2018 (10) TMI 431 - AT - Income Tax

Addition u/s 68 - addition on Suspicious transactions - sale profit of shares - Held that - As decided in the case of Navneet Agarwal,-vs- ITO, Ward-35(3), Kolkata 2018 (8) TMI 509 - ITAT KOLKATA AO has not brought on record any evidence to prove that the transactions entered by the assessee which are otherwise supported by proper third party documents are collusive transactions. We are bound to consider and rely on the evidence produced by the assessee in support of its claim and base our decision on such evidence and not on suspicion or preponderance of probabilities. No material was brought on record by the AO to controvert the evidence furnished by the assessee. Under these circumstances, we accept the evidence filed by the assessee and allow the claim that the income in question is a bonafide Long Term Capital Gain arising from the sale of shares and hence exempt from income tax. - Decided in favour of assessee.

Issues Involved:
1. Validity of the addition made under Section 68 of the Income Tax Act, 1961, in respect of sale profits of shares.

Detailed Analysis:

Issue: Validity of Addition under Section 68 of the Income Tax Act, 1961

Background:
The appeal concerns the addition made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961, regarding the sale profits of shares of M/s. Unno Industries Ltd. The AO observed several suspicious activities related to the preferential allotment and trading of shares, which raised doubts about the legitimacy of the transactions.

Observations by the Assessing Officer:
- Initial allotment of shares to beneficiaries was generally done through preferential allotment.
- The market price of shares rose to very high levels within a year.
- Trading volume during the period of price manipulation was extremely thin.
- Most investors received their initial investment amount in cash, with only a small amount retained as security.
- Many companies involved had no business credentials to justify the sharp rise in share prices.
- The rise in market price was not supported by company fundamentals or genuine factors.
- Common persons/entities were involved in trading across multiple companies during the price rise period.
- Names of most companies were changed during the scam period.
- Shares were split to avoid market analyst scrutiny.
- Trade volume jumped significantly when market prices reached optimum levels for Long Term Capital Gains (LTCG).
- Shares fell sharply after LTCG beneficiaries offloaded them.
- Shares were not available for buy/sell outside the syndicate, ensured by synchronized trading or exchange mechanisms.

First Appellate Authority's Findings:
- The AO's findings were comprehensive and required no further elaboration.
- Direct evidence indicated the transactions were accommodations for bogus LTCG claims to exempt income.
- SEBI had suspended certain scrips after investigating abnormal price increases.
- The assessee's documentation (application of shares, allotment, share certificates, payment by cheques, filings before the Registrar of Companies, etc.) was elaborate but not considered evidence due to the pre-planned and schemed nature of the transactions.
- Transactions were deemed unnatural and highly suspicious, with grave doubts about the assessee's story.

Tribunal's Consideration:
- The Kolkata Bench of the ITAT had previously decided similar cases in favor of the assessee.
- Legal evidence produced by the assessee should guide the decision, not general observations or theories of human behavior.
- Allegations of a scam must be established with evidence specific to the assessee.
- The revenue must prove cash transactions with evidence, and any third-party statements must be confronted with the assessee.
- The Hon'ble Supreme Court held that no addition could be made on suspicion or conjectures.

Judgments Referenced:
- The Tribunal referenced several judgments where similar additions were deleted due to lack of evidence and reliance on suspicion or general observations.
- Key judgments include those from the Calcutta High Court, Punjab and Haryana High Court, and the Hon'ble Supreme Court, emphasizing the need for concrete evidence and the right to cross-examination.

Conclusion:
- The Tribunal found no adverse material implicating the assessee in the alleged scam.
- The AO and CIT(A) failed to provide specific evidence against the assessee.
- The assessee's documentation and evidence were not disproven.
- The addition under Section 68 was deleted, and the appeal was allowed in favor of the assessee.

Result:
All appeals of the assessee were allowed, and the addition made under Section 68 was deleted.

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