2016 (6) TMI 132 - AT - Income Tax

Addition u/s 68 - assessee claiming the income from long term capital gain (LTCG) on sale of listed equity shares and subjected to STT as exempt under section 10(38) - Held that - The authorities below, i.e. AO/CIT(A) have made the addition under section 68 of the Act merely on presumptions, suspicions and surmises in respect of penny stocks; disregarding the direct evidences placed on record and furnished by the assessee in the form of brokers contract notes for purchases and sales of the said shares of M/s. Shukun Constructions Ltd., copies of the physical share certificates and her D-MAT account statement establishing the holding of the shares in her name prior to the sale thereof; confirmation of the transactions of buying and selling of the said shares by the respective stock brokers, receipt of sale proceeds through banking channels, etc. We are also of the view that the ratio and the factual matrix of the decisions in the cited case, i.e. Jatin Chhadwa (2012 (8) TMI 1007 - ITAT MUMBAI ) and Harkhchand K. Gada (HUF) & others (2012 (8) TMI 968 - ITAT MUMBAI) would be applicable and support the case of the assessee since no adverse finding has been rendered in respect of the direct material evidence placed on record in respect of her transactions of purchase and sale of the said shares of M/s. Shukun Constructions Ltd. which stand duly disclosed in her audited Balance Sheets filed with the return of income of assessment years 2004-05 and the current year under consideration. In this factual and legal matrix of the case, as discussed above, we find that the addition of ₹ 32,94,982/- under section 68 of the Act made and confirmed by the authorities below to be unsustainable and therefore direct the AO to delete the said addition and accept the LTCG income of ₹ 31,96,507/- shown as exempt under section 10(38) of the Act. - Decided in favour of assessee

Summary

Issues Involved:
1. Addition under Section 68 of the Income Tax Act, 1961.
2. Claim for exemption under Section 10(38) of the Income Tax Act, 1961.
3. Assessment of capital gains as long-term or short-term.

Issue-wise Detailed Analysis:

1. Addition under Section 68 of the Income Tax Act, 1961:
The primary issue in this case was the addition of ?32,94,982/- under Section 68 of the Income Tax Act, 1961, by the Assessing Officer (AO). The AO treated the sale proceeds from shares of Shukun Constructions Ltd. as unexplained cash credit, alleging that the transactions were fabricated and backdated to generate artificial gains. The AO's conclusion was based on the presumption that the shares were penny stocks and the transactions were arranged. However, the assessee provided substantial documentary evidence, including broker contract notes, physical share certificates, D-MAT statements, and bank statements, to substantiate the genuineness of the transactions. The Tribunal found that the AO did not conduct a proper investigation to counter the evidence presented by the assessee. The Tribunal concluded that the assessee had discharged the onus required under Section 68 by establishing the identity of the payer, the source of funds, and the genuineness of the transactions.

2. Claim for Exemption under Section 10(38) of the Income Tax Act, 1961:
The assessee claimed exemption of ?31,96,507/- under Section 10(38) for long-term capital gains (LTCG) on the sale of listed equity shares subjected to Securities Transaction Tax (STT). The AO denied this exemption, alleging that the purchase transactions were backdated. The Tribunal observed that the assessee had filed her return of income for the year in which the shares were purchased within the extended date as per Section 139(1) and had disclosed the purchases in her audited balance sheet. There was no evidence of any action or enquiry by SEBI or BSE regarding the alleged manipulation of share prices. The Tribunal held that the assessee had provided sufficient documentary evidence to support her claim for exemption under Section 10(38).

3. Assessment of Capital Gains as Long-term or Short-term:
The assessee argued that if the capital gains on the sale of shares were not considered long-term due to the AO's allegation of backdated purchase, the gains should be assessed as short-term capital gains under Section 111A. The assessee provided evidence that the shares were dematerialized in her name almost three months before the sale, confirmed by the share broker and the Stock Exchange. The Tribunal, however, did not find it necessary to adjudicate on this issue separately as it had already decided in favor of the assessee on the primary issue of the genuineness of the transactions and the exemption under Section 10(38).

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the AO to delete the addition of ?32,94,982/- under Section 68 and accept the LTCG income of ?31,96,507/- as exempt under Section 10(38). The Tribunal found that the addition was made on mere presumptions and suspicions without proper investigation and disregarding the direct evidence provided by the assessee. Consequently, the Tribunal did not address the legal and alternate issues raised by the assessee in other grounds of appeal. The appeal was allowed, and the order was pronounced in the open court on 27th April 2016.