The court established that transactions involving shares deemed sham to bypass taxation cannot claim exemptions under Section 10(38) if they lack genuine financial justification, reinforcing the obligation to substantiate claims of legitimacy in tax matters.

आदेश/Order

PER PARESH M. JOSHI, J.M. :

This is an appeal filed by the Assessee under section 253 of the Income Tax Act, 1961 (hereinafter referred to as Act) as and by way second appeal before this Tribunal. The Assessee is aggrieved by the order dt. 29/03/2010 passed in First Appeal No. 111/HSR/2016-17 which pertains to the assessee. The order dt. 29/03/2010 is passed by Commissioner of Income Tax (Appeals) u/s250(6) of the Act which is hereinafter referred to as the “impugned order”. The relevant AY is 2014-15 and the corresponding previous year period is from 01/04/2013 to 31/03/2014.

2. Factual Matrix Proceedings before AO

2.1 The assessee derived income from salary, business income from partnership firms, capital gains and income from other sources during the financial year ending 31/03/2014 relevant to the A.Y.2014-15.

2.2 That theassessee filed return of income for the A.Y 2014-15 on 29/04/2015 declaring a total income of Rs. 8,58,360/-.

2.3 That the case of the assessee was selected through CASS system of ITD for examination of “suspicious sale transaction in sales and exempt long term capital gains shown in return (penny stock tab in ITS)” under the scope complete scrutiny.

2.4 That the statutory notice under section 143(2) of the Act was issued on 26/07/2016 and subsequent notices too under section 143(2) and 142(1) of the Act, 1961 alongwith Questionnaire were issued and served upon the assessee.

2.5 That the Counsel for the Assessee attended the assessment proceedings from time to time and furnished the requisite information.

2.6 That perusal of the computation of income, return of income furnished by the assessee reveals that the assessee has shown exempt income of Rs. 1,04,06,769/- and claimed the same as exempt u/s 10(38) of the Act.

2.7 That as per the details of statement of long term capital gains transaction, tax exempt under section 10(38); the shares of “NCL Research and Financial Services Ltd.” Numbering 7000 were purchased @ Rs. 257/- per share on 30/04/2012 for a total consideration of Rs. 18,07,540/- and that the same were sold on different dates from 20/05/2013 to 13/09/2013 i.e; during the F.Y. 2013-14 relevant to A.Y 2014-15 for a consideration of Rs. 1,22,14,309/-in aggregate thereby earning a Long Term Capital Gain amounting to Rs. 1,04,06,769/- on sale of shares which was claimed as Exempt Income under section 10(38)of the Act.

2.8 That after examining the information and written submissions furnished from time to time, taking into consideration the sworn statements, the assessment is completed as under:-

2.9 The above order of assessment is under section 143(3) of the Act of ITO Ward-1, Sirsa. It is dated 31/12/2016.

2.10 In the aforesaid assessment order dt. 31/12/2016 the Ld. AO has taken into consideration investigation carried out by the investigation wing of Income Tax Department which led to a country wide investigation to unearth the organized racket of generating bogus entries of long term capital gains (hereinafter called LTCG) which is exempt from tax u/s 10(38) of the Income Tax Act, 1961 .

Modus Operandi

2.11 The modus operandi adopted by the “operators” was to make the beneficiaries buy some shares of a pre determined penny stock companies controlled by them. These shares were transferred to the beneficiaries at a very nominal price mostly off line through preferential allotment or offline sale to save STT.

2.12 The beneficiary individuals were made to hold the shares for a minimum period of one year, the statutory period after which LTCG is exempt under the provisions of Section 10 (38) of the Income Tax Act, 1961 .

2.13 In the meanwhile the operators rig the price of the stocks and gradual