You buy shares in a company and after over a year you sell them. In between the company also issues bonus shares, taking your total holdings up. You claim the proceeds from the sale under capital gains tax exemption, but the Income Tax Department rejects your claim. What do you do?In one such case, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has deleted additions of around Rs 79 lakh made in connection with the sale of shares.The case concerned a woman who claimed an exemption on long-term capital gains of Rs 65.41 lakh from the sale of shares.
What the case is about
A woman purchased 60,000 shares of a company between March 3 and March 15, 2011, for Rs 13,52,850, at Rs 22.55 per share. The company subsequently issued bonus shares in a 1:1 ratio, which increased her holding to 1.2 lakh shares.Also Read | Wife sold shares for Rs 8.31 crore LTCG, bought husband’s Mumbai property for Rs 7.5 crore and claimed Section 54F exemption; taxman calls it tax avoidance, but ITAT Mumbai gives relief to herThe woman sold the shares between August 31 and December 24, 2012, and got around Rs 77,47,600. The transactions were conducted through the Bombay Stock Exchange’s online platform, routed through banking channels and subjected to securities transaction tax (STT).She claimed long-term capital gains of Rs 65,41,902 as exempt under Section 10(38) of the Income Tax Act.However, the assessing officer rejected her exemption claim and treated the full sale consideration as unexplained. A separate addition of Rs 1,54,952 was also made under Section 69C towards alleged commission expenditure.The case involved shares of a company which had also featured in other tax disputes involving allegations of price manipulation and bogus transactions.The National Faceless Appeal Centre upheld the additions, following which the woman then appealed against it at ITAT.The records she had submitted to the lower authorities included share purchase and sale contract notes, bank statements, demat account statements and evidence of the sale proceeds received from the broker.She also provided information from the official websites of the Bombay Stock Exchange and the Ministry of Corporate Affairs showing the company’s status.Also Read | Taxpayer declared Rs 1.79 lakh in ITR, faced Rs 11.22 crore income addition on large cash deposits, unsecured loans; ITAT grants him chance to substantiate case with condition he plant 500 trees
Why did the woman get relief from ITAT?
The central issue before the ITAT was whether the transactions could be treated as bogus when the investor had furnished documents tracing the purchase, holding and sale of the shares, but the Income Tax Department had not established her involvement in the alleged manipulation.The tribunal noted that the lower authorities had not found the documents to be false or fabricated. It also found no material establishing that the woman was involved in price rigging or manipulation of the shares.In its order, ITAT observed that the evidence relating to the purchase, holding and sale of the shares had not been disproved by the department. It added that no material had been produced to establish a connection between the woman and alleged manipulation or accommodation-entry providers.The tribunal stated: “no material has been brought on record to establish any nexus of the Assessee with the alleged manipulation or accommodation-entry providers.”Also Read | Homebuyer got parking from builder in 2008, but society later adopted a ‘first come, first served’ rule; Maharashtra court protects resident’s space until ownership dispute is decidedIt also noted that the shares had been held for more than one-and-a-half years, the transactions had taken place through banking channels, and the sales were executed through a recognised stock exchange. The bench further observed that no allegation of manipulation, rigging or collusion with the promoters or any other person had been proved against the woman.The tribunal relied on earlier decisions involving similar allegations and the same company’s shares in which the Mumbai ITAT had deleted additions involving the same scrip. It also referred to the Bombay High Court’s decision in PCIT-31 vs. Indravadan Jain, HUF, concerning share transactions supported by contract notes, demat records and banking evidence, where the investor’s involvement in alleged price manipulation had not been established.Considering the documents, the absence of evidence linking the woman to manipulation and the judicial precedents, the tribunal held that the additions could not be sustained.It therefore deleted the Rs 77,47,600 addition which was for the entire sale consideration after rejecting the exemption claim, along with the separate Rs 1,54,952 addition towards alleged commission expenditure. The order was pronounced on September 8, 2026, and the appeal was allowed.“Thus, considering the peculiar facts and circumstances of the case and the judicial precedents referred to above, we are of the considered view that the addition of Rs. 77,47,600/-, representing the entire sale consideration by denying the claim of long-term capital gain of Rs. 65,41,902/- exempt u/s. 10(38) of the Act, and the consequential addition of Rs. 1,54,952/- u/s. 69C of the Act towards alleged commission expenditure, as made by the AO and affirmed by the Ld. Commissioner, are unsustainable. Thus, the same are, accordingly, deleted,” the ruling said.Akhil Chandna, Partner and Global People Solutions Leader, Grant Thornton Bharat explains that what weighed in the taxpayer’s favour was that the department could not point to anything showing her involvement in the alleged manipulation of share prices.“The taxpayer had submitted the purchase and sale details, contract notes, demat statements and bank records. These were not found to be false or fabricated. The ITAT also took into account earlier rulings involving the same company’s shares, where additions made on similar grounds had been deleted,” Chandna tells TOI.Also Read | Man enters JDA for land, gets 6 flats from builder and transfers 5 to wife, but gets tax notice; ITAT Delhi deletes Rs 4.14 crore additions after finding no stock-in-trade conversion or sale
Significance of ruling
According to Chandna, the decision makes an important distinction: A sharp rise in the price of a share may raise questions, but that alone cannot be the basis for rejecting a taxpayer’s claim of exempt long-term capital gains. There must be some evidence connecting the taxpayer with the alleged manipulation.“For taxpayers, especially those dealing in low-priced shares, retaining the complete transaction records is important. However, such records may not be sufficient where the department has evidence linking the taxpayer to the alleged manipulation,” he says.
