2019 (8) TMI 1117 - AT - Income Tax

Bogus LTCG - sale proceeds of shares of Kailash Auto Finance Limited (KAFL) treating the same as income from undisclosed sources - HELD THAT - once the assessee produced all relevant evidence to substantiate the transaction of purchase, dematerialization and sale of shares then, in the absence of any contrary material brought on record the same cannot be held as bogus transaction merely on the basis of report of Investigation Wing, Kolkata wherein there is a general statement of providing bogus long term capital gain transaction to the clients without stating anything about the transaction of allotment of shares by the company to the assessee. In that case of SANJAY BIMALCHAND JAIN VERSUS THE PR. CIT 2017 (5) TMI 983 - BOMBAY HIGH COURT , the purchases were made by the assessee in cash for acquisition of shares of companies and the purchase of shares of the companies was done through the broker and the address of the broker was incidentally the address of the company. The profit earned by the assessee was shown as capital gains which was not accepted by the A.O. and the gains were treated as business profit of the assessee by treating the sales of the shares within the ambit of adventure in nature of trade. Thus, it can be seen that in the decision relied upon by the ld. DR, the dispute was whether the profit earned on sale of shares was capital gains or business profit. It is clear from the above that the facts of the case of the assessee are identical with the facts in the above case wherein the co-ordinate bench of the Tribunal has deleted the addition in the case of Shri Manish Baid 2017 (10) TMI 522 - ITAT KOLKATA in respect of sale of shares of M/s KAFL. Therefore, respectfully following the same and the facts in the instant case as taken note in para 7 supra and discussions, is inclined to set aside the order of Ld. CIT(A) and direct the AO not to treat the long term capital on sale of shares of M/s KAFL as bogus and delete the consequential addition. - Decided in favour of assessee.

Issues Involved:
1. Justification of the addition made by the AO under section 68 of the Income-tax Act, 1961.
2. Rejection of the assessee’s claim of Long Term Capital Gains (LTCG) exemption under section 10(38) of the Act.
3. Allegations of bogus transactions and artificial price rigging of shares.
4. Reliance on SEBI’s interim order and Investigation Wing's report.
5. Evidentiary support and genuineness of the transactions.
6. Consideration of alternative grounds for addition as "adventure in the nature of trade."

Detailed Analysis:

1. Justification of the Addition under Section 68 of the Income-tax Act, 1961:
The core issue was whether the addition made by the AO under section 68 of the Income-tax Act, 1961, was justified. The AO treated the entire LTCG as unexplained income, citing the assessee's failure to submit evidence regarding the purchase of shares. However, the Tribunal noted that the assessee had provided sufficient documentation, including purchase bills, demat account statements, and bank statements, which were not found to be false or fabricated by the AO. The Tribunal emphasized that the AO did not bring any material evidence to prove that the transactions were bogus or that the assessee had introduced unaccounted money.

2. Rejection of the Assessee’s Claim of LTCG Exemption under Section 10(38) of the Act:
The Tribunal examined whether the rejection of the assessee's claim for LTCG exemption under section 10(38) was valid. The assessee had claimed exemption on the sale of shares of M/s. Kailash Auto Finance Limited (KAFL). The Tribunal referred to previous cases where similar claims were allowed, noting that the shares were sold through a recognized stock exchange and the transactions were supported by valid documentation. The Tribunal concluded that the assessee had discharged the onus of proving the genuineness of the transactions, and there was no basis for rejecting the LTCG exemption claim.

3. Allegations of Bogus Transactions and Artificial Price Rigging of Shares:
The AO alleged that the transactions in the scrip of KAFL were manipulated by entry operators to artificially hike share prices. The Tribunal, however, found no direct evidence implicating the assessee in such activities. It was noted that the SEBI’s interim order, which influenced the AO, was later withdrawn, and there were no findings of any infirmity in the scrips of KAFL. The Tribunal held that mere suspicion or general statements in the Investigation Wing's report could not be the basis for treating genuine transactions as bogus.

4. Reliance on SEBI’s Interim Order and Investigation Wing's Report:
The AO's reliance on SEBI’s interim order and the Investigation Wing's report was scrutinized. The Tribunal observed that the SEBI order, which was initially adverse, was subsequently withdrawn, and the restrictions imposed were lifted. The Tribunal emphasized that the AO should not have relied on the interim order without considering its withdrawal and the final findings. The Tribunal also noted that the Investigation Wing's report did not contain specific evidence against the assessee.

5. Evidentiary Support and Genuineness of the Transactions:
The Tribunal highlighted the importance of evidentiary support in establishing the genuineness of transactions. The assessee had provided comprehensive evidence, including purchase bills, demat account statements, contract notes, and bank statements. The Tribunal found that these documents were sufficient to substantiate the transactions and that the AO had not provided any contrary material evidence. The Tribunal reiterated that suspicion, however strong, could not replace legal proof.

6. Consideration of Alternative Grounds for Addition as "Adventure in the Nature of Trade":
The Revenue argued that if the appeal was upheld, the transactions should be considered as "adventure in the nature of trade" and taxed as business income. The Tribunal, however, found no basis for this argument. It was noted that the assessee had held the shares in a demat account, sold them through a recognized stock exchange, and received the sale proceeds through banking channels. The Tribunal concluded that the transactions were genuine investments and not an adventure in the nature of trade.

Conclusion:
The Tribunal allowed the appeal, setting aside the order of the CIT(A) and directing the AO to delete the addition made under section 68 of the Act. The Tribunal held that the assessee's transactions were genuine, supported by valid documentation, and that the LTCG exemption under section 10(38) was rightly claimed. The Tribunal emphasized the need for concrete evidence rather than suspicion or general reports to justify additions under section 68.

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