The Income Tax Appellate Tribunal, Nagpur, has reaffirmed that long-term capital gains from the sale of shares listed on recognized stock exchanges cannot be treated as bogus merely on the basis of suspicious price movements or generic investigation reports. The decision underscores the primacy of documentary evidence and the burden on the revenue to disprove genuine transactions.
Background & Facts
The Dispute
The appellant, Ritu Deep Saraf, incurred a long-term capital gain of Rs. 40,88,160 from the sale of equity shares of ACI Infocom Ltd. during the assessment year 2013-14. The Assessing Officer, under Section 147 read with Section 144B of the Income Tax Act, 1961, treated this gain as bogus and made an addition under Section 68. Additionally, an amount of Rs. 1,22,645 was added under Section 69C as unexplained commission expenses allegedly incurred to arrange the transaction.
Key Facts
- The appellant purchased shares of ACI Infocom Ltd. and held them in a demat account for over 12 months.
- The shares were sold through a SEBI-registered broker on a recognized stock exchange.
- All purchase and sale transactions were routed through banking channels with verifiable records.
- The appellant submitted share purchase confirmations, demat account statements, broker statements, and bank transaction records.
- The revenue did not dispute the existence of the transactions but alleged they were "accommodation entries" based on a generic investigation wing report concerning price manipulation in the scrip.
- No specific evidence linked the appellant to any exit provider, shell entity, or price rigging activity.
- The revenue did not conduct any independent inquiry into the appellant’s transactions or obtain any adverse finding from SEBI or the company.
Procedural History
- 31.03.2022: Assessment order passed under Section 147 r.w.s. 144B, making additions of Rs. 40,88,160 under Section 68 and Rs. 1,22,645 under Section 69C.
- 29.10.2025: Order of the National Faceless Appeal Centre (NFAC), Delhi, upholding the additions.
- 18.03.2026: Hearing before ITAT Nagpur.
- 07.05.2026: Judgment pronounced by the Tribunal.
Relief Sought
The appellant sought deletion of the additions under Sections 68 and 69C, arguing that the long-term capital gain was genuine and eligible for exemption under Section 10(38), and that the commission expenses were legitimate and supported by documentation.
The Legal Issue
The central question was whether Section 68 and Section 69C of the Income Tax Act, 1961, permit the revenue to treat long-term capital gains from listed shares as bogus and add unexplained expenses solely on the basis of a general investigation report and suspicious price movement, without any specific evidence linking the assessee to a sham transaction.
Arguments Presented
For the Appellant
The appellant’s counsel relied on the recent decision of the Mumbai Bench of the ITAT in Kamal Khetan v. DCIT (ITA No. 2702/MUM/2025 dated 14.08.2025), which held that where purchase and sale of shares are documented, routed through banking channels, and executed on a recognized stock exchange, the burden shifts to the revenue to disprove genuineness. The counsel emphasized that the Supreme Court in Omar Salay Mohamed Sait v. CIT and Umacharan Shaw & Bros. v. CIT has held that suspicion, however strong, cannot substitute legal evidence. The appellant also cited decisions of the Bombay and Delhi High Courts, which have consistently held that an increase in share price alone cannot justify treating a transaction as an accommodation entry.
For the Respondent
The Departmental Representative supported the order of the Assessing Officer and the Commissioner (Appeals) but failed to cite any binding precedent or specific evidence connecting the appellant to any fraudulent scheme. No independent inquiry was conducted, no exit providers were identified, and no adverse findings from SEBI or the company were produced.
The Court's Analysis
The Tribunal examined the nature of the transactions and the legal standards applicable to additions under Sections 68 and 69C. It noted that the appellant had discharged the primary burden by producing complete documentary evidence of purchase, holding, and sale of shares through regulated channels.
"The prima facie bonafides of existence of transaction executed cannot thus be doubted. It is not the case of the revenue that the capital gain arising to Assessee is not in the nature of LTCG as the shares were held by the assessee more than one & half years. The case of revenue is that such transactions is an accommodation entry and thus it is a sham, which is based on report of Investigation wing in many scrips."
The Tribunal held that the revenue’s reliance on a generic investigation report, without any specific linkage to the appellant, was legally unsustainable. It emphasized that the burden to disprove the transaction lies with the revenue, and this burden cannot be discharged by citing modus operandi observed in unrelated cases.
"Presumption can be based against the assessee if all such factors are brought on record and not on some general report of Investigation Wing. Such report can be triggering point but not conclusive unless some inquiry has been done by the AO or something specific has been brought on record."
The Tribunal further noted that the Assessing Officer had not verified whether the appellant had booked losses or gains in the same scrip, and had erroneously relied on a SEBI order that did not pertain to ACI Infocom Ltd. The Tribunal concluded that the additions were based on conjecture and surmise, violating the principles laid down in Omar Salay Mohamed Sait and Umacharan Shaw & Bros.
The Verdict
The appeal is allowed. The addition of Rs. 40,88,160 under Section 68 and Rs. 1,22,645 under Section 69C are deleted. The Tribunal held that the long-term capital gain from the sale of ACI Infocom Ltd. shares was genuine and eligible for exemption under Section 10(38). No further action or penalty is directed.
What This Means For Similar Cases
Documentary Evidence Prevails Over Generic Reports
- Practitioners must insist that revenue authorities produce specific, case-linked evidence before treating any share transaction as bogus.
- Generic investigation reports or modus operandi summaries from unrelated cases are insufficient to rebut documentary proof.
Suspicion Alone Cannot Justify Addition
- An increase in share price, even if significant, cannot by itself be grounds for invoking Section 68 or 69C.
- The revenue must establish a direct nexus between the assessee and any alleged shell entities, exit providers, or price manipulation.
Section 10(38) Exemption Remains Protected
-
Where all conditions under Section 10(38) are met - holding period, sale on recognized exchange, demat transfer - the exemption cannot be denied merely on suspicion.
-
Assessing Officers must verify compliance with Section 10(38) before initiating proceedings under Sections 68 or 69C.
-
Always demand production of SEBI findings, company investigations, or direct evidence implicating the assessee.
-
File citations of Kamal Khetan and Indravadan Jain HUF to reinforce the principle that documented transactions on recognized exchanges are presumed genuine.
-
Do not accept blanket assumptions based on "pattern-based" investigations; challenge them on grounds of lack of application of mind and violation of natural justice.
-
In appeals, highlight the absence of independent inquiry by the AO as a fatal flaw in the assessment order.
-
Where the revenue fails to rebut documentary evidence, seek deletion of additions under Section 68 and 69C without delay.
-
Consider filing writ petitions in High Courts if lower authorities continue to rely on generic reports despite binding precedents.
