2019 (2) TMI 1070 - AT - Income Tax

Addition u/s 68 - Bogus LTCG - sale proceeds of shares of Kailash Auto Finance Limited (KAFL) treating the same as income from undisclosed sources after rejecting the assessee s claim of Long Term Capital Gains (LTCG) on sale of those shares - HELD THAT - Sale of shares of M/s. KAFL which was dematerlized in Demat account has taken place through recognised stock exchange and assessee received money through banking channel. So, assessee has explained the nature and source of the money with supporting documents and thus has discharged the onus casted upon him by producing the relevant documents, accordingly, the question of treating the said gain as unexplained cash credit under section 68 cannot arise unless the AO is able to find fault/infirmity with the same. The source of the receipt of the amount has been explained and the transaction in respect of which the said amount has been received by assessee has not been cancelled by the stock exchange/SEBI. So, it is difficult to countenance the action of AO/Ld. CIT(A) in the aforesaid facts and circumstances explained above. Even assuming that the brokers may have done some manipulation then also the assessee cannot be held liable for the illegal action of the brokers when the entire transactions have been carried out through banking channels duly recorded in the Demat accounts with a Government depository and traded on the stock exchange unless specific evidence emerges that the assessee was in hand in gloves with the broker for committing the unscrupulous activity to launder his own money in the guise of LTCG. There is also nothing on record which could suggest that the assessee gave his own cash and got cheque from the alleged brokers/buyers. The assessment is based upon some third party statements recorded behind the back of the assessee and the assessee has not been allowed to cross examine those persons by the assessee, so the statements even if adverse against the assessee cannot be relied upon by the AO to draw adverse inference against the assessee in the light of the documents to substantiate the claim of LTCG, which has not been found fault with by the AO. - Decided in favour of assessee. Disallowance of expenditure u/s. 69C - HELD THAT - As already adjudged that the transaction of shares of M/s KAFL which assessee claimed to have received LTCG is genuine, the notional commission payment does not arise and therefore, directed to be deleted.- Decided in favour of assessee.

Issues Involved:
1. Justification of addition under Section 68 of the Income Tax Act for sale proceeds of shares.
2. Legitimacy of Long Term Capital Gains (LTCG) claimed by the assessee.
3. Validity of evidence and procedural fairness in the assessment.
4. Disallowance of expenditure under Section 69C of the Income Tax Act.

Detailed Analysis:

1. Justification of Addition under Section 68:
The primary issue was whether the addition made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, treating the sale proceeds of shares as income from undisclosed sources, was justified. The AO alleged that the transactions in the shares of Kailash Auto Finance Limited (KAFL) were manipulated by entry operators to artificially hike the share prices, leading to bogus LTCG claims. Consequently, the AO treated the entire LTCG as unexplained income under Section 68.

2. Legitimacy of Long Term Capital Gains (LTCG):
The assessee claimed LTCG from the sale of shares of KAFL, which were initially purchased at ?1,05,000 and later sold for ?20,49,749. The AO rejected this claim based on the SEBI report and the Investigation Wing's findings, alleging that the transactions were manipulated. However, the Tribunal noted that similar cases had been decided in favor of the assessee, where the LTCG claims were upheld. The Tribunal emphasized that the AO's rejection of the LTCG claim was based on suspicion and preponderance of probability without concrete evidence.

3. Validity of Evidence and Procedural Fairness:
The Tribunal highlighted that the AO did not provide any legal evidence against the assessee and relied on third-party statements without allowing cross-examination. The assessee furnished all necessary documents, including purchase bills, demat statements, contract notes, and bank statements, to substantiate the genuineness of the transactions. The Tribunal found that the SEBI's interim order, which influenced the AO, was later withdrawn, and no adverse material specifically implicated the assessee. The Tribunal relied on precedents, including the Special Bench of Mumbai Tribunal in GTC Industries Ltd., to assert that suspicion alone could not justify the addition.

4. Disallowance of Expenditure under Section 69C:
The AO disallowed ?58,324 as unexplained expenditure towards commission under Section 69C, which was confirmed by the CIT(A). However, since the Tribunal adjudged the LTCG claim as genuine, the notional commission payment was deemed irrelevant and directed to be deleted.

Conclusion:
The Tribunal allowed the appeal, holding that the AO's addition under Section 68 was unjustified and based on mere suspicion without concrete evidence. The LTCG claim was upheld as genuine, supported by valid documentary evidence. The disallowance of expenditure under Section 69C was also deleted, as it was contingent on the genuineness of the LTCG claim. The order emphasized the importance of procedural fairness and the necessity of concrete evidence in tax assessments.

← Previous Next →