Section 68 Addition on LTCG from Shares in Demerger Set Aside Due to Valid Evidence and Legitimate Transactions

The ITAT Mumbai set aside the addition made under Section 68 regarding LTCG on shares allotted pursuant to a Bombay HC order in a demerger. The assessee furnished comprehensive documentary evidence, including demat and bank statements, which were not disputed by the revenue. The LTCG proceeds were received through legitimate banking channels, and shares were credited to the demat account with transactions routed via BSE. No evidence of price manipulation or circular transactions was established by the revenue. Relying on precedent, the tribunal deleted the addition, allowing the assessee's appeal.

---

---

ISSUES:

Whether long-term capital gains (LTCG) arising from sale of shares received pursuant to a court-approved demerger are eligible for exemption under section 10(38) of the Income Tax Act, 1961.Whether the sale proceeds of shares can be treated as unexplained cash credit under section 68 of the Income Tax Act on the ground of alleged bogus transactions involving penny stocks and price manipulation.Whether the assessee has discharged the onus of proving the genuineness of share transactions carried out through recognized stock exchanges and proper banking channels.The evidentiary value and effect of investigation reports alleging price manipulation and circular transactions on the assessment of capital gains and additions under section 68.The applicability and precedential value of judicial decisions regarding treatment of LTCG on shares and additions under section 68 in cases involving alleged sham transactions or price manipulation.

RULINGS / HOLDINGS:

The exemption claimed under section 10(38) was denied by the assessing officer on the ground that the shares were penny stocks and the LTCG was bogus; however, the appellate tribunal found that the shares were received pursuant to a legally sanctioned demerger and sold through the Bombay Stock Exchange (BSE) platform, with all transactions routed through proper banking channels, thereby discharging the primary onus of genuineness.The addition of Rs. 26,02,806/- under section 68 as unexplained cash credit was set aside by the tribunal, holding that the revenue authorities failed to discredit or challenge the documentary evidence furnished, including demat account statements, bank statements, and broker bills, and no evidence was brought on record to prove involvement in price manipulation or rigging.The tribunal relied on co-ordinate bench decisions and the jurisdictional High Court ruling which held that bona fide transactions conducted on recognized stock exchanges with proper documentation and banking trail do not justify additions under section 68 merely on suspicion or allegations of price manipulation.The tribunal concluded that the addition made by the assessing officer was not justified and deleted the addition under section 68, allowing the exemption under section 10(38) in respect of LTCG on shares received on demerger.

RATIONALE:

The legal framework applied includes provisions of the Income Tax Act, 1961, specifically sections 10(38) (exemption of LTCG on listed shares) and 68 (unexplained cash credits), alongside procedural safeguards under sections 139(1), 143(2), 143(3), 142(1), and 250.The tribunal emphasized the importance of documentary evidence such as demat account statements, broker bills, bank statements, and court-sanctioned demerger schemes to establish the genuineness of transactions.The tribunal noted that mere allegations or investigation reports indicating price manipulation or circular transactions, without direct evidence implicating the assessee, are insufficient to treat the LTCG as bogus or to make additions under section 68.The tribunal followed precedents where bona fide transactions executed on recognized stock exchanges with proper documentation and banking trail were held not to warrant additions under section 68, distinguishing such cases from those involving sham or staged transactions.The tribunal recognized the principle that the revenue bears the burden of disproving the genuineness of transactions and that the assessee's compliance with procedural and documentary requirements discharges the primary onus.

---