Section 10(38)

Section 10(38) — the law in short

What the courts have decided on section 10(38), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• PCIT v Indravadan Jain, HUF High CourtHelps taxpayerHigh Courts differ
  SEBI has found that the broker rigged the price of the scrip I sold. Does that finding by itself make my capital gain bogus?
  No. The Bombay High Court dismissed the Revenue's appeal where the shares had been bought on the floor of the Kolkata Stock Exchange through a registered broker, paid for by cheque, held in demat for more than a year and sold on the floor of the exchange with contract notes and bills produced and the sale proceeds received from the exchange. The Assessing Officer's case was that the scrip was a penny stock, that the broker had been found by SEBI to have manipulated the price through synchronised cross-deals, and that the price had gone from Rs. 3.12 to Rs. 155.04 in two years. That was held not to be enough, because the price manipulation was the broker's conduct and nothing connected the assessee to it.
• PCIT v Swati Bajaj High CourtCuts both waysHigh Courts differ
  My long-term capital gain on a listed share has been treated as bogus because the scrip appears in the investigation wing's penny-stock report — can the department do that when all my paperwork is in order?
  It depends, and this record cannot tell you which way this batch went. The Calcutta High Court heard the Revenue's appeals under section 260A against a common Tribunal order of 26 June 2019 that had allowed some 90 assessees' appeals on penny-stock long-term capital gains. The questions framed were whether the Tribunal ignored the direct and circumstantial evidence of price manipulation, whether its order was perverse, and whether the exemption and the related commission disallowance were rightly deleted. The harvested text carries the facts and the parties' arguments but stops before the Court's reasoning and order, so the holding is not stated here.
• PCIT v Smt Krishna Devi High CourtHelps taxpayerHigh Courts differ
  The Assessing Officer has added my long-term capital gain on a share whose price rose 4,849%, relying on the Investigation Wing's penny-stock report. Is the price rise by itself enough?
  No. The Delhi High Court accepted that the price movement and the company's financials were odd, and still refused to sustain the addition. The assessee had bought online, paid through a bank, held the shares in demat form and sold through the demat account with sale proceeds received by banking channel. The officer issued notices under ss.133(6)/131 to the company and to the entity that had paid for the shares; they produced nothing and came back unserved, and he then went no further. On that record the Court held the finding that there was an arrangement to convert unaccounted money was an assumption based on conjecture, and that suspicion is not proof. Read it with the contrary Calcutta line in PCIT v Swati Bajaj, which the library also carries.
• Smt Tharakumari v ITO High CourtHelps department
  The officer refused me cross-examination of the person whose statement he used. Does that alone get the addition deleted?
  Not by itself, and this case shows why. The assessee's counsel argued in the Madras High Court that she had been denied the opportunity to cross-examine Shri Deepak Patwari, on whose sworn statement before the Investigation Wing the addition rested. The Court did not reject the principle. It dismissed the appeal because she had not co-operated in the assessment, had not appeared before the CIT(A) on any of five hearing dates, and had put no evidence on record to show that the statement was wrong or to explain how she came to identify and sell the scrip. The concurrent findings that the transaction was sham and taxable under s.68 were therefore not perverse.
• Vijay Gupta v CIT High CourtHelps taxpayer
  I made a mistake in my own return and paid tax I did not owe. The time to revise has gone. Can the Commissioner give me relief under section 264?
  Yes. The Delhi High Court held that the revisional power under section 264 is very wide and is not confined to correcting the officer's errors - it extends to errors made by the assessee, including a legitimate claim never made in the return and raised for the first time in the revision application. An intimation under section 143(1) is an "order" for section 264. Paying the Rs.500 fee late is a curable irregularity, not a bar. The Commissioner's rejection was set aside and the revision restored for fresh consideration on merits.
• Kishorebhai Bhikhabhai Virani v ACIT High CourtHelps departmentNo later treatment found
  My client sold two lots of long-term shares in the same year — one at a loss on shares whose gain would have been exempt under s.10(38), the other at a taxable gain. Can the loss be set off against the gain?
  On this Gujarat High Court decision, no. Because s.10(38) keeps the income arising from such a capital asset out of the computation of total income altogether, the loss arising on the same class of asset is likewise not includable, and is therefore not available for set-off under s.70(3) or for carry forward under s.74. The Court rejected the argument that 'income' in s.10(38) does not include 'loss'.
• DCIT v Business Excellance Trust — shares that were unlisted when bought fall in the main part of the section 10(38) notification ITATCuts both waysNo later treatment found
  My client bought shares off-market when the company was unlisted, sold them on the exchange after listing and paid STT on the sale. The officer denies section 10(38) because no STT was paid on purchase. Is he right?
  No, on this Tribunal's reasoning. All three carve-out clauses of the notification issued under the third proviso to section 10(38) are about listed equity shares, so a purchase of shares that were unlisted at the time of acquisition falls in the main part of the notification, and the exemption survives even though no STT was paid on acquisition.
• M/s United Investments v ACIT ITATHelps taxpayer
  The officer says my long-term capital loss on listed shares cannot even be determined, because gains on those shares would have been exempt under s.10(38). Is there authority the other way?
  Yes. The Kolkata Tribunal held that the judicial concept that 'income' includes 'loss' applies only where the entire source of income falls outside the charging provisions; where the source — capital gains — remains chargeable and s.10(38) exempts only one specie of income arising from it, the concept does not apply. It directed the Assessing Officer to assess the long-term capital loss on the sale of listed shares and to allow its carry forward.
• Jafferali K. Rattonsey v DCIT ITATHelps taxpayer
  I held shares in physical form for years and dematerialised them just before selling. The AO says my holding period runs from the demat date. Is he right?
  No. The date of purchase is taken from the broker's note or contract note, and the period of holding runs from that date, not from the date of dematerialisation. The Assessing Officer had converted a long-term gain into a short-term one by treating the demat date as the date of acquisition and the market price on that date as cost; the Tribunal rejected both moves.
• Statutory position — section 10(38): the third proviso, Notification 43/2017 and the 1 April 2018 sunset CBDT Circulars & InstructionsCuts both waysSuperseded by amendment
  The assessing officer says my client's long-term gains on listed shares are not exempt under section 10(38) because no STT was paid when the shares were bought. Is that right, and does section 10(38) even apply to my year?
  First check the year: section 10(38) does not apply at all to a transfer made on or after 1 April 2018, because the Finance Act 2018 inserted a fourth proviso switching the clause off from that date — so for AY 2019-20 onwards the question is section 112A, not section 10(38). For a transfer up to 31 March 2018, the third proviso (inserted by the Finance Act 2017) does require STT to have been paid on ACQUISITION as well, but only in the cases carved out by the Central Government's Notification No. 43/2017 (S.O. 1789(E)) dated 5 June 2017 — the notification's main part covers all acquisitions of equity shares from 1 October 2004 that were not chargeable to STT, and only its three listed clauses take an acquisition out of the exemption.
• Statutory position — Rule 8D of the Income-tax Rules, 1962 was SUBSTITUTED with effect from 2 June 2016: the three-limb formula was replaced by a two-limb one, and the disallowance is now capped at the total expenditure claimed — which formula applies is a question of the year, and the answer is not the same for every year still open CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer has computed a s.14A disallowance under Rule 8D. Which version of Rule 8D applies to my year, and is the disallowance capped?
  That depends entirely on the previous year, because Rule 8D was substituted. THE DATE IS THE FIRST QUESTION: the departmental page for Rule 8D carries footnote 78, "Substituted by the IT (Fourteenth Amdt.) Rules, 2016, w.e.f. 2-6-2016", and footnote 79, "Omitted by the IT (Fourteenth Amdt.) Rules, 2016, w.e.f. 2-6-2016". As substituted, sub-rule (1) provides that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee, or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with sub-rule (2). Sub-rule (2) as substituted has TWO limbs and a cap: the expenditure is the aggregate of (i) the amount of expenditure directly relating to income which does not form part of total income, and (ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income, with a proviso that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee. The three-limb formula that preceded it, including the interest-apportionment limb and the percentage-of-average-investments limb, is STILL the applicable law for earlier previous years, and is still being applied in appeals for them. The pre-substitution text is now sourced, from the departmental page for the notification that inserted the rule: under the original rule 8D(2) the disallowance was the aggregate of (i) expenditure directly relating to exempt income, (ii) where interest expenditure was not directly attributable to any particular income or receipt, an amount computed as A x B / C, where A was that interest, B the average value of investments yielding exempt income on the first and last day of the previous year and C the average of total assets on the same two days, and (iii) "an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year". Sub-rule (3) defined "total assets" as total assets in the balance sheet excluding an increase on revaluation but including a decrease.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.