Listed share sales and claimed LTCG exemption under 10(38) challenged as sham; addition u/s 68 deleted for lack of proof.

The dominant issue was whether the assessee's listed share sale proceeds and resultant LTCG were sham, justifying addition u/s 68 and denial of exemption u/s 10(38). The Tribunal held the Revenue failed to rebut the assessee's documentary evidence and sworn statement affirming genuineness; the assessee, being a promoter, plausibly transacted in the scrip, held shares for 2-3 years, and sold only part holdings, negating a typical penny-stock accommodation pattern. Reliance on third-party statements was held legally unsustainable because cross-examination was denied, vitiating the evidentiary basis under SC principles. Absent any SEBI/BSE finding of price rigging by promoters, price volatility alone was insufficient. The u/s 68 addition and denial of exemption were deleted.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether the sale proceeds arising from sale of listed shares, resulting in claimed exempt long-term capital gain, could be treated as unexplained cash credit under section 68 on the allegation that the transactions were prearranged/penny-stock accommodation entries.

(ii) Whether the assessee discharged the onus of proving genuineness of purchase, holding, and sale of shares through contemporaneous documentary evidence and banking/demat trail, so as to sustain exemption under section 10(38) and negate section 68 addition.

(iii) Whether reliance on third-party statements recorded by the tax authority, without granting cross-examination, could validly support an adverse inference that the share transactions were bogus.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Sustainability of section 68 addition on sale proceeds from listed share sales alleged to be bogus

Legal framework (as discussed): The Court examined the addition made under section 68 by treating the sale proceeds credited as unexplained, while the assessee claimed exemption for long-term capital gain under section 10(38). The dispute turned on whether the capital gain transaction was genuine or an accommodation entry.

Interpretation and reasoning: The Court held that suspicion arising from investigation reports and unusual price movement, without specific material linking the assessee to price rigging or cash-for-entry arrangement, was insufficient to treat the sale proceeds as unexplained. It was material that (a) the assessee acquired shares through an off-market promoter acquisition supported by a share purchase agreement and payment evidence, (b) shares were dematerialised and later sold on a recognised stock exchange through registered brokers, (c) delivery and consideration flowed through demat/banking channels, and (d) there was no finding or material placed showing any adverse regulatory action establishing price rigging by the assessee or the company. The Court further found the facts distinguishable from "typical penny stock" patterns because the assessee was a promoter/managerial person in the company, held the shares for more than the minimum period, and sold only a portion of the holding rather than exiting entirely at the first opportunity.

Conclusion: The Court conclusively upheld deletion of the section 68 addition; the sale proceeds could not be taxed as unexplained cash credit merely on generalized penny-stock allegations and price movement, absent specific incriminating evidence connecting the assessee to accommodation entry activity.

Issue (ii): Whether the assessee proved genuineness of purchase, source, holding, and sale so as to sustain exemption under section 10(38)

Legal framework (as discussed): The Court assessed whether the assessee had produced adequate evidence ordinarily maintained to substantiate exempt long-term capital gains under section 10(38), and whether the tax authority rebutted those evidences with concrete material.

Interpretation and reasoning: The Court found the assessee discharged the onus by producing and explaining: the share purchase agreement evidencing acquisition from promoters; banking evidence for payments; dematerialisation records and demat statements showing credited holdings; stock-exchange sale through registered brokers supported by contract notes; delivery through demat; receipt of sale proceeds through banking channels; and contemporaneous public disclosures made due to promoter/managerial position. The Court rejected the tax authority's focus on how the assessee came to know lenders funding the purchase, because the loans were through banking channels, carried commercial interest, and were repaid with interest; importantly, none of the examined persons stated that the loans were sham or represented the assessee's unaccounted money. The Court also accepted that on an anonymous electronic exchange platform, the seller ordinarily cannot know the identity of ultimate purchasers, weakening any inference of prearranged counter-parties solely from post-facto identification of certain buyers.

Conclusion: The Court held the transactions of purchase and sale were proved as genuine on the record, and consequently the long-term capital gain claim was not liable to be rejected; the exemption claim was to be accepted and the section 68 approach was unsustainable on these facts.

Issue (iii): Effect of denial of cross-examination where third-party statements were relied upon

Legal framework (as discussed): The Court considered the evidentiary use of statements recorded from third parties under summons powers, and the requirement of affording cross-examination when such statements are used against the assessee.

Interpretation and reasoning: The Court noted that the assessee sought cross-examination of persons whose statements were recorded behind his back, but the opportunity was denied citing lack of time. The Court held that even otherwise, reliance on such statements without cross-examination renders that reliance unsustainable. Additionally, on facts, the Court found that the third-party statements did not incriminate the assessee by stating that unaccounted cash was provided for obtaining an "exit" through bogus purchasers; rather, key statements examined did not provide adverse linkage establishing collusion or accommodation entry in the assessee's case.

Conclusion: The Court treated the denial of cross-examination as a serious flaw undermining reliance on third-party statements and, coupled with absence of inculpatory content, rejected the use of those statements to sustain the section 68 addition.

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