2020 (2) TMI 1030 - AT - Income Tax

Bogus LTCG on sale of shares - Penny stock - sale of shares sold on recognized stock exchange and bringing to tax as unexplained credit u/s 68 - Additions u/s 68 - According to the assessee, the case of the assessee is of cash debit and not of cash credit, hence provisions of section 68 are not attracted . - HELD THAT - In the case, assessee has purchased shares of the three companies at a particular price and sold them at a lower price, which resulted in short-term capital loss. The list of the shares transacted by the assessee has been reproduced above. According to the assessee purchase and sale of the shares have been made on recognized stock exchange through registered brokers and payments have been made and received by way of bank account. In view of all the documents containing contract notes, de-mat account statement etc. the transaction have been carried out are in the normal course of its investment activity. On the Contra, according to the Revenue authorities the assessee has obtained the accommodation entries of short capital loss to set off the tax liability of long-term capital gain arising on sale shares of unlisted companies. The first, issue which has been raised by the assessee that it has not been confronted with the statements of various parties relied upon by the Assessing Officer. The assessee has also contended that opportunity of cross-examining those parties/persons was not provided to the assessee. According to the assessee, this resulted in the violation of the principle of natural justice and thus assessment should be held void ab intio. However, in our opinion, not providing opportunity of cross-examination may be in the nature of irregularity which is curable but not an illegality leading to annulling of the assessment. Further, the ld. CIT(A) of the impugned order has held that addition has not been made solely on the basis of the statement of those persons/parties. As provided as why the investment in the shares transacted by the assessee was not justified in view of the comparison of the other shares available. The Assessing Officer also pointed out the price fluctuation in the shares of the companies over a period, dividend history and other financial parameters to substantiate that there was no financial logic for investment in the company except for claim of bogus short-term capital loss against receipt of cash money. The Ld. Assessing Officer accordingly concluded that the addition was made on the basis of the material available on record, the surrounding circumstances, the human conduct and preponderance of probabilities. We find that in instant case addition in dispute is not solely on the basis of the statement of the persons and the Assessing Officer has relied on other materials. The statements of the persons who controlled the business of providing accommodation entry have been corroborated with the material, surrounding circumstances and preponderance of probability. We accordingly uphold the finding of the ld. CIT(A) on that issue in dispute. The relevant grounds of the appeal of the assessee are accordingly rejected. Short Term Capital Loss - HELD THAT - It is evident that one leg of the transaction (sale transaction of the share for capital gain) is bogus and non-genuine, then in same set of circumstances; the other leg of the transaction (purchase of share for capital loss) is bound to be bogus and not genuine. Thus, the transaction of the assessee of purchase and subsequent sale leading to short term capital loss are not genuinely entered. Scrip in which the assessee has transacted, the ratio of other decisions of the Tribunal and other high courts relied upon by the assessee cannot be applied over the facts of the instant case - Short-term capital loss claimed by the assessee is not found to be genuine and deserve to be disallowed. The relevant grounds of the appeal of the assessee are accordingly dismissed. Addition could have been made under section 68 - HELD THAT - . We agree with the contention of the asseesee that addition for short term capital loss cannot be made under section 68 of the Act, because addition has not been made for unexplained credit on sale of the shares during the year but in respect of the claim of bogus short capital loss. In the case of the assessee, correct action would be disallowance of claim of the short capital loss of the assessee. However, in our opinion, mentioning wrong section in the assessment order cannot render the entire assessment null and void. It is not the jurisdictional requirement for completing the assessment. The Assessing Officer has correctly acquired the jurisdiction over the case and only mistake is under which section the addition should be made. We reject the contention of the assessee to nullify the order due to wrong application of section by the Assessing Officer while rejecting the claim of the short term capital gain. The grounds of the appeal are accordingly dismissed.

Summary

Issues Involved:
1. Addition of ?1,22,76,352/- as unexplained credit under Section 68.
2. Addition of ?3,06,908/- as unexplained expenditure under Section 69C.

Issue-Wise Detailed Analysis:

1. Addition of ?1,22,76,352/- as Unexplained Credit under Section 68:

The assessee contested the denial of the claim of set-off of Short Term Capital Loss (STCL) of ?1,22,76,352/- on the sale of shares sold on a recognized stock exchange, which was brought to tax as unexplained credit under Section 68. The CIT(A) concluded that the appellant introduced unaccounted income in the form of STCL by manipulating penny stocks. The Assessing Officer (AO) referred to a report by the Deputy Director of Income Tax (Investigation), which detailed the modus operandi of providing bogus long-term/short-term capital gain/loss through trading of penny stocks. The AO summarized that the transactions were pre-arranged to set off huge LTCG earned by the assessee during the year.

The AO highlighted the unconventional nature of transactions, the lack of business activity and assets of the companies involved, and the unrealistic price movements of the shares. The AO also referred to statements from individuals involved in providing accommodation entries, which corroborated the findings that the transactions were not genuine. The CIT(A) upheld the addition, stating that the transactions were make-believe and lacked economic or financial justification.

The assessee argued that the transactions were carried out on a recognized stock exchange, payments were made through banking channels, and the broker did not dispute the genuineness of the transactions. However, the Tribunal found that the AO's addition was not solely based on statements but also on independent analysis of documents and surrounding circumstances. The Tribunal upheld the CIT(A)'s finding that the transactions were not genuine investments but accommodation entries to claim bogus STCL.

2. Addition of ?3,06,908/- as Unexplained Expenditure under Section 69C:

The AO made an addition for commission income charged by accommodation entry providers at 2.5% of the amount of ?1,22,76,352/-, resulting in an addition of ?3,06,908/- under Section 69C. The CIT(A) confirmed the addition, holding it as consequential in nature without application of mind. The Tribunal found that the AO's action was justified based on the material available on record, surrounding circumstances, and preponderance of probabilities. The Tribunal upheld the CIT(A)'s decision, rejecting the assessee's contention that the addition was made without proper reasoning.

Conclusion:

The Tribunal dismissed the appeal of the assessee, upholding the additions made by the AO and confirmed by the CIT(A). The transactions were found to be accommodation entries for claiming bogus STCL, lacking genuine economic or financial rationale. The additions under Sections 68 and 69C were deemed justified based on the evidence and analysis provided by the AO.