2018 (8) TMI 2096 - AT - Income Tax

Addition u/s 68 - bogus LTCG on Shares - denying the exemption of long term capital gain U/s 10(38) - HELD THAT - Holding of the shares by the assessee cannot be doubted and the finding of the AO is based merely on the suspicion and surmises without any cogent material to show that the assessee has introduced his unaccounted income in the shape of long term capital gain. We find that the CIT(A) has also referred to SEBI enquiry against M/s Girriraj Stock Broking (P) Ltd and has stated that current status is that M/s Girriraj Stock Broking (P) Ltd is under investigation. Therefore, in absence of specific findings which can be known only on completion of enquiry and in absence of any material on record that the subject matter of the enquiry has any connection with the transaction of bogus long term capital gain, the same cannot be relied upon by the Revenue. CIT(A) has stated that period of holding is less than 12 months. In this regard, reference can be drawn to the provisions of section 2(42A)(c) which provides that in the case of a capital asset being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, there shall be included the period for which the share or shares in the amalgamating company were held by the assessee. In the present case, the original shares in M/s Drishti Suppliers Ltd were bought by the assessee in 2010 against which shares of Quest Financial Services Ltd were allotted to the assessee pursuant to amalgamation between the companies. Thus, the holding period has to be reckoned from the date when shares in M/s Drishti Suppliers Ltd were originally purchased by the assessee. Hence, in view of the facts and circumstances when we hold that the order of the Assessing Officer treating the long term capital gain as bogus and consequential addition made to the total income of the assessee is not sustainable. Hence, we delete the addition made by the AO on this account. Addition made on account of notional commission u/s 69C as consequential to the issue of treatment of long term capital gain as bogus - HELD THAT - Once, we have reversed the finding of the AO on the issue of treatment of long term capital gain as bogus then, the consequent addition made by the AO on notional commission is not sustainable. Accordingly, the same is deleted. Assessee appeal allowed.

Summary

Issues Involved:
1. Addition made under Section 68 of the Income Tax Act by denying the exemption of long-term capital gain under Section 10(38).
2. Addition made under Section 69C of the Income Tax Act for undisclosed expenses.

Issue-Wise Detailed Analysis:

1. Addition under Section 68 by Denying Exemption of Long-Term Capital Gain under Section 10(38):
The assessee filed returns declaring a total income of Rs. 12,34,370/-. A search and seizure action under Section 132 was carried out, leading to a notice under Section 153A. The assessee declared long-term capital gains of Rs. 26,83,000/- from the sale of shares of M/s Quest Financial Services Ltd., claiming exemption under Section 10(38). The AO received information that the promoter of M/s Quest Financial Services Ltd. was involved in providing bogus long-term capital gains. A show cause notice was issued to the assessee, questioning the legitimacy of the long-term capital gains and suggesting that commission expenses should be taxed as undisclosed expenses.

The assessee contended that the transactions were conducted through authorized brokers on recognized stock exchanges and requested cross-examination of the individuals whose statements were used against him. The AO rejected these contentions, stating that the assessment did not require incriminating material from the search and was not bound by technical rules of evidence. The AO concluded that the assessee had received bogus long-term capital gains and added Rs. 26,83,000/- to the income under Section 68.

On appeal, the CIT(A) upheld the AO's decision, noting discrepancies in the purchase transactions and the lack of evidence provided by the assessee to counter the AO's findings. The CIT(A) also held that the assessee was not entitled to the exemption under Section 10(38) as the holding period was less than 12 months.

Upon further appeal, the Tribunal found that the AO's assessment was based solely on the statements of third parties without providing the assessee an opportunity for cross-examination, which violated principles of natural justice. The Tribunal noted that the assessee had provided substantial evidence supporting the genuineness of the transactions, including purchase bills, demat account statements, and bank records showing payments through cheques. The Tribunal held that the AO's reliance on uncorroborated statements and the lack of independent enquiry rendered the addition under Section 68 unsustainable.

2. Addition under Section 69C for Undisclosed Expenses:
The AO added Rs. 1,60,980/- as undisclosed income under Section 69C, assuming that the assessee paid commission for the bogus long-term capital gains. The CIT(A) upheld this addition, presuming that the assessee paid commission based on the findings related to the non-genuine nature of the share transactions.

The Tribunal, however, reversed this addition, noting that it was consequential to the primary issue of the long-term capital gains. Since the Tribunal found the long-term capital gains to be genuine, the related addition for commission expenses was also deemed unsustainable.

Conclusion:
The Tribunal allowed the appeals filed by the assessees, reversing the additions made under Sections 68 and 69C. The Tribunal emphasized the necessity of providing the opportunity for cross-examination and the importance of corroborative evidence in making assessments. The decision underscored that assessments based on mere suspicion and uncorroborated statements without independent enquiry are not sustainable.