Income Tax Appellate Tribunal on Capital Gains: Gift of Shares Must Be Accepted When Supported by Evidence

Headnote:

The ITAT Delhi upheld the CIT(A)’s decision deleting an addition of ₹15.84 crore, holding that the Assessing Officer (AO) wrongly treated the assessee’s sale of shares as short-term capital gain and incorrectly denied deduction under Section 54F. The Tribunal agreed that crucial shares were received as a gift, not purchased, and the AO had rejected valid documentary evidence without proper inquiry. Once supported by a gift deed, affidavits, demat statements, and corroborated share-movement records, the gift had to be accepted. As the donor held the shares for over 24 months, the assessee’s gains were long-term, making Section 54F deduction allowable.

Background:

1. The assessee sold 6,51,000 shares of Viney Corporation Pvt. Ltd.

The AO held that the assessee’s father, Shri Viney Prakash Agarwal, had purchased 9,23,826 shares from Smt. Sudesh Kumari on 02.07.2019, and subsequently gifted part of them to the assessee in October 2020.

Based on this, the AO:

treated the shares as short-term capital assets,

computed short-term capital gain,

denied Section 54F deduction, and

added ₹15,84,78,027 to the income.

The assessee argued that the AO misread documents—the shares were not purchased but gifted, supported by:

a gift deed (02.07.2019) executed by Sudesh Kumari,

affidavit of the donor,

demat account transfer records, and

VCL share-movement statements.

CIT(A) accepted the evidence and deleted the addition.

Revenue appealed.

Tribunal’s Observations:1. AO rejected valid evidence without basis

1. AO doubted the gift deed merely on suspicion, claiming it was created after the show-cause notice.
2. However, he failed to investigate or bring contrary evidence.
3. The donor’s sworn affidavit was ignored without justification, contrary to Supreme Court ruling in Daulat Ram Rawatmull (1973) 87 ITR 349 that affidavits must be accepted unless disproved through inquiry.

2. Evidence proved the transaction was a genuine gift

1. Documents showed Sudesh Kumari owned 24,46,590 shares before 31.03.2016, and gifted 9,23,826 shares to Viney Prakash Agarwal.
2. Demat transfers substantiated the gift.
3. In the remand report, the AO himself admitted that the only difference in the new documents was filling of blank columns and clarification of values—no adverse finding was made.

3. Consequently, cost and period of holding must follow Sections 49 & 2(42A)

1. Since Agarwal received the shares by gift, their cost in his hands = donor’s cost.
2. Donor held them since before 2016, so:
3. they were long-term capital assets in the donor’s hands,
4. hence also long-term in the assessee’s hands.

4. AO erred in treating the shares as short-term

1. AO wrongly computed STCG and even made an internal computational mistake (treated full ₹2,16,683 as cost of 6,51,000 shares).

5. Section 54F deduction

1. Since the gain was long-term, and the assessee invested in residential property, he was eligible for Section 54F deduction.
2. AO wrongly denied the claim on an incorrect assumption of STCG.

Legal Provisions Discussed:

1. Section 49(1), Income-tax Act, 1961 — Cost to previous owner in case of gift.
2. Section 2(42A) — Holding period of assets acquired by gift to be reckoned from donor's acquisition date.
3. Section 45(2A) — Computation of capital gain.
4. Section 54F — Exemption on investment in residential property.
5. Section 143(3) — Scrutiny assessment.

Decision

1. CIT(A)’s order upheld.
2. AO’s addition of ₹15.84 crore deleted.
3. Share transfer treated as genuine gift, not purchase.
4. Capital gain held as long-term.
5. Section 54F deduction allowed.