ITAT Mumbai grants long-term capital gains exemption under Section 10(38) despite penny stock allegations

ITAT Mumbai allowed the assessee's appeal regarding long-term capital gains exemption under Section 10(38). The AO had made addition under Section 68 treating gains from Sunrise Asian shares as bogus based on investigation reports identifying it as penny stock. ITAT held that the investigation report was general without specific wrongdoing by assessee or broker Anand Rathi. SEBI order referenced by AO didn't mention assessee or broker among 83 entities acting in concert for price manipulation. No action was taken by SEBI against assessee or broker. The tribunal found share transactions genuine, noting assessee's stock market knowledge and investment history. Appeal decided in favor of assessee.

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Issues Involved:
1. Disallowance of Long Term Capital Gain (LTCG) claim.
2. Taxation of sale consideration of shares.
3. Validity of the AO's reliance on the investigation report and statement of Shri Vipul Vidur Bhatt.
4. Evidence provided by the assessee to substantiate the LTCG claim.
5. SEBI's role and findings regarding the penny stock.
6. Precedent from the case of Bhavin Vaghasia v ITO.

Detailed Analysis:

1. Disallowance of Long Term Capital Gain (LTCG) claim:
The main grievance of the assessee was the disallowance of the LTCG claim of Rs. 23,37,135/- on the sale of shares of M/s. Sunrise Asian Ltd. The AO concluded that the LTCG claim was part of an organized scam/circular trading to evade tax and launder money. The AO based this conclusion on an investigation report and the statement of Shri Vipul Vidur Bhatt, which indicated that the prices of acquisition and sale of M/s. Sunrise shares were manipulated.

2. Taxation of sale consideration of shares:
The AO added the entire sale consideration of Rs. 25,12,020/- to the income of the assessee, asserting that the transaction was fictitious and merely an accommodation entry for converting unaccounted money into accounted money under the guise of LTCG.

3. Validity of the AO's reliance on the investigation report and statement of Shri Vipul Vidur Bhatt:
The AO relied heavily on the investigation report prepared by the Investigation Wing of the Department (Kolkata) and the statement of Shri Vipul Vidur Bhatt. The assessee argued that the investigation report was a general report and did not specifically incriminate the assessee or her broker. The Tribunal noted that the investigation report and the statement did not provide direct evidence against the assessee or her broker.

4. Evidence provided by the assessee to substantiate the LTCG claim:
The assessee provided various documents to substantiate the LTCG claim, including:
- Bank statements for purchase and sale.
- Share certificates.
- Demat account statements.
- Contract notes from the broker.
- Income Tax Returns (ITR) for AY 2012-13 and 2013-14.
The Tribunal observed that the assessee had proved the purchase and sale of shares through primary documents and the transactions were conducted through banking channels, thus establishing the genuineness of the transactions.

5. SEBI's role and findings regarding the penny stock:
The AO referred to a SEBI order that identified the scrip of M/s. Sunrise as a penny stock and had taken action against certain entities. However, it was noted that SEBI had not taken any action against the assessee or her broker. The Tribunal found that the AO's reliance on the SEBI order was misplaced as it did not directly link the assessee or her broker to any wrongdoing.

6. Precedent from the case of Bhavin Vaghasia v ITO:
The Tribunal referred to a similar case, Bhavin Vaghasia v ITO, where the Tribunal had allowed the LTCG claim on the sale of shares of M/s. Sunrise. The facts and circumstances in the case of the assessee were found to be similar to those in Bhavin Vaghasia. The Tribunal applied the same reasoning and allowed the appeal of the assessee, directing the AO to allow the LTCG claim and delete the addition of Rs. 25,12,070/-.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the AO's reliance on the general investigation report and the statement of Shri Vipul Vidur Bhatt was not sufficient to disallow the LTCG claim. The Tribunal found that the assessee had provided adequate evidence to substantiate the genuineness of the transactions. The appeal was partly allowed, with the LTCG claim being accepted and the addition being deleted. Ground number 4 was dismissed as it was not argued or decided by the CIT(A).

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