2013 (7) TMI 950 - AT - Income Tax

Bogus share transaction - whether the entire sale proceeds of the shares received by these assessees can be treated as an income from undisclosed sources? - reliance placed by the AO on the evidence without affording opportunity to the assessee to cross-examine - Held that - AO has failed to establish a clear case against the assessees that the share transactions on which the long-term capital gains have been declared are sham and camouflage - reliance placed by the AO on the evidence without affording opportunity to the assessee to cross-examine the three brokers who have allegedly denied the issuance of the contract notes also goes in favour of the assessees on the well settled judicial principles that no evidence should be used against the assessee unless the assessee has been given opportunity to cross-examine the deponents. As admittedly all the sales are routed through the demat account charge of manipulation by the AO is totally baseless. Once the documentary evidence is filed by the assessee pointing out some minor discrepancies and without affording opportunity to cross-examine the said brokers has no weightage as evidence in the judicial proceedings. The charge of sharp rise in the share prices without proper financial footing of the investee companies is general charge and is not established by the AO. We also hold that merely because there is a delay in converting the physical shares into electronic form i.e. the demat account that cannot be the criteria to hold that the shares transactions are arranged and camouflaged as in all the cases the assessees have recorded their share transactions in the regular books of account prior to the date of search. There was heavy burden on the AO to destroy the claim of the assessee but except going on the general philosophy nothing has been made out by the AO to show that the claim of the assessee in respect of the sale of shares is not correct. We therefore hold that both the authorities below are not justified in holding that the entire sale proceeds shown by the assessee are out of sham and bogus arranged share transactions. - Decided in favour of these assessee. Addition of the alleged payment of commission @ 6 per cent is also without any merit and accordingly grounds are also decided in favour of these assessee.

Issues Involved:
1. Whether the CIT(A) erred in confirming the addition made by the AO by treating the sale proceeds received on sale of shares as unaccounted income.
2. Whether the CIT(A) erred in holding that the sale proceeds on the sale of the scrips were taxable as unaccounted income as against capital gain offered by the assessee.
3. Whether the CIT(A) erred in holding that there was manipulation in the purchase and sale prices of the shares.
4. Whether the CIT(A) erred in confirming the addition on account of alleged payment of commission @ 6 per cent for arranging the bogus transactions of the shares.

Issue-wise Detailed Analysis:

1. Addition of Sale Proceeds as Unaccounted Income:
The primary issue was whether the CIT(A) erred in confirming the addition made by the AO by treating the sale proceeds received on sale of shares as unaccounted income. The AO's position was based on the assertion that the shares were purchased at nominal prices and sold at significantly higher prices within a short period, suggesting manipulation. The AO also noted that the shares were dematerialized shortly before their sale, and there was no proof of delivery for the shares allegedly purchased. The AO relied on statements from brokers denying the transactions and inquiries from stock exchanges confirming that the purchases were not done online. However, the Tribunal found that the AO did not provide the assessees the opportunity to cross-examine the brokers, which is a violation of natural justice. The Tribunal emphasized that the sales were made through demat accounts and stock exchanges, and the burden was on the AO to prove manipulation, which was not satisfactorily done. Consequently, the Tribunal held that the entire sale proceeds could not be treated as unaccounted income.

2. Taxability of Sale Proceeds as Unaccounted Income vs. Capital Gains:
The CIT(A) held that the sale proceeds on the sale of the scrips were taxable as unaccounted income rather than capital gains, as claimed by the assessees. The Tribunal noted that the shares were sold through stock exchanges at market prices, and the transactions were recorded in the regular books of account. The Tribunal found that the AO's suspicion of manipulation was not supported by concrete evidence, and the documentary evidence provided by the assessees, including contract notes, demat accounts, and correspondence with investee companies, supported the genuineness of the transactions. The Tribunal concluded that the sale proceeds should be treated as capital gains and not unaccounted income.

3. Alleged Manipulation in Purchase and Sale Prices:
The CIT(A) supported the AO's view that there was manipulation in the purchase and sale prices of the shares. The AO's suspicion was based on the sharp rise in share prices, which was allegedly not in line with the financial standing of the companies. The Tribunal, however, found that the AO did not provide substantial evidence to support the claim of manipulation. The Tribunal emphasized that the shares were sold at market prices through stock exchanges, and the burden of proving manipulation was on the AO. The Tribunal held that the transactions were genuine and dismissed the charge of manipulation.

4. Addition on Account of Alleged Payment of Commission:
The CIT(A) confirmed the addition of alleged payment of commission @ 6 per cent for arranging the bogus transactions of the shares. The AO's basis for this addition was the assumption that the assessees must have paid a commission for the accommodation entries. The Tribunal found that there was no concrete evidence to support this addition, and it was based purely on presumption. The Tribunal noted that nothing was found during the search to substantiate the claim of commission payment. Consequently, the Tribunal held that the addition on account of alleged payment of commission was without merit and directed its deletion.

Conclusion:
The Tribunal allowed the appeals, holding that the sale proceeds from the shares should be treated as capital gains, not unaccounted income. The Tribunal also dismissed the addition on account of alleged payment of commission, emphasizing the lack of concrete evidence and the violation of natural justice principles. The Tribunal's decision was based on the documentary evidence provided by the assessees and the failure of the AO to substantiate the claims of manipulation and bogus transactions.

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