2019 (1) TMI 855 - AT - Income Tax

Addition u/s 68 - sale proceeds of shares as income from undisclosed sources - rejecting the assessee s claim of Long Term Capital Gains (LTCG) on sale of those shares - Held that - We note that at Para -18 of the assessment order AO mentions about the role of brokers in allowing entry operators to register their bogus companies as their client and also certain admission made by some brokers about their involvement in so called Jama kharchi companies. In the said para some names of few brokers and Jama Kharchi operators have been mentioned. However, we note that the name of assessee s broker, M/s. Guiness Securities Ltd., through whom the assessee sold his shares, does not appear at all in that report. We note that M/ s Guiness Securities Ltd was not named in the assessment order / D.I. report as a broker who was involved in price rigging of penny stocks. On the other hand, we note that M/s. Guiness Securities Ltd is a SEBI registered stock broking company having registration no. INB 011146033 and also is a member of Bombay Stock Exchange having membership no. 3027; Neither during the time of execution of the contract in FY 2013-14 nor even today, this stock-broking company was suspended by SEBI or BSE on any charge of irregularities like price rigging etc as alleged by the AO. We note that AO failed to bring on record any material to connect the assessee to any of the alleged entry operators/ brokers who are a part of this so called price rigging group or LTCG Generator Group. We note that in an identical/similar case, wherein the AO made addition of the LTCG claim made on sale of M/s. KAFL scrips on similar reasoning based on the SEBI interim report, investigation report of the Wing of the Department and certain statements recorded by the Department in the case of Sanjiv Shroff Vs. ACIT 2019 (1) TMI 213 - ITAT KOLKATA it is also a matter of record that the assessee furnished all evidences in the from of bills, contract notes, demat statements and the bank accounts to prove the genuineness of the transactions relating to purchase and sale of shares resulting in LTCG. These evidences were neither found by the AO to be false or fabricated. The facts of the case and the evidences in support of the assessee s case clearly support the claim of the assessee that the transactions of the assessee were bonafide and genuine and therefore the AO was not justified in rejecting the assessee s claim of exemption under section 10(38) of the Act. AO was not justified in assessing the sale proceeds of shares of KAFL as undisclosed income of the assessee u/s 68 of the Act. - Decided in favour of the assessee.

Issues Involved:
1. Justification of addition made under section 68 of the Income Tax Act in respect of sale proceeds of shares.
2. Claim of Long Term Capital Gains (LTCG) and exemption under section 10(38) of the Income Tax Act.
3. Validity of the assessment based on general investigation reports and statements without specific evidence against the assessee.
4. Role of SEBI orders and investigation reports in determining the genuineness of transactions.
5. Requirement of cross-examination of witnesses whose statements are used against the assessee.
6. Treatment of alleged unexplained expenditure towards commission charges.

Detailed Analysis:

1. Justification of Addition Under Section 68:
The main issue was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in upholding the addition made by the Assessing Officer (AO) under section 68 of the Income Tax Act, treating the sale proceeds of shares of M/s Kailash Auto Finance Limited (KAFL) as income from undisclosed sources. The AO concluded that the transactions resulting in LTCG on sale of shares of KAFL were bogus, asserting that the assessee ploughed back unaccounted money into the books of accounts.

2. Claim of LTCG and Exemption Under Section 10(38):
The assessee claimed LTCG from the sale of shares of KAFL and sought exemption under section 10(38) of the Act. The AO did not agree with the assessee's claim, citing a study conducted by the Investigation Wing about BSE-listed penny stocks and concluding that the profits earned were beyond human probabilities. The AO relied on SEBI orders and statements from brokers and operators to support his conclusions.

3. Validity of Assessment Based on General Investigation Reports:
The Tribunal noted that the AO relied heavily on general statements, study reports, and modus operandi of unscrupulous players without specific evidence against the assessee. The AO failed to provide direct or demonstrative proof linking the assessee to the alleged bogus transactions. The Tribunal emphasized that the AO must prove and establish the cash trail and specific allegations against the assessee, which was not done in this case.

4. Role of SEBI Orders and Investigation Reports:
The AO referred to SEBI orders and investigation reports to support his adverse conclusions. However, the Tribunal observed that neither the Investigation Wing's report nor the SEBI orders contained any adverse material or remarks against the assessee or its broker. The Tribunal highlighted that the SEBI had revoked the ban on several entities previously banned for trading KAFL scrips, indicating a lack of evidence against them.

5. Requirement of Cross-Examination:
The Tribunal noted that the AO used statements from third parties without providing the assessee an opportunity for cross-examination, which is a violation of principles of natural justice. The Tribunal cited the Supreme Court's decision in Andaman Timber Industries, emphasizing that not allowing cross-examination of witnesses whose statements are relied upon renders the order null and void.

6. Treatment of Alleged Unexplained Expenditure:
The Tribunal addressed the addition of ?1,83,020 as unexplained expenditure towards commission charges for the sale of shares. Since the Tribunal held that the LTCG transactions were genuine, the addition for commission charges was also directed to be deleted.

Conclusion:
The Tribunal found that the AO's conclusions were based on suspicion and surmises without concrete evidence. The assessee provided all necessary documents to substantiate the genuineness of the transactions, which were not found to be false or fabricated. The Tribunal allowed the assessee's claim of LTCG and directed the deletion of the addition made under section 68. The appeal was partly allowed, emphasizing the need for specific evidence and adherence to principles of natural justice in tax assessments.

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