2018 (10) TMI 1649 - AT - Income Tax

Bogus LTCG earned on sale of shares - Exemption under section 10(38) denied - appellant had dealt in Penny Stocks - HELD THAT - Since the assessee has placed the contract note, payment through cheques identifying the company whose shares were transacted, the genuineness of claim of long-term capital gain should not have been doubted. We do not find merit in these contentions of the assessee in the light of the facts that there is prevalent practice in the country through which unaccounted money is converted into long-term capital gain by circuitous means. In the instant case, financials were examined by us and we find that the financial worth of the company is meagre and not at all worth to be invested therein. With such financials, we are unable to understand how there can be manifold increase in the shares. In the light of the duration of transactions and the financials of the company whose shares were transacted, we find that the Revenue has brought sufficient material on record to demonstrate that unaccounted money was introduced in the books of account through long-term capital gain by adopting such method. Whatever judicial pronouncements are relied on, these are in those cases where the transactions are genuine - Decided against assessee.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Violation of principles of natural justice.
3. Classification of income from sale of shares.
4. Appreciation of facts and law by authorities.
5. Observations and conclusions by lower authorities.
6. Authenticity of share transactions.
7. Liability to pay interest.

Detailed Analysis:

1. Validity of the Assessment Order:
The appellant contended that the assessment order was erroneous and should be quashed as it was bad in law and void ab-initio. The Tribunal, however, upheld the assessment order, emphasizing that the Revenue had sufficient grounds to suspect the transactions and conduct a detailed investigation.

2. Violation of Principles of Natural Justice:
The appellant argued that the assessment order violated principles of natural justice, particularly due to the absence of cross-examinations of individuals whose statements were relied upon by the Assessing Officer (AO). The Tribunal found that the AO had relied on substantial evidence, including reports from the SEBI and investigation wing, which justified the conclusions drawn without the need for cross-examination.

3. Classification of Income from Sale of Shares:
The main issue revolved around whether the income from the sale of shares should be classified as Long-Term Capital Gain (LTCG) exempt under Section 10(38) of the Income Tax Act or as business income. The AO reclassified the income as business income, citing the appellant's dealings in "Penny Stocks" and the suspicious nature of the transactions. The Tribunal supported this reclassification, noting the dubious nature of the transactions and the pre-arranged method to evade taxes.

4. Appreciation of Facts and Law by Authorities:
The appellant claimed that the authorities did not properly appreciate the facts and applicable law. The Tribunal, however, found that the authorities had thoroughly examined the financial worth of the company, the nature of the transactions, and the findings from various investigative reports, leading to a well-supported conclusion.

5. Observations and Conclusions by Lower Authorities:
The appellant argued that the observations and conclusions by the lower authorities were based on surmises and conjectures. The Tribunal disagreed, highlighting the detailed analysis and substantial evidence, including financial data and market behavior, which supported the authorities' conclusions.

6. Authenticity of Share Transactions:
The appellant asserted that the share transactions were genuine, supported by receipts, invoices, and contract notes. The Tribunal, however, found that the transactions were pre-arranged and lacked transparency, with the shares being purchased at prices below their face value and sold at significantly inflated prices without any supporting economic or financial basis. The Tribunal emphasized the findings from SEBI and other investigative agencies, which indicated that the transactions were part of a scheme to launder money and evade taxes.

7. Liability to Pay Interest:
The appellant denied the liability to pay interest, arguing that it was erroneously levied. The Tribunal did not find merit in this argument, given the findings of tax evasion and the reclassification of income.

Conclusion:
The Tribunal dismissed the appeal, upholding the findings of the lower authorities that the transactions were pre-arranged and part of a scheme to evade taxes. The income from the sale of shares was rightly classified as business income, and the appellant's claims of violations of natural justice and erroneous observations were rejected. The Tribunal emphasized the substantial evidence and detailed analysis that supported the authorities' conclusions.