LTCG On Penny Stock Transaction Cannot Be Denied Exemption In Absence Of Incriminating Material: ITAT Mumbai

The Assessee, Vipul Suresh Kumar Modi, had filed an income tax return. Subsequently notice under Section 153A of the Income Tax Act, 1961 was issued to the Assessee. During the assessment proceedings, the Assessing Officer (AO) had noticed that the Assessee had sold shares of M/s Global Capital Markets Ltd (GCML), purchased at the cost of INR 13,28,294 for the sale consideration of INR 47,63,825. The AO had held that the sale transaction was a penny stock transaction undertaken by the Assessee in a pre-arranged manner to evade taxes. The AO had concluded that the sale consideration was not in the nature of capital gain and that it represented unexplained income invested by the Assessee. The AO therefore had made additions to the Assessee's income and had denied exemption on the long term capital gains under the Act. The Assessee had filed an appeal before the Commissioner of Income Tax (Appeals) (CIT (A)) against the order of the AO. The CIT(A) had ruled that since the additions to the Assessee's income were made on the basis of suo-motu observations of the AO and were not based on any incriminating material found during the course of search conducted under Section 153(2) of the Act, the said additions to Assessee's income could not be made. The revenue department had filed an appeal before the ITAT against the order of the CIT (A).

The departmental representative before the ITAT had submitted that the sale consideration derived from the sale of shares of GCML was bogus and therefore the exemption claimed on the long term capital gains arising on the transfer of said shares could not allowed.

Section 153A of the Income Tax Act, 1961 provides that where in respect of an assessee a search under the Act is initiated or where the books of accounts, documents or other assets of the assessee are requisitioned, the Assessing Officer shall assess or reassess the total income of the relevant assessment year and six assessment years immediately preceding the relevant assessment year in which such search is conducted or requisition is made.

The ITAT observed that in the present case the CIT (A) had recorded the finding that the additions made by the AO were not based on any incriminating material found during the course of search, and the same was not disputed by the departmental representative before the ITAT. The ITAT observed that the Bombay High Court in the case of CIT versus Continental Warehousing Corporation (2015) had held that no addition could be made in respect of unabated assessments which had become final in absence of any incriminating material found during the search. It also observed that the Supreme Court in the case of CIT versus Sinhgad Technical Education Society and Others (2017) had upheld the said order of the Bombay High Court.

The ITAT therefore dismissed the appeal of the revenue department and upheld the order of the CIT (A).

Case Title: Deputy Commissioner Of Income Tax, Mumbai Versus Vipul Suresh Kumar Modi

Dated: 17.02.2022

Representative For The Assessee: Vinita Shah

Representative For The Revenue Department: Achal Sharma (CIT - DR)

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