2023 (11) TMI 1243 - AT - Income Tax

Bogus LTCG - exemption u/s 10(38) denied - HELD THAT - No doubt assessee has meticulously completed the paperwork by routing his entire investment through banking channel, but the results thereof are altogether beyond the pale of common course of natural events, human conduct and public and private business. As pertinent to note that neither in the past nor in the subsequent years, assessee engaged into any such investment to have a huge windfall. If the assessee been so informative qua the nuances of the share market, he would have certainly undertaken such adventurous activities at least in future by making such investment in the unknown stock. We are, therefore, of the considered view that what is apparent is not real and what is real is not made to appear. Investment in unknown stock by the assessee is not real and all the paper work and routing money through banking channels is only to make it real or legal, but when examined, the whole transaction of sale and purchase of the stock with huge windfall to the assessee is only a part of the larger picture. We concur with the findings of the AO and while upholding the same, we find the grounds of appeal devoid of any merits and are liable to be dismissed. Grounds of appeal are accordingly dismissed.

Summary

Issues Involved:

1. Legitimacy of Long-Term Capital Gains (LTCG) claimed under Section 10(38) of the Income Tax Act.
2. Genuineness of share transactions and whether they were part of a scheme to convert black money into white.
3. Applicability of Section 68 of the Income Tax Act for treating LTCG as unaccounted income.
4. Procedural fairness regarding the opportunity to cross-examine witnesses and access investigation reports.

Summary:

1. Legitimacy of Long-Term Capital Gains (LTCG) claimed under Section 10(38) of the Income Tax Act:

The assessee claimed an exemption under Section 10(38) of the Income Tax Act for LTCG derived from the sale of shares of M/s. Life Line Drugs & Pharma Ltd. The Assessing Officer (AO) doubted the genuineness of the transaction due to the abnormal profits and the involvement of a syndicate providing bogus accommodation entries. The AO treated the LTCG as income from an unexplained source, relying on various judicial decisions to support the conclusion that the gains were not genuine.

2. Genuineness of share transactions and whether they were part of a scheme to convert black money into white:

The AO found that the shares were purchased at Rs. 6/- per share and sold at Rs. 283/- per share within 19 months, raising suspicions of market manipulation. The AO referred to statements from individuals involved in providing accommodation entries, including one Shri Anuj Agarwal, and concluded that the transactions were not genuine. The CIT(A) upheld the AO's findings, noting the lack of evidence for STT payments and the abnormal profits within a short span.

3. Applicability of Section 68 of the Income Tax Act for treating LTCG as unaccounted income:

The AO and CIT(A) presumed the transactions were not genuine due to the lack of evidence and the abnormal profits. The Tribunal concurred, citing the case of PCIT vs. Swati Bajaj, where similar facts led to the conclusion that such transactions were part of a scheme to convert unaccounted cash into LTCG. The Tribunal emphasized that merely routing transactions through banking channels and stock exchanges does not prove their genuineness.

4. Procedural fairness regarding the opportunity to cross-examine witnesses and access investigation reports:

The assessee argued that the AO did not provide an opportunity to cross-examine witnesses or access the full investigation report, violating principles of natural justice. The Tribunal, referencing the case of Suman Poddar, held that the absence of cross-examination and full reports did not prejudice the assessee, as the AO's conclusions were based on a broader investigation into the modus operandi of penny stock manipulation.

Conclusion:

The Tribunal upheld the AO's decision to treat the LTCG as unaccounted income under Section 68 of the Income Tax Act, dismissing the appeal. The meticulous paperwork and routing through banking channels were deemed insufficient to prove the genuineness of the transactions, which were part of a larger scheme to convert black money into white. The procedural objections raised by the assessee were also dismissed, as they did not demonstrate any prejudice resulting from the AO's actions. The appeal was thus dismissed in its entirety.