2019 (8) TMI 1321 - AT - Income Tax

Bogus LTCG - Addition u/s 68 - 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 Question of treating the said gain as unexplained cash credit under section 68 of the Act cannot arise unless the AO is able to find fault/infirmity with the same. I note that 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 refers also to some third party statement of Shri Sunil Dokania which was admittedly recorded behind the back of the assessee and the assessee has neither been allowed to cross examine this person by the assessee nor the statement of Shri Sunil Dokania furnished to assessee, so the statements even if adverse against the assessee cannot be relied upon by the AO to draw adverse inference against the assessee (Reliance on Hon ble Supreme Court decision in Andaman Timber 2015 (10) TMI 442 - SUPREME COURT and 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

Summary

Issues Involved:
1. Whether the addition made by the AO under section 68 of the Act regarding the sale proceeds of shares of Kailash Auto Finance Limited (KAFL) treating it as income from undisclosed sources was justified.
2. Whether the assessee's claim of Long Term Capital Gains (LTCG) on the sale of shares and the exemption under section 10(38) of the Act was valid.

Detailed Analysis:

Issue 1: Justification of Addition under Section 68
The AO treated the sale proceeds of shares of KAFL as income from undisclosed sources under section 68 of the Act. The AO relied on the Investigation Wing's report, which alleged that the transactions in KAFL shares were manipulated by entry operators, and the share prices were artificially hiked to generate LTCG. Consequently, the AO rejected the assessee's claim of LTCG and added the entire amount to the income as unexplained income. The CIT(A) upheld this addition.

Issue 2: Validity of LTCG Claim and Exemption under Section 10(38)
The assessee contended that the transactions were genuine, supported by documentary evidence such as purchase bills, demat statements, contract notes, and bank statements. The Tribunal in similar cases (Manish Kumar Baid, Rukmini Devi Manpria, and Jagmohan Agarwal) had allowed the LTCG claims, stating that the transactions in KAFL shares were not bogus. The Tribunal emphasized that the AO's rejection of the LTCG claim was based on suspicion and preponderance of probability without concrete evidence.

The Tribunal noted that the assessee had purchased 12,500 shares of Panchshul Marketing Ltd., which later merged with KAFL, and the shares were sold through a recognized stock exchange. The sale proceeds were received through banking channels, and all relevant documents were provided to substantiate the transactions. The Tribunal found no adverse material specifically against the assessee to justify the AO's addition under section 68.

Conclusion:
The Tribunal allowed the appeal, holding that the AO was not justified in treating the sale proceeds of KAFL shares as undisclosed income under section 68. The Tribunal directed the AO to accept the assessee's claim of LTCG and the exemption under section 10(38) of the Act, as the transactions were genuine and supported by substantial evidence. The Tribunal also distinguished the case from other judicial decisions cited by the Revenue, noting that the facts and circumstances in those cases were different.

Order:
The appeal of the assessee is allowed, and the AO is directed not to treat the LTCG on the sale of KAFL shares as bogus and to delete the consequential addition.