Bogus Share Transaction: ITAT Denies Exemption Under Section 10(38) Of Income Tax Act

The bench of S. S. Viswanethra Ravi (Judicial Member) and Inturi Rama Rao (Accountant Member) reiterated that it is a settled principle of law that fraud vitiates everything.

The Assessing Officer (AO) passed an order denying the assessee- Abhishek Ashok Lohade's claim for exemption of capital gains under Section 10(38) of the Income Tax Act, 1961, on the sale of shares by the assessee.

The AO, relying upon the investigation report by the Investigation Wing of the Income Tax Department, Calcutta and the Securities & Exchange Board of India (SEBI), ruled that the transaction of purchase and sale of shares of a given entity, i.e., M/s. SRK Limited, by the assessee was a bogus transaction.

After the assessee failed to substantiate during the course of the assessment proceedings, that the transaction of purchase and sale of shares by the assessee was genuine, the AO passed an order taxing the sale proceeds of the shares as unexplained cash credit.

Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A) upheld the order of the AO by invoking the doctrine of test of human probability. The assessee challenged the order of the CIT(A) before the ITAT.

The assessee Abhishek Ashok Lohade submitted before the ITAT that it had discharged the onus of proving the genuineness of the transaction for claiming exemption under Section 10(38) of the Income Tax Act.

The ITAT noted that the AO had opined that the assessee had indulged in suspicious transactions relating to long term capital gains on sale of shares and that the assessee was a beneficiary of accommodation entries provided by a Calcutta based Entry Provider. The ITAT observed that the Investigation Wing of the Income Tax Department, Calcutta had conducted search and seizure operations on the said Entry Provider, who had admitted to have provided accommodation entries in respect of scripts of various companies, including for the company M/s. SRK Limited.

The Tribunal took into account that the said investigation report of the Income Tax Department was available in the public domain and that it also specified the modus operandi adopted for the purpose of claiming bogus long term capital gains.

Noting that the assessee had failed to rebut the findings of the AO, the Tribunal held that it is a settled principle of law that fraud vitiates everything and thus, the said transaction of sale and purchase of shares by the assessee was void ab initio.

The ITAT referred to the decision of the Supreme Court in Friends Trading Co. versus Union of India (2022), where the Apex Court had ruled that since the Duty Entitlement Passbook Scheme (DEPB) licenses were forged, the exemption benefit availed on such forged DEPB licenses under the Customs Act, 1962 was void ab initio. The Supreme Court had ruled that since fraud vitiates everything, the period of limitation would have no application in the said case. It had added that even if the beneficiary had no knowledge regarding the forged/fake DEPB licenses, it would have no bearing on the imposition of customs duty.

While holding that the ratio of Friends Trading Co. (2022) was applicable to the bogus transaction undertaken by the assessee, the ITAT ruled that the assessee committed fraud against the AO as well as the CIT(A), who are quasi- judicial authorities, by deliberately withholding information from them and by failing to establish the genuineness of transactions.

Ruling that the principle of fraud must be applied to the case of the assessee, the ITAT concluded that the transaction of purchase and sale of shares of SRK Industries by the assessee was sham and a colourful device adopted with the intention to bring undisclosed income into the books of account.

"In the present case also, the appellant deliberately withheld the information from the Assessing Officer as well as the ld. CIT(A) which is within exclusive knowledge of appellant to establish the genuineness of transactions of purchase of shares of that company. It is nothing but a fraud played by the appellant against the Assessing Officer as well as the ld. CIT(A) who are quasi judicial authorities employed for execution of the provisions of the Income Tax Act. Therefore, the principle of fraud can be squarely applied to the facts of the present case and principles of natural justice have no application. Applying the said doctrine, we have no hesitation to hold that the transaction of purchase and sale of shares of SRK Industries under consideration before us is void ab-initio, this is nothing but sham, make believe and colourful device adopted with excellent paper work with intention bringing the undisclosed income into books of account."

Therefore, holding that the said transaction of sale and purchase of shares by the assessee was void ab initio, the ITAT upheld the order of the AO as well as the CIT(A) and dismissed the appeal.

Case Title: Abhishek Ashok Lohade versus ITO

Dated: 22.11.2022 (ITAT Pune)

Counsel for the Respondent: Mr. Ramnath P Murkunde

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