2019 (1) TMI 273 - AT - Income Tax

Bogus LTCG - Treating the assessee s losses arising from sale of various script to be non-genuine - Held that - The Revenue fails to dispute herein as well as there is no material either of the case file indicating this assessee to have availed accommodation entries as per any search / survey statement. The Revenue seeks to place a very heavy reliance in department investigation wing survey operation statements u/s. 133A from one of the assessee s directors against genuineness of the impugned losses. We find that such a search and survey statement; if any in absence of any evidence in itself carries no value as per CBDT s Circular dated 10.03.2003 as reiterated in subsequent clarification dated 18.12.2014. We therefore go by our foregoing detailed discussion to conclude that the CIT(A) has rightly deleted the impugned loss disallowance in both assessment year(s). - decided against revenue

Summary

Issues Involved:
1. Genuineness of Long Term Capital Gains (LTCG) and Short Term Capital Losses (STCL).
2. Treatment of LTCG as income from undisclosed sources.
3. Disallowance of Commission paid to share broker.
4. Ad-hoc disallowance of Trip Expenses and Repairs & Maintenance expenses.

Detailed Analysis:

1. Genuineness of Long Term Capital Gains (LTCG) and Short Term Capital Losses (STCL):
The primary issue in all three appeals was the genuineness of the LTCG and STCL claimed by the assessees. The Assessing Officer (AO) treated the LTCG from the sale of shares in M/s NCL Research & Financial Services Ltd. as income from undisclosed sources for the first assessee and disallowed the STCL for the second assessee. The AO relied on the Directorate of Investigation's report, which alleged that the transactions were bogus and part of a scheme to generate tax-free income.

2. Treatment of LTCG as Income from Undisclosed Sources:
The AO, supported by the CIT(A), treated the LTCG of ?3,26,63,032/- as income from undisclosed sources, denying the exemption under Section 10(38) of the Income Tax Act, 1961. The AO's reasoning was based on the Directorate of Investigation's report, which suggested that the transactions were colorable and lacked genuineness. The AO also referred to the case of CIT vs. L.N. Dalmia and CIT vs. Shekhawati Rajputana Trading Co. (P) Ltd., emphasizing that the transactions were sham and meant to avoid tax liabilities.

3. Disallowance of Commission Paid to Share Broker:
The AO disallowed a commission of ?6,53,260/- allegedly paid to the share broker, treating it as unexplained expenditure under Section 69C of the Act. The AO assumed, based on the Directorate of Investigation's report, that the assessee must have paid a commission to obtain the accommodation entries for the LTCG. However, the assessee argued that there was no evidence of such payment, and the AO's disallowance was based on mere suspicion without any concrete proof.

4. Ad-hoc Disallowance of Trip Expenses and Repairs & Maintenance Expenses:
The AO made an ad-hoc disallowance of ?5,00,000/- out of Trip Expenses and Repairs & Maintenance expenses, citing a potential leakage of revenue. The assessee contended that all expenses were duly supported by bills and vouchers, and the AO did not find any defects upon verification. The disallowance was argued to be arbitrary and without any factual basis.

Judgment Analysis:

1. Genuineness of LTCG and STCL:
The Tribunal found that the assessee had provided substantial evidence, including demat account statements, contract notes, and bank statements, to support the genuineness of the LTCG. The Tribunal noted that the AO's reliance on the Directorate of Investigation's report was not substantiated with specific evidence against the assessee. The Tribunal referred to several case laws, including the decisions in ITO vs. Shri Suresh Chand Gupta and D.D. Agarwal (HUF) vs. ITO, where similar additions were deleted due to lack of evidence.

2. Treatment of LTCG as Income from Undisclosed Sources:
The Tribunal rejected the AO's treatment of LTCG as income from undisclosed sources, emphasizing that the assessee had successfully demonstrated the genuineness of the transactions. The Tribunal highlighted that the AO failed to provide any material evidence indicating the assessee's involvement with entry operators or price rigging. The Tribunal relied on the principles laid down in Sumati Dayal vs. CIT and CIT vs. Durga Prasad More, which state that suspicion cannot replace evidence.

3. Disallowance of Commission Paid to Share Broker:
The Tribunal found that the AO's disallowance of the commission was based on assumptions without any concrete evidence. The Tribunal noted that the AO did not provide any documents or statements proving the payment of commission. The Tribunal held that the provisions of Section 69C could not be applied based on hypothetical figures and deleted the disallowance.

4. Ad-hoc Disallowance of Trip Expenses and Repairs & Maintenance Expenses:
The Tribunal held that the AO's ad-hoc disallowance was arbitrary and not supported by any evidence. The Tribunal noted that the assessee had provided all necessary documents and the AO did not find any defects. The Tribunal deleted the disallowance, stating that it was based on mere suspicion and conjecture.

Conclusion:
The Tribunal allowed the appeal of the first assessee, deleting the addition of ?3,26,63,032/- as LTCG and the disallowance of ?6,53,260/- as commission. The Tribunal also dismissed the Revenue's appeals in the case of the second assessee, upholding the CIT(A)'s decision to delete the disallowance of STCL. The Tribunal emphasized the need for concrete evidence and rejected the AO's reliance on suspicion and general reports.