2021 (4) TMI 1376 - AT - Income Tax

Bogus LTCG - exemption of Long Term Capital Gain u/s 10(38) arising from sale of equity shares of listed company denied carried out through a recognized stock exchange and shares been transferred through Demat account - HELD THAT - As regards the judgment of Hon ble Supreme Court in the case of Suman Poddar 2019 (11) TMI 1237 - SC ORDER we find that Hon ble High Court of Delhi in its recent judgment in the case of PCIT V/s Krishna Devi Others 2021 (1) TMI 1008 - DELHI HIGH COURT dealing with the similar issue of claim of exemption u/s 10(38) of the Act for Long Term Capital Gain from sale of equity shares has duly considered the judgment of Hon ble Supreme Court in the case of Suman Poddar V/s ITO (supra) and has confirmed the order of the Tribunal stating it to be the last fact finding authority who on the basis of evidence brought on record has rightly came to the conclusion that the lower tax authorities are not able to sustain the addition without any cogent material on record. Dinesh Ramesh Vardhan 2020 (8) TMI 405 - ITAT MUMBAI and Ashok Agrawal 2020 (11) TMI 650 - ITAT JAIPUR the alleged transaction of earning Long Term Capital Gain from sale of equity shares of M/s Sunrise Asian Limited is neither bogus nor sham and thus eligible for exemption u/s 10(38) of the Act and no addition was thus called for u/s 68 of the Act. Decided in favour of assessee.

Summary

Issues Involved:
1. Denial of exemption under Section 10(38) of the Income Tax Act for Long Term Capital Gains (LTCG) from the sale of equity shares.
2. Addition under Section 68 of the Income Tax Act for alleged unexplained cash credits.
3. Addition for estimated brokerage expenses.
4. Disallowance of expenses claimed by the assessee.

Issue-Wise Detailed Analysis:

1. Denial of Exemption under Section 10(38) for LTCG:
The primary issue revolves around the denial of exemption under Section 10(38) for LTCG arising from the sale of equity shares of M/s Sunrise Asian Limited (SAL). The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] alleged that SAL is a penny stock company and the transactions resulting in LTCG were sham and fabricated. The AO observed that the market value of the equity shares was unrealistic and manipulated, not reflecting the company's financials. The AO concluded that the transaction was a "colorful device" to convert unaccounted money into LTCG. However, the Tribunal, relying on the decisions of Co-ordinate Benches in similar cases (e.g., Dipesh Ramesh Vardhan V/s DCIT and Ashok Agrawal V/s ACIT), held that the transactions were genuine and not sham. It was noted that the shares were purchased and sold through recognized stock exchanges, with all conditions of Section 10(38) being fulfilled. The Tribunal found no evidence to support the AO's allegations of price manipulation and held that the LTCG claim was legitimate and exempt under Section 10(38).

2. Addition under Section 68 for Alleged Unexplained Cash Credits:
The AO made additions under Section 68, treating the LTCG as unexplained cash credits. This was based on the suspicion that the transactions were part of a scheme to introduce unaccounted money into the books. The Tribunal observed that the AO's conclusions were based on general observations and the modus operandi of other cases without specific evidence against the assessee. The Tribunal emphasized that the burden of proving a transaction as bogus lies with the revenue authorities, which they failed to discharge. The Tribunal noted that the assessee provided sufficient documentary evidence, including contract notes, demat statements, and bank statements, to substantiate the transactions. Consequently, the Tribunal deleted the additions made under Section 68.

3. Addition for Estimated Brokerage Expenses:
The AO estimated brokerage expenses at 3% of the LTCG, assuming that such expenses were incurred to arrange the alleged bogus LTCG. The Tribunal found this addition to be without any basis or evidence. It was noted that the brokerage and other charges were already included in the contract notes provided by the assessee. The Tribunal held that the AO's estimation was purely based on assumptions and surmises, and there was no concrete evidence to support the claim of additional brokerage expenses. Therefore, the Tribunal deleted the addition for estimated brokerage expenses.

4. Disallowance of Expenses Claimed by the Assessee:
In the case of Nilesh Jain (HUF), the AO disallowed expenses amounting to Rs. 50,522 claimed by the assessee. The Tribunal observed that the AO made a factual error in calculating the sale consideration and the LTCG. The Tribunal accepted the assessee's contention that the expenses were incurred to effect the sales and should be allowed. Consequently, the Tribunal allowed the claim of expenses and deleted the disallowance made by the AO.

Conclusion:
The Tribunal allowed the appeals filed by the assessees, holding that the transactions resulting in LTCG from the sale of equity shares of SAL were genuine and eligible for exemption under Section 10(38). The additions made under Section 68 for unexplained cash credits and estimated brokerage expenses were deleted. The Tribunal also allowed the claim of expenses in the case of Nilesh Jain (HUF). The decisions were based on the lack of concrete evidence from the revenue authorities to substantiate their allegations and the fulfillment of all conditions by the assessees for claiming the exemptions and deductions.