Sale of shares and long-term capital gains flagged by SEBI: s.10(38) exemption upheld, bogus-gain addition deleted

The dominant issue was whether the AO was justified in treating the assessee's long-term capital gains from sale of shares as bogus and denying exemption under s.10(38) merely because SEBI had flagged the scrips as suspicious. The ITAT held that the CIT(A) correctly deleted the addition after considering the assessee's evidence and relying on a co-ordinate Bench decision accepting similar gains from the same scrip, and further noted the AO's own acknowledgment of the company's standing and the absence of any finding of collusion with promoters to rig gains. The Revenue's appeal was dismissed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the additions on account of alleged bogus long term capital gains claimed as exempt under section 10(38) on sale of shares of Capital Trade Link Ltd. and Alankit Ltd. were justified.

1.2 Whether the consequential addition as unexplained expenditure under section 69C, alleged as cost for arranging accommodation entries, was sustainable.

1.3 Whether mere reliance on SEBI/SIT reports, trading pattern, ASM categorisation and a SEBI circular banning negotiated deals, without specific incriminating material against the assessee or the scrips, could justify treating the impugned share transactions as bogus.

1.4 Whether the first appellate authority erred in relying on earlier coordinate bench decisions in respect of the same scrips and same assessee/family, holding similar long term capital gains to be genuine.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Genuineness of LTCG on shares of Capital Trade Link Ltd. and Alankit Ltd. and exemption under section 10(38)

Legal framework (as discussed)

2.1.1 The first appellate authority examined the exemption under section 10(38) and referred to the "twin conditions" under that provision, i.e., that the income must arise from transfer of a long term capital asset being an equity share in a company and such transaction must be chargeable to securities transaction tax. Reference was also made to judicial principle that "suspicion cannot become the basis of addition" as laid down in authority cited as CIT vs. Indian Oil Corporation, 159 ITR 956 (SC).

Interpretation and reasoning

2.1.2 For Capital Trade Link Ltd., the first appellate authority relied on earlier decisions of a coordinate bench in (i) the case of the assessee's husband for the same scrip and assessment years 2016-17 and 2017-18, where additions towards LTCG on the same shares were deleted; and (ii) the assessee's own case for AY 2016-17, where the revenue's appeal against allowance of LTCG on sale of Capital Trade Link Ltd. shares was dismissed and the claim was held genuine. The Tribunal noted these findings and treated them as applicable to the present year.

2.1.3 For Alankit Ltd., the first appellate authority noted that the Assessing Officer himself accepted it as a leading e-governance service provider listed on NSE and BSE and analysed only its trading pattern to conclude that the assessee had taken bogus capital gain. From the AO's own chart, it was observed that the scrip traded at its highest values in November and December 2017, whereas the assessee had sold her shares in May 2016. It was reasoned that, had the assessee been engaged in taking bogus capital gains by way of price manipulation, she would have sold at or near the highest price band, not much earlier. Hence, mere analysis of trading pattern without more could not support the allegation of bogus capital gains.

2.1.4 The first appellate authority further recorded that: (i) there was no finding that the assessee had booked capital gains in connivance with the promoters of Alankit Ltd.; (ii) the Assessing Officer did not bring on record any specific contrary findings or material to show that the profits were non-genuine; (iii) the transactions were evidenced by payment and receipt through banking channels; (iv) transfer of shares took place through demat account and online trading platform after payment of STT; (v) both scrips continued to be actively traded in the market; and (vi) both companies had regularly declared dividends during the relevant financial years. These facts were taken to support genuineness of the share transactions.

2.1.5 It was also recorded that the Assessing Officer had not carried out any investigation specific to the assessee's transactions or brought on record any material from the market regulator SEBI to establish dubious status of the scrips or any accommodation entry arrangement involving the assessee. In the absence of such specific material and in light of the evidences of regular, STT-paid, demat-based trades, the allegation of bogus LTCG was rejected.

Conclusions

2.1.6 The first appellate authority held that, since the assessee had fulfilled the twin conditions of section 10(38) and there was no reference by the Assessing Officer to non-fulfilment of those conditions, and given the documentary evidences of genuine market transactions, the LTCG on sale of shares of Capital Trade Link Ltd. and Alankit Ltd. could not be treated as bogus. The addition of Rs. 3,73,18,458 on account of alleged bogus LTCG was deleted.

2.1.7 The Tribunal found "no reasons to interfere" with these findings, emphasising the undisputed fact that the AO himself described Alankit Ltd. as a leading e-governance service provider and recorded no finding of assessee's connivance with the promoters or any specific evidence of manipulation. The Tribunal thus upheld the deletion of the addition on LTCG.

2.2 Sustainability of addition under section 69C as cost of arranging alleged accommodation entries

Interpretation and reasoning

2.2.1 The addition under section 69C was made on the premise that the assessee incurred unexplained expenditure for arranging accommodation entries corresponding to the alleged bogus LTCG. The first appellate authority, having held the LTCG transactions to be genuine and not accommodation entries, treated the foundational premise of the section 69C addition as non-existent.

Conclusions

2.2.2 Consequently, with the main allegation of bogus LTCG failing, the first appellate authority deleted the addition of Rs. 7,46,370 under section 69C. The Tribunal, having affirmed the genuineness of the LTCG transactions and the reasoning of the first appellate authority, implicitly upheld the deletion of the related section 69C addition.

2.3 Effect of SEBI/SIT reports, ASM categorisation and SEBI circular banning negotiated deals on genuineness of the assessee's transactions

Interpretation and reasoning

2.3.1 The revenue contended that SEBI had flagged the relevant scrips as suspicious, that Capital Trade Link Ltd. fell under "Additional Surveillance Measure (ASM) Grade 1", that there was abnormal price hike, and that SEBI's circular dated 14 September 1999 banning negotiated and cross deals rendered the assessee's off-market purchases at Rs. 1 per share non-genuine and a colourable device to benefit from manipulated price rise.

2.3.2 The Tribunal noted that the departmental representative relied "heavily" on the assessment order and on SEBI/SIT reports and ASM categorisation but accepted the first appellate authority's finding that there was "nothing on record" from SEBI establishing a dubious status of Capital Trade Link Ltd. or Alankit Ltd. in relation to the assessee's specific transactions. No concrete SEBI or SIT material was produced to show that the particular trades undertaken by the assessee were tainted or part of any accommodation entry racket.

2.3.3 The first appellate authority's reasoning, endorsed by the Tribunal, stressed that: (i) the AO did not perform any transaction-specific investigation; (ii) the trades were through banking channel and demat accounts with STT paid; (iii) the scrips remained active and traded in the market; and (iv) the companies consistently declared dividends. In this context, general references to SEBI/SIT reports, ASM categorisation or the SEBI circular on negotiated deals, without specific linkage to the assessee's transactions and without showing non-compliance with applicable legal requirements, were held insufficient to sustain additions.

Conclusions

2.3.4 The Tribunal concluded that mere suspicion based on general regulatory alerts, price movement, ASM classification or generic SEBI reports cannot substitute for specific evidence against the assessee. In the absence of such evidence, and given compliance with statutory conditions for exemption under section 10(38), the additions premised on alleged bogus LTCG and related unexplained expenditure could not be upheld.

2.4 Reliance on earlier coordinate bench decisions in respect of the same scrips and same assessee/family

Interpretation and reasoning

2.4.1 The first appellate authority and the Tribunal both took note that, in the case of the assessee's husband, the coordinate bench had already deleted additions on LTCG arising from the same scrip (Capital Trade Link Ltd.) for AYs 2016-17 and 2017-18. Likewise, in the assessee's own case for AY 2016-17, the coordinate bench had dismissed the revenue's appeal and upheld the genuineness of LTCG on sale of shares of Capital Trade Link Ltd.

2.4.2 These prior decisions were considered directly relevant and on identical facts and scrip, and were treated as persuasive and binding guidance in assessing the genuineness of the present year's transactions, absent any fresh distinguishing material produced by the revenue.

Conclusions

2.4.3 The Tribunal concurred with the first appellate authority that, consistent with the coordinate bench's previous findings in closely connected cases and on the same scrips, the revenue's grounds challenging the deletion of additions were devoid of substance. The appeal of the revenue was therefore dismissed in entirety.

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