2019 (7) TMI 179 - AT - Income Tax

Bogus capital gain - Claim for exemption u/s 10(38) in respect of sale of shares denied - HELD THAT - The appellant had furnished the copies of contract notes, Demat statement, Bank Statement, broker s ledger. The transactions in listed shares took place through a registered share broker, namely M/s. Sosha Credit Pvt. Ltd. The purchase of shares was acquired through public offer by way of direct subscription in Initial Public offering. The sale of shares took place on screen based trading platform of Bombay Stock Exchange. The transaction was settled by making / receiving payment by account payee cheques through proper banking channel. The assessee had paid securities transaction tax (STT) on sale of shares. The transaction took place at the price prevailing on stock exchange on respective transaction dates and there is no adverse finding by the lower authorities in respect to the documents produced by the assessee to substantiate the sale of M/s GCM Securities Limited. D.R. except relying heavily on the orders of the lower authorities could not bring to our attention any material to show that the documents placed before us were sham, bogus or there was any factual infirmity therein. D.R. also could not controvert the ld. A.R s submissions that the disallowance was made solely on the basis of the report of the Investigation Wing in the shares of M/s KAFL. D.R. could not bring to our attention any material or evidence from which one could infer that the transactions in shares of M/s GCM Securities Limited were either manipulated or sham or that any enquiry was conducted either by the Investigation Wing or by the AO in respect of assessee s transactions in shares of M/s GCM Securities Limited. Both the lower authorities were not justified in not allowing the appellant s claim for exemption u/s 10(38) in respect of the profit derived by the appellant on sale of 6400 shares of M/s GCM Securities Limited. Appeal of the assessee is allowed.

Issues Involved:

1. Denial of exemption under Section 10(38) of the Income Tax Act for Long Term Capital Gain (LTCG) on sale of shares.
2. Validity of the assessment order based on the investigation report of unrelated scrips.
3. Examination of evidence submitted by the assessee to substantiate the genuineness of share transactions.
4. Analysis of financials and market price movements of the company in question.
5. Legal precedents supporting the assessee's claim.

Detailed Analysis:

1. Denial of Exemption under Section 10(38) of the Income Tax Act:
The primary grievance of the assessee was against the Ld. CIT(A)'s action in not allowing the claim for exemption under Section 10(38) amounting to ?39,19,157/- in respect of sale of shares of M/s. GCM Securities Ltd. The AO denied the exemption based on an investigation report related to M/s. Kailash Auto Finance Ltd. (KAFL), which was unrelated to the assessee's transactions.

2. Validity of the Assessment Order Based on Investigation Report of Unrelated Scrips:
The AO's assessment order was criticized for focusing extensively on the investigation report of M/s. KAFL, which had no relevance to the assessee's transactions in M/s. GCM Securities Ltd. The AO did not bring any tangible material on record to prove that the assessee’s transactions were bogus. The assessment order was found to lack independent and objective application of mind.

3. Examination of Evidence Submitted by the Assessee:
The assessee provided comprehensive evidence, including:
- Copy of Bank Statement
- Copy of DEMAT statement
- Confirmation from ICICI Bank upon allotment of shares in IPO
- Contract notes issued by the share broker
- Ledger accounts of the share broker

These documents were not found to be false, fabricated, or fictitious by the lower authorities. The transactions were conducted through a registered stock broker and were settled through proper banking channels with securities transaction tax (STT) paid.

4. Analysis of Financials and Market Price Movements of the Company in Question:
The financials of M/s. GCM Securities Ltd. for FY 2014-15 were scrutinized, revealing a substantial turnover and profit, along with investments in blue-chip securities and payment of interim dividends. The AO's adverse inference based on unrelated financial years and unrelated scrips was deemed unjustified. The price movements on the stock exchange were based on the financials of the relevant period, not influenced by past results.

5. Legal Precedents Supporting the Assessee's Claim:
Several legal precedents were cited to support the assessee's claim, emphasizing that suspicion alone cannot replace legal proof. Key judgments included:
- Anupam Kapoor (299 ITR 179) where the transaction was held genuine based on material evidence.
- M/s Classic Growers Ltd. vs. CIT where the High Court held that the AO's suspicion was misplaced without substantiating evidence.
- CIT V. Lakshmangarh Estate & Trading Co. Limited which reiterated that suspicion cannot replace proof.
- CIT V. Shreyashi Ganguli where the transactions were upheld as genuine despite the selling broker being under SEBI's action.

Conclusion:
The Tribunal found that both the AO and Ld. CIT(A) were not justified in denying the exemption under Section 10(38). The evidence provided by the assessee substantiated the genuineness of the transactions. The Tribunal set aside the order of Ld. CIT(A) and directed the AO to allow the exemption and delete the consequential addition. The appeal of the assessee was allowed.

Order Pronounced:
The order was pronounced in the open court on 01 July, 2019.

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