Addition u/s 68 sustained for LTCG exemption from bogus co. share

Zeeshan Azizmohmed Shaikh Vs ITO (ITAT Mumbai)

Both SEBI and BSE corroborated the fact that Kailash Auto Finance Ltd was not a genuine company – LTCG exemption u/s 10(38) denied – addition u/s 68 sustained

Facts- The assessee is an individual and is engaged in the business of trading in paper. The assessee filed its return of income declaring a total income of Rs. 10,57,900. During the course of assessment proceedings, it was observed that the assessee has sold 1,27,000 shares of Kailash Auto Finance Limited for trade value of Rs. 50,11,000 (including commission paid for transaction) during the year under consideration. It was further observed that LTCG of Rs. 48,59,287 arising out of the above transaction have been claimed as exempt under section 10(38) of the Act. In order to verify the genuineness of the activities/business of Kailash Auto Finance Limited, notices u/s 133(6) of the Act were issued to SEBI/ROC/BSE, Mumbai requesting authorities to intimate about any action pending/initiated against the said company. In reply, the SEBI vide its letter dated 01/11/2016 intimated the AO that Kailash Auto Finance Limited has been barred / suspended / blacklisted from trading at BSE and has also been penalised. It was further informed that vide its order dated 17/03/2015 SEBI has found that the prices were artificially rigged by the directors and other related persons to provide the accommodation entry of bogus LTCG and STCL to the beneficiaries. As assessee was one of the beneficiary, who had earned LTCG to the tune of Rs. 48,59,287 from the sale of shares of Kailash Auto Finance Limited, the assessee was asked to show cause as to why the said claim and commission paid for the transaction be not treated as undisclosed income and added to total income of the assessee.

AO vide order dated 28/12/2016 passed under section 143(3) of the Act held that financial transactions undertaken by the assessee as sham and the entire edifice was only a colourable device used to evade tax. AO further held that the assessee’s claim of earning huge tax-exempt gains fails the test of both genuineness and human probabilities as laid down by the Hon’ble Supreme Court in Sumati Dayal v/s CIT: 214 ITR 801 and CIT v. Durga Prasad More [1971] 82 ITR 540. Thus, AO disallowed the exemption claimed by the assessee under section 10(38) in respect of LTCG and added the same as unexplained cash credit under section 68 of the Act. Similarly, the commission of Rs. 24,713 paid by the assessee in respect of the aforesaid transaction was also disallowed and added to the total income of the assessee.

CIT (A) confirmed the order. Hence, the assessee is before ITAT.

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