2021 (2) TMI 1338 - AT - Income Tax

Addition u/s 68 - Denial of long term capital gain on sale of shares under section 10(38) - A.R. submits that the assessee is a regular investor and makes investments through registered brokers and thus carries out purchase and sale of equity shares on recognized stock exchange on the screen based online platform and all the conditions for claiming exemption u/s 10(38) of the Act are fully satisfied by the assessee - HELD THAT - We are not in agreement with the conclusion drawn by the Ld. CIT(A) that the long term capital gain made by the assessee from sale of shares is a non genuine transaction and accordingly we set aside the order of Ld. CIT(A) and direct the AO to delete the addition made under section 68 of the Act and direct the AO to grant exemption under section 10(38) of the Act in respect of long term capital gain. The ground no. 1 to 3 are allowed.

Summary

Issues Involved:
1. Sustaining the addition under section 68 related to the sale of equity shares.
2. Disallowing the exemption claimed under section 10(38) for long-term capital gains.
3. Violation of principles of natural justice by not allowing cross-examination.
4. Addition of unexplained expenditure under section 69C.

Issue-wise Detailed Analysis:

1. Sustaining the addition under section 68 related to the sale of equity shares:
The assessee declared an income of Rs.13,97,910/- and claimed Rs.2,20,06,230/- as exempt under section 10(38) related to long-term capital gains from the sale of equity shares of Matra Kaushal Enterprises Ltd. The Assessing Officer (AO) added Rs.2,24,65,230/- to the income under section 68, treating the gains as bogus based on information from the Kolkata Investigation Wing about suspicious penny stocks. The AO rejected the assessee's corroborating evidence, including purchase documents, payment proofs, Demat statements, and sales receipts, concluding that the gains were prearranged and organized. The CIT(A) upheld this addition, citing manipulation in trading and artificial increase in share prices, referencing various judicial decisions and investigation reports.

2. Disallowing the exemption claimed under section 10(38) for long-term capital gains:
The AO and CIT(A) disallowed the exemption claimed under section 10(38), asserting that the assessee misutilized the provision by engaging in bogus transactions to claim tax-free gains. They argued that the transactions were not genuine investments but were manipulated to claim exemptions. The CIT(A) emphasized that the financial results of the company did not justify the steep increase in share prices, indicating artificial inflation. The assessee contended that all conditions for claiming the exemption were met, and the transactions were genuine, supported by documentary evidence.

3. Violation of principles of natural justice by not allowing cross-examination:
The assessee argued that the AO and CIT(A) violated the principles of natural justice by not allowing cross-examination of the individuals whose statements were used against them. The AO relied on statements from third parties and investigation reports without providing the assessee an opportunity to cross-examine these witnesses. The assessee cited several judicial precedents emphasizing the necessity of cross-examination for a fair trial, including the Supreme Court's decision in Andaman Timber Industries, which held that denying cross-examination amounts to a violation of natural justice.

4. Addition of unexplained expenditure under section 69C:
The AO added Rs.11,23,262/- as unexplained expenditure under section 69C, estimating commission on the alleged bogus transactions. The CIT(A) upheld this addition, stating that the AO was fair in estimating the commission at 5%. The assessee argued that the addition was based on conjectures and not supported by concrete evidence. They contended that the transactions were genuine, and the AO failed to establish any money trail or link between the assessee and the alleged operators.

Tribunal's Findings:
The Tribunal found that the assessee provided substantial evidence to support the genuineness of the transactions, including purchase and sale documents, Demat statements, and bank statements. The AO's reliance on third-party statements and investigation reports without concrete evidence against the assessee was deemed insufficient. The Tribunal emphasized that suspicion, however strong, cannot replace concrete evidence. It also noted the violation of natural justice due to the denial of cross-examination. Consequently, the Tribunal directed the deletion of the additions made under sections 68 and 69C and granted the exemption under section 10(38).

Conclusion:
The appeal was allowed, and the Tribunal directed the AO to delete the additions and grant the exemption claimed by the assessee. The judgment reinforced the importance of concrete evidence, adherence to natural justice principles, and the inadequacy of suspicion and conjecture in making tax additions.