2018 (10) TMI 1432 - AT - Income Tax

Addition made u/s 68 in respect of LTCG on sale of shares - assessee claimed exempt income u/s 10(38) - AO sought to treat the LTCG reported by the assessee as bogus as according to him, the scrip did not justify such a huge increase in its sale price and that the increase in share price thereon was only artificial and due to price rigging carried out by some persons in the market. - Held that - With regard to the arguments of the ld DR that at the time of purchase of shares of Trinity Tradelink Limited by the assessee, the shares of STFL were very much available in the stock market and the assessee could have very well bought the shares of STFL from the open market. He need not have resorted to purchasing the shares of Trinity Tradelink Ltd and later on pursuant to demerger, get the shares in STFL. In this regard, we find from the materials available on record, that the assessee was not the director or promoter of either M/s Trinity Tradelink Ltd or STFL. Assessee was only a shareholder in Trinity Tradelink Ltd and pursuant to the demerger of that company with another company, the assessee was allotted shares in STFL, which cannot be faulted with by the revenue by mere surmise and conjecture and without bringing any evidence on record. Moreover, it is for the assessee to chose whether to buy a particular scrip and the department cannot step into the shoes of the assessee in this regard and participate in the business and investment decisions of the assessee. The transactions of purchase and sale of shares happen in the secondary market based on the prevailing market prices through the registered stock brokers in the concerned stock exchange. This is how the transactions happen across the world. For these events, the documents are furnished by the stock brokers in the form of contract notes, delivery instructions submitted by the parties for effecting the sale through the recognized stock exchange and transactions of movement of shares from one person to another are recorded in the respective demat statements issued by the concerned Depository Participant. These documents cannot be disbelieved as not giving any credence to the share transactions as they had happened in the open market. In any case, it is for the revenue to bring out any other extraneous material to prove that these documents are fabricated with the connivance of assessee, registered stock broker and recognized stock exchange. It cannot be brushed aside that these transactions in the open market had duly suffered STT which is also reflected in the contract notes issued by the stock broker and the revenue had already been enriched by the STT component. Hence it would not be proper for the ld DR to state that these documents cannot be relied upon. We hold that the CIT-A had rightly deleted the addition made u/s 68 of the Act in respect of LTCG on sale of shares. Accordingly, the grounds raised by the revenue are dismissed.

Summary

Issues Involved:
- Justification of the addition towards long-term capital gains on the sale of shares.
- Treatment of long-term capital gains as bogus and unexplained cash credit under Section 68 of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Justification of the Addition Towards Long-Term Capital Gains on Sale of Shares:
The core issue in this appeal was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in upholding the addition made towards long-term capital gains (LTCG) on the sale of shares. The assessee, an Association of Persons (AOP), had declared LTCG of ?95,20,445/- on the sale of listed equity shares of Sharp Trading & Finance Ltd (STFL), claiming it as exempt under Section 10(38) of the Income Tax Act, 1961. The Assessing Officer (AO) treated the LTCG as bogus, suspecting price rigging and artificial increase in share prices, and added the same as unexplained cash credit under Section 68 of the Act. The CIT(A) deleted this addition, leading to the Revenue's appeal.

2. Treatment of Long-Term Capital Gains as Bogus and Unexplained Cash Credit Under Section 68:
The AO's primary contention was that the financials of STFL did not justify the significant increase in its share price, attributing it to artificial price rigging. The AO added the LTCG as unexplained cash credit under Section 68, based on the improbability of such returns and the general report of the investigation wing, Kolkata, which suggested price manipulation by certain market operators.

Detailed Analysis:

Facts and Evidence Presented by the Assessee:
The assessee provided comprehensive evidence supporting the genuineness of the share transactions, including:
- Purchase and sale details of shares, contract notes from registered brokers, demat statements, and bank statements showing the credit of sale proceeds.
- The shares were initially allotted by Trinity Tradelink Ltd and later converted to STFL shares due to a demerger scheme.
- The transactions were conducted through recognized stock exchanges and subjected to Securities Transaction Tax (STT).

Arguments and Findings:
The assessee argued that the transactions were genuine and conducted through the open market, with no control over the market prices. The CIT(A) found no evidence of price rigging or collusion presented by the AO and noted that the AO's conclusions were based on presumptions and general reports without specific evidence against the assessee.

Judicial Precedents and Tribunal's Decision:
The Tribunal referred to several judicial precedents emphasizing that assessments should be based on concrete evidence rather than presumptions or general suspicions. Key cases cited included:
- PCIT vs. Sh Hitesh Gandhi, where the Punjab & Haryana High Court ruled in favor of the assessee in similar circumstances.
- Mukesh R Marolia vs. Additional CIT, where both the Mumbai Tribunal and the Bombay High Court upheld the genuineness of share transactions based on documentary evidence.

The Tribunal concluded that the AO failed to provide specific evidence of price rigging or collusion involving the assessee. The CIT(A)'s findings were upheld, noting that the AO's actions were based on surmises and suspicions without concrete evidence. The Tribunal emphasized the importance of adhering to principles of natural justice, including providing the assessee an opportunity for cross-examination and confronting them with any adverse evidence.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition made under Section 68. The Tribunal held that the LTCG on the sale of shares, conducted through recognized stock exchanges and subjected to STT, was genuine and could not be treated as unexplained cash credit without specific evidence of wrongdoing. The decision underscored the necessity of basing assessments on factual evidence rather than presumptions or generalized reports.