2023 (4) TMI 1300 - AT - Income Tax

Bogus LTCG - exemption claimed u/s. 10(38) on sale of penny stocks - onus to prove - HELD THAT - As pointed out the investigation did not commence from the assessee but had commenced from the companies and the persons who were involved in the trading of the shares of these companies which are all classified as penny stocks companies. Therefore, the argument of the assessee that the copy of the investigation report has not been furnished, the persons from whom statements have been recorded have not been produced for cross examination are all contention which has to necessarily fail. If there is information and data available of unreasonable rise in the price of the shares of these penny stock companies over a short period of time of little more than one year, the genuineness of such steep rise in the prices of shares needs to be established and the onus is on the assessee to do so as mandated in section 68. Thus, the assessee cannot be permitted to contend that the assessments were based on surmises and conjectures or presumptions or assumptions. The assessee does not and cannot dispute the fact that the shares of the companies which they have dealt with were insignificant in value prior to their trading. Until and unless the initial burden cast upon the assessee is discharged, the onus does not shift to the revenue to prove otherwise. It is incorrect to argue that the assessee have been called upon to prove the negative in fact, it is the assessee s duty to establish that the rise of the price of shares within a short period of time was a genuine move that those penny stocks companies had credit worthiness and coupled with genuineness and identity. The assessee cannot be heard to say that their claim has to be examined only based upon the documents produced by them namely bank details, the purchase/sell documents, the details of the D-Mat Account etc. The assessee have lost sight of an important fact that when a claim is made for LTCG or STCL, the onus is on the assessee to prove that credit worthiness of the companies whose shares the assessee has dealt with, the genuineness of the price rise which is undoubtedly alarming that to within a short span of time. The transaction of LTCG claimed exempt u/s. 10(38) by the assessee is colourable device in guise of investment in listed shares. Entire transactions were stage managed with object to plough back his unaccounted income in form of fictitious long term capital gain (LTCG) and claim bogus exemption, Assessing Officer was justified in denying exemption under section 10(38) and treating such bogus LTCG in penny stock under purview of unexplained cash under section 68 - Assessee appeal dismissed.

Summary

Issues Involved:
1. Violation of principles of natural justice.
2. Bogus and sham transaction of the sale of shares.
3. Denial of exemption of long-term capital gain (LTCG) under section 10(38) of the Income Tax Act.
4. Treatment of the transaction as income from undisclosed sources under section 68 of the Income Tax Act.

Summary:

Violation of Principles of Natural Justice:
The assessee contended that the assessment was completed based on alleged statements of third parties without providing copies or an opportunity for cross-examination, violating principles of natural justice as upheld by the Supreme Court in Andaman Timber Industries v. Commissioner of Central Excise and Kishanchand Chellaram v. CIT. However, the Tribunal held that the assessee failed to prove how the non-furnishing of the investigation report or non-production of persons for cross-examination prejudiced them, especially since the statements did not specifically indict the assessee.

Bogus and Sham Transaction of Sale of Shares:
The assessee's purchase and subsequent sale of shares of M/s Sunrise Asian Ltd. were scrutinized. The Tribunal observed that the price of the shares jumped abnormally from Rs. 50 in 2011 to Rs. 615 in 2015 despite the company's negligible profitability and earnings per share (EPS). This pattern indicated that the transactions were stage-managed to plough back unaccounted income as LTCG.

Denial of Exemption of LTCG under Section 10(38):
The Assessing Officer (AO) disallowed the LTCG exemption claimed under section 10(38) on the grounds that the transactions were suspicious and not genuine. The Tribunal upheld this view, stating that the assessee failed to prove the genuineness of the transactions and that the steep rise in share prices was not justified by the company's financials. The Tribunal emphasized that the onus was on the assessee to establish the genuineness of the LTCG claims, which they failed to do.

Treatment of Transaction as Income from Undisclosed Sources under Section 68:
The AO treated the transaction as income from undisclosed sources under section 68, which was upheld by the Tribunal. The Tribunal noted that the assessee's claims were based on documents like bank details and D-Mat accounts, but these were insufficient to prove the genuineness of the transactions. The Tribunal applied the test of preponderance of probabilities and concluded that the transactions were not genuine investments but a colorable device to claim bogus exemptions.

Conclusion:
The Tribunal dismissed the appeal, concluding that the entire transaction was a colorable device to plough back unaccounted income as LTCG and claim bogus exemptions. The AO was justified in denying the exemption under section 10(38) and treating the LTCG as unexplained cash under section 68. The appeal of the assessee was dismissed.