Assessee denied section 10(38) exemption for capital gains from shares of paper company with manipulated stocks

ITAT Kolkata dismissed assessee's appeal challenging denial of exemption under section 10(38) for long-term capital gains. Assessee purchased 6,000 equity shares of Sulabh Engineers Services Ltd. through broker, but AO found the company to be a paper entity with manipulated stocks. Despite assessee's argument of earning small profit, ITAT held that magnitude of profit doesn't determine genuineness of investee company. Following Calcutta HC precedent in Swati Bajaj case, ITAT ruled that investment in companies with manipulated shares by brokers cannot claim exemption, regardless of profit amount earned.

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Issues involved:
Appeal against disallowance of long-term capital gain under section 10(38) of the Income Tax Act.

Analysis:
1. Issue: Disallowance of long-term capital gain
- The assessee contested the disallowance of long-term capital gain amounting to Rs.10,07,722 under section 10(38) of the Income Tax Act.
- The assessee purchased shares of Sulabh Engineers & Services Ltd., which were later sold, resulting in a claimed long-term capital gain.
- The Assessing Officer disallowed the claim, alleging that the company was a paper entity with manipulated stocks, leading to undue benefits for investors.
- The CIT (Appeals) upheld the disallowance, prompting the appeal to the Tribunal.

2. Arguments by the assessee:
- The assessee argued that the long-term capital gain was genuine, citing precedents from various ITAT benches supporting similar cases.
- The assessee highlighted that the shares' sale price was not abnormally high compared to the purchase price, indicating innocent investment.
- Emphasis was placed on the lack of evidence implicating the assessee or the broker in price manipulation activities.

3. Revenue's stance:
- The revenue relied on a High Court judgment in a similar case to support disallowance, claiming no distinguishable features.

4. Tribunal's decision:
- The Tribunal considered the High Court's judgment on manipulated shares and the unreliability of the investee company.
- It rejected the argument that a lower profit indicated innocence, emphasizing that profit magnitude does not determine genuineness.
- The Tribunal dismissed the appeal, stating that the assessee's investment could not be deemed genuine based on profit amount alone.

5. Conclusion:
- The Tribunal upheld the disallowance of long-term capital gain, emphasizing the unreliability of the investee company and the lack of distinguishing features in the case.
- The decision highlighted that profit magnitude does not establish the legitimacy of an investment, leading to the dismissal of the appeal.

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