2023 (2) TMI 1280 - AT - Income Tax

Addition u/s 68 - bogus LTCG on share transactions - exemption of income u/s 10(38) denied - reason for selection for scrutiny was suspicious sale transaction in shares and exempt long term capital gains shown in return (Penny Stock tab in ITS) - HELD THAT - The burden was on the department to nail the assessee through proper evidence, that there was some cash transaction with the suspected brokers, on whom there was an investigation being conducted by the department. See Shyam R Pawar 2014 (12) TMI 977 - BOMBAY HIGH COURT - Just because few operators have done some nefarious activities, the assessee cannot be blamed and cannot be denied the gain LTCG merely on the basis of suspicion. As relevant evidence were produced to suggest that the transactions (purchase and sale of shares) were undertaken and thereafter the same was reflected in the Demat Account; and the transactions have taken place through banking channel and through registered broker of Stock Exchange; and there is no evidence to disprove these relevant documents which support the claim of assessee (LTCG). Therefore, the claim of LTCG on the scrip under question cannot be disallowed based on general enquiry conducted by department unless the involvement of assessee is shown in the illegal activities, without which, the impugned action to disallow the claim of assessee cannot be sustained. Decided in favour of assessee.

Summary

Issues Involved:
1. Addition of Rs. 24,66,000/- by the AO in respect of Long Term Capital Gain (LTCG).
2. Genuineness of the purchase and sale of shares.
3. Allegation of penny stock transactions.
4. Applicability of Section 10(38) exemption.

Issue-wise Detailed Analysis:

1. Addition of Rs. 24,66,000/- by the AO in respect of Long Term Capital Gain (LTCG):
The assessee filed a return of income declaring a total income of Rs. 7,01,450/-. The return was processed under Section 143(1) and later selected for scrutiny due to a suspicious sale transaction in shares and exempt long-term capital gains shown in the return. The AO noted that the assessee claimed exemption under Section 10(38) for LTCG on the sale of shares amounting to Rs. 20,64,793/-. The AO, based on an investigation report, concluded that the scrip of M/s. Greencrest was a penny stock and that the transaction was an accommodation entry. Consequently, the AO added Rs. 24,66,000/- to the income of the assessee, considering it as unexplained investment or income from other sources.

2. Genuineness of the purchase and sale of shares:
The assessee, a Chartered Accountant, claimed to have purchased 1,50,000 shares of M/s. Marigold Glass Industries Ltd. (later M/s. Greencrest Financial Services Ltd.) for Rs. 18,00,000/-. These shares were split, increasing to 15,00,000 shares. The assessee sold 36,000 shares for Rs. 24,58,602/-. The assessee provided substantial evidence, including allotment advice, bank statements, Demat statements, contract notes, and proof of payment through banking channels. The Tribunal noted that the transactions were supported by primary documents and conducted through recognized stock exchanges, with applicable STT paid.

3. Allegation of penny stock transactions:
The AO relied on the investigation report indicating that M/s. Greencrest was a penny stock used for providing accommodation entries. However, the Tribunal found that the assessee had no connection with the alleged entry operators and that the transactions were genuine investments. The Tribunal referred to previous cases where similar allegations were made, but the transactions were upheld as genuine due to lack of concrete evidence against the assessee.

4. Applicability of Section 10(38) exemption:
The Tribunal examined the evidence provided by the assessee and found that the transactions were genuine and conducted through proper channels. The Tribunal referred to several precedents where similar claims were allowed, emphasizing that the burden of proof was on the department to establish that the transactions were not genuine. In the absence of such evidence, the Tribunal directed the AO to delete the addition and allow the LTCG income as exempt under Section 10(38).

Conclusion:
The Tribunal concluded that the addition of Rs. 24,66,000/- under Section 68 made by the AO was unsustainable. The Tribunal directed the AO to delete the addition and allow the LTCG income of Rs. 24,58,602/- as exempt under Section 10(38). Consequently, the brokerage charge added of Rs. 12,730/- was also deleted. The appeal of the assessee was partly allowed.