2019 (6) TMI 298 - AT - Income Tax

Bogus LTCG - addition u/s 68 - exemption u/s. 10(38) denied - penny stocks purchases - benami transactions - off market transaction for purchase of shares - HELD THAT - The assessee has furnished all evidences in support of the claim of the assessee that it earned LTCG on transactions of his investment in shares. The purchase of shares had been accepted by the AO in the year of its acquisition and thereafter until the same were sold. The off market transaction for purchase of shares is not illegal as was held by the decision of Co-ordinate Bench of this Tribunal in the case of Dolarrai Hemani vs. ITO 2016 (12) TMI 1074 - ITAT KOLKATA and BLB CABLES AND CONDUCTORS PVT. LTD. 2018 (8) TMI 525 - CALCUTTA HIGH COURT The transactions were all through account payee cheques and reflected in the books of accounts. The purchase of shares and the sale of shares were also reflected in Demat account statements. The sale of shares suffered STT, brokerage etc. In the facts and circumstances of the case, it cannot be held that the transactions were bogus. We note that since the purchase and sale transactions are supported and evidenced by Bills, Contract Notes, Demat statements and bank statements etc., and when the transactions of purchase of shares were accepted by the ld AO in earlier years, the same could not be treated as bogus simply on the basis of some reports of the Investigation Wing and/or the orders of SEBI and/or the statements of third parties. Thus we set aside the order of CIT(A) and direct the AO not to treat the long term capital as bogus and delete the consequential addition. - Decided in favour of assessee. Unexplained expenditure towards commission charges of sale of such shares by the operator - HELD THAT - The transactions relating to LTCG were genuine and not the accommodation entries as alleged by the AO. Consequently the addition is hereby directed to be deleted. We accordingly hold that the issue is allowed in favour of the assessee.

Issues Involved:

1. Legitimacy of Long Term Capital Gains (LTCG) claimed by the assessee on the sale of shares of M/s Kailash Auto Finance Limited (KAFL) and M/s Essar India Ltd. (EIL).
2. Justification of additions made by the Assessing Officer (AO) under Section 68 of the Income-tax Act, 1961.
3. Validity of the AO's reliance on statements and reports from SEBI and other third parties.
4. Legitimacy of the assessee's transactions in shares and the claim for exemption under Section 10(38) of the Act.
5. Requirement for cross-examination of witnesses whose statements were used against the assessee.
6. Treatment of alleged commission charges as unexplained expenditure.

Detailed Analysis:

1. Legitimacy of Long Term Capital Gains (LTCG):

The primary issue was whether the LTCG claimed by the assessee on the sale of shares of KAFL and EIL was genuine. The assessee had purchased shares of M/s. Careful Projects Advisory Limited (CPAL), which later amalgamated with KAFL, and shares of EIL. The AO rejected the LTCG claim, suspecting the transactions as bogus and treating the gains as income from undisclosed sources. The AO based his suspicion on the rapid price rise of the shares and statements from various individuals indicating a scheme to provide bogus LTCG.

2. Justification of Additions under Section 68:

The AO made additions under Section 68, treating the sale proceeds of the shares as unexplained cash credits. The AO's conclusion was based on the alleged manipulation of share prices and statements from individuals like Shri Sunil Dokania, who described a modus operandi involving layering of unaccounted money through various accounts to create artificial LTCG.

3. Reliance on Statements and Reports:

The AO relied heavily on statements from third parties and SEBI reports, which indicated price rigging and manipulation in the shares of KAFL. The AO also referred to various judicial decisions to support his conclusions. However, the Tribunal noted that the assessee was not provided an opportunity to cross-examine these witnesses, which is a violation of the principles of natural justice as established in the case of CCE vs. Andaman Timber Industries.

4. Legitimacy of Transactions and Exemption Claim:

The Tribunal examined the evidence provided by the assessee, including purchase bills, demat account statements, and bank statements, which substantiated the genuineness of the transactions. The Tribunal found that the transactions were carried out through recognized stock exchanges and the sale proceeds were received through banking channels. The Tribunal referred to several cases where similar claims were allowed, emphasizing that suspicion alone cannot replace legal proof.

5. Requirement for Cross-Examination:

The Tribunal highlighted the importance of cross-examination, citing the Supreme Court's ruling in CCE vs. Andaman Timber Industries. The AO's failure to provide the assessee an opportunity to cross-examine witnesses like Shri Sunil Dokania rendered the assessment unsustainable. The Tribunal reiterated that statements from third parties cannot be used as sole evidence without cross-examination.

6. Treatment of Alleged Commission Charges:

The AO had also added an amount as unexplained expenditure towards commission charges for the sale of shares. Since the Tribunal held that the LTCG transactions were genuine, the addition of commission charges was also directed to be deleted.

Conclusion:

The Tribunal concluded that the AO's additions under Section 68 were based on suspicion and surmises without concrete evidence. The assessee had provided sufficient documentation to prove the genuineness of the transactions. The Tribunal set aside the order of the CIT(A) and directed the AO to delete the additions, allowing the assessee's appeal. The Tribunal emphasized the need for direct evidence and the opportunity for cross-examination in such cases.

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