2015 (3) TMI 922 - AT - Income Tax

Fraudulent share transactions - CIT(A) confirming sale consideration of ₹ 55,54,250/- claimed as giving rise to long term capital gains, as unexplained cash credit u/s. 68 - Held that - The transaction about purchases of shares in physical form of such companies whose share prices have been rigged by some fraudulent operators cannot have any direct evidences. An inference about such a purchase connived with such companies have to be drawn on the basis of the circumstances available on the record. As pointed out, the shares have been transferred within 4 days of the date of purchases raises ample doubt about the credibility of the company. As pointed out in all probabilities, the company must have been involved in such fraudulent transactions. Post year 2000, it is improbable that any person would transact in shares by taking physical delivery of the shares. When many instances have been surfaced relating to bad delivery or bogus scrips, the regulatory authorities have made it compulsory to transact through Demat account. Having regard to the circumstances and the conduct of the assessee as disclosed in his statement u/s. 132(4) of the Act as well as other material on record , inference could be reasonably drawn that the shares purchased by the assessee have been backdated to give it a colour of Long term capital gain by showing the period of holding for more than 12 months. Needless to say that income tax proceedings are civil proceedings and the degree of proof required is by preponderance of probabilities, therefore applying the test of preponderance of probabilities and considering the entire sequence of events, the revenue authorities have rightly concluded that the assessee s claim about the long term capital gains from the sale of shares is not genuine.Therefore, it cannot be said that the explanation offered by the assessee in respect of the sale consideration has been rejected unreasonably and that the findings that the said amounts are income of the assessee from other sources is not based on evidence. Accordingly, findings of the Ld. CIT(A) are confirmed. - Decided against assessee. Estimation of expenditure at the rate of 5% of the sale consideration as unexplained expenditure u/s. 69C - Held that - As we have decided ground No. 1 on preponderance of probabilities then taking leaf out of our findings, there is no doubt that such transactions involve certain money paid to the operators/arrangers of such fraudulent capital gains. The Revenue authorities have reasonably calculated 5% of the sale consideration. Therefore, no interference is called for. - Decided against assessee.

Summary

Issues Involved:

1. Whether the sale consideration of Rs. 55,54,250/- claimed as long-term capital gains should be treated as unexplained cash credit under Section 68 of the Income Tax Act.
2. Whether the addition of Rs. 2,77,713/- as unexplained expenditure under Section 69C on account of commission/service charges payable to the broker is justified.

Issue-wise Detailed Analysis:

1. Sale Consideration as Unexplained Cash Credit (Section 68):

The assessee challenged the order of the CIT(A) confirming the sale consideration of Rs. 55,54,250/- as unexplained cash credit under Section 68. The dispute revolves around share transactions in companies alleged to be penny stock companies involved in fraudulent transactions. The Revenue authorities argued that these transactions were colorable devices to introduce black money as long-term capital gains.

The facts revealed that the assessee's premises were searched under Section 132, leading to an assessment under Section 153A r.w.s. 143(3). The assessee declared long-term capital gains from shares of Shalimar Agro Products and G.Tech Info Training Ltd. The Assessing Officer (AO) scrutinized these transactions and found discrepancies, including the denial of transactions by broker Sanjay R. Shah and the inability of another broker to provide further evidence due to destroyed records.

The AO concluded that the transactions were bogus, backdated to show long-term capital gains, and added Rs. 55,54,250/- as income from bogus LTCG under Section 68. The CIT(A) upheld this, noting the assessee's initial admission of the capital gains as income during the search, which was later retracted. The CIT(A) relied on Section 115 of the Evidence Act and various judicial pronouncements to confirm the addition.

The Tribunal examined whether the explanation given by the assessee was reasonable. It noted inconsistencies, such as the rapid transfer of shares and the improbability of physical share transactions post-2000. The Tribunal applied the test of human probability, as laid down by the Supreme Court in Durga Prasad More and Sumati Dayal, concluding that the transactions were not genuine and confirming the CIT(A)'s findings. Thus, the sale consideration was rightly treated as unexplained cash credit under Section 68.

2. Addition of Unexplained Expenditure (Section 69C):

The assessee also challenged the addition of Rs. 2,77,713/- as unexplained expenditure under Section 69C, calculated as 5% of the sale consideration. The AO had reasoned that such fraudulent transactions involve certain payments to operators/arrangers.

The Tribunal, having decided the first issue on the preponderance of probabilities, agreed with the Revenue authorities' estimation. It found that the calculation of 5% as unexplained expenditure was reasonable and required no interference. Thus, the addition under Section 69C was upheld.

Conclusion:

The Tribunal dismissed the appeal, confirming the CIT(A)'s order treating the sale consideration as unexplained cash credit under Section 68 and the addition of 5% as unexplained expenditure under Section 69C. The judgment emphasized the application of the test of human probability and the importance of reasonable explanations in tax assessments.