Term Capital Gain made by the Assessing Officer from the sale of shares of Global Capital Markets Ltd., a penny stock, without appreciating the findings of the Assessing Officer regarding the price movement of the company.(ii) Whether the Tribunal erred in ignoring the facts that the transactions claimed by the Assessee as Long Term Capital Gain were arranged through brokers, operators, and exit providers for generating bogus Long Term Capital Gain.(iii) Whether the Tribunal was justified in allowing the appeal of the Assessee by holding that the investment in shares was genuine, relying on a previous High Court decision, and overlooking the findings of CIT(A) that the sale transaction was a sham.(iv) Whether the Tribunal's decision was perverse in ignoring facts establishing manipulation of share prices of Global Capital Markets Ltd.(v) Whether the Tribunal erred in deleting the disallowance of Long Term Capital Gains and commission, overlooking the fact that the transactions were stage-managed to facilitate the Assessee to plough back unaccounted income.(vi) Whether the Tribunal was justified in holding the transactions as genuine based on the duration for which shares were held, despite the investigation carried out by the Income Tax Department.(vii) Whether the Tribunal was justified in holding the transactions as genuine, not appreciating that the Assessee entered into a pre-arranged scheme of share trading to take advantage of bogus exempted Long Term Capital Gain.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and Precedents:The case revolves around the interpretation of Section 260A of the Income Tax Act, 1961, concerning appeals to the High Court, and Section 10(38) regarding exemptions on Long Term Capital Gains. The Tribunal relied on the precedent set by the Gujarat High Court in the case of Jagat Pravinbhai Sarabhai, which dealt with similar issues of penny stock transactions and the genuineness of investments.Court's Interpretation and Reasoning:The Tribunal found that the Assessee's transactions in shares of Global Capital Markets Ltd. were genuine. It highlighted that the shares were held for over seven years, indicating a genuine investment rather than a short-term accommodation entry. The Tribunal emphasized the lack of evidence from the Assessing Officer and CIT(A) proving manipulative practices by the Assessee.Key Evidence and Findings:The Tribunal considered the duration for which the shares were held, the manner of transaction through recognized brokers, and payment of Securities Transaction Tax (STT) as evidence of genuine investment. It noted that the Assessee had not deposited cash before purchasing the shares, further supporting the legitimacy of the transactions.Application of Law to Facts:The Tribunal applied the legal principles established in the case of Jagat Pravinbhai Sarabhai, where the genuineness of long-term investments was substantiated by holding shares for an extended period. It concluded that the Assessee's case was similar and thus warranted the same treatment.Treatment of Competing Arguments:The Tribunal addressed the Revenue's arguments regarding the alleged manipulation of share prices and stage-managed transactions. It found these arguments unsubstantiated due to the lack of concrete evidence linking the Assessee to manipulative practices or fraudulent activities.Conclusions:The Tribunal concluded that the Assessee was a genuine investor, not involved in taking accommodation entries in penny stocks. It held that the transactions were legitimate, and the Long Term Capital Gains claimed were not bogus.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning:The Tribunal stated, 'The genuineness of investment in the shares by the assessee was substantiated by him by producing contract note, Transaction was through recognised Broker, transaction was done through banking channel on which STT was paid. The shares were held by assessee, as an Investor for a period of seven/ eight years.'Core Principles Established:The judgment reinforced the principle that long-term holding of shares, supported by proper documentation and compliance with regulatory requirements, indicates genuine investment rather than fraudulent activity.Final Determinations on Each Issue:The Tribunal determined that the Assessee's transactions were genuine, the Long Term Capital Gains were legitimate, and the Revenue's additions were unjustified. It dismissed the Revenue's appeals, affirming the Assessee's position.