2021 (3) TMI 342 - AT - Income Tax

Undisclosed income offered during the course of search - AO has alleged that the assessee is beneficiary of bogus long term capital gain derived from sale of penny stocks - AO making additions only on the basis of statements recorded during the course of search without reference to any incriminating material found during the course of search to suggest undisclosed income - HELD THAT - As explained by the assessee, the disclosure is only on adhoc offer without any specific reference to any material found at the time of search. Wherever, it is with reference to specific material that does not relate to this year. The declaration by the assessee itself being incorrect, therefore we are of the considered view that the additions made by the AO towards undisclosed income offered in the statement recorded during the course of search was neither based on any evidence collected during the course of search nor relates to the assessee. In fact, the assessee had agreed to offer additional income only to buy peace and from the fact that nondisclosure of income was not admitted in the return itself is a rebuttal of statement. Hence, we are of the considered view that the AO as well as the CIT(A) were completely erred in making additions towards undisclosed income on the basis of statements recorded during the course of search, even though, there is no evidence collected during the course of search which suggest undisclosed income for the relevant assessment year. Hence, we direct the AO to delete additions made towards undisclosed income. - Decided in favour of assessee. Deemed dividend u/s.2(22)(e) - Addition credit balance - HELD THAT - In the present case, there is no personal benefit at all to the assessee. The AO himself accepts the fact that the funds were utilized during the course of business and therefore, this transaction at any point did not get out of the business circle at all. The provisions of section 2(22)(e) of the Act, is a deeming provision and should be construed strictly. It is an established fact that the said transaction took place during the course of business and there being no personal/individual benefit accrued to the assessee and hence section 2(22)(e) of the Act cannot be invoked. Had it been the case of the AO that the assessee had directly borrowed loans and advances from the company to his proprietorship concern, then the AO could have invoked the provisions of section 2(22)(e) of the Act. In this case, as rightly observed by the AO, the assessee has indirectly borrowed the funds of M/s. Infinity Jewellers and M/s. Mariyam Creations and that allegation of indirect benefit is only a formulative theory of circuitous transactions without there being any evidence to prove that these transactions are loans and advances giving benefit to the shareholder. Therefore, we are of the considered view that the AO as well as the CIT(A) were completely erred in coming to the conclusion that amount due in the books of M/s. AK Exports to M/s. Infinity Jewellers and M/s. Mariyam Creations is diversion of funds from LJM to the assessee and such transactions comes under the purview of deemed dividend u/s.2(22)(e) -at commercial transactions in the books of M/s. AK Exports due to M/s. Infinity Jewellers and M/s. Mariyam Creations cannot be considered as indirect borrowing from LJM to treat the same as deemed dividend u/s.2(22)(e) of the Act. Hence, we direct the ld.AO to delete the addition made towards deemed dividend u/s.2(22)(e) of the Act.- Decided in favour of assessee. Bogus LTCG - Disallowance of exemption claimed u/s.10(38) towards long term capital gain derived from transfer of equity shares of M/s. Mahavir Advanced Remedies Limited - Addition based on the investigation report by SEBI pertaining to certain cases based from Kolkatta wherein share prices rigged substantially over a period of time - HELD THAT - Merely on suspicion and surmises, this disallowance was made without any corroborative evidence. The AO failed to bring on record any evidence indicating bogus transactions. The essential requirements for a claim u/s. 10(38) are that; the income should arise from a sale of LTC Asset; that LTCA is an equity share in the company or unit of an equity oriented fund or unit of business trust; The transaction of sale entered comes on or after FA 2004 came into force; Such transaction is subject to Securities Transaction Tax. In this case, the genuineness of the transaction is not disputed by the lower authorities at all. All these transactions are through proper banking channels, Dematted and subjected to securities transaction tax. When the pre-requisite conditions imposed by the legislature stands complied in toto, the AO cannot proceed to treat the same as bogus and disallow the same solely based on the fact that the shares prices went up substantially. More importantly, said company Mahavir Remedies haven t been termed as SHELL Company which involved in unlawful trading of scripts. AO as well as the ld.CIT(A) were erred in holding that long term capital gain derived from transfer of equity shares of M/s. Mahavir Advanced Remedies Ltd., is bogus in nature, which is assessable as unexplained credit under the head income from other sources . Hence, we direct the AO to delete additions made towards long term capital gain derived from transfer of shares.- Decided in favour of assessee. Addition towards unexplained jewellery u/s.69 - HELD THAT - It is an admitted fact that there was a difference in diamond jewellery found during the course of search, for which no proper explanation was offered by the assessee. Although, the assessee explained that his wife has brought some diamonds at their wedding but failed to substantiate his claim with necessary evidences. Therefore, we are of the considered view that there is no error in the findings recorded by the AO and affirmed by the CIT(A) to confirm addition towards unexplained jewellery amounting to ₹ 10,17,000/-. Hence, we are inclined to uphold the findings of CIT(A) and reject the ground taken by the assessee.

Summary

Issues Involved:
1. Jurisdiction of the Assessing Officer.
2. Addition of ?20,00,00,000/- as undisclosed income.
3. Addition of ?76,19,00,000/- as deemed dividend u/s 2(22)(e).
4. Disallowance of exemption u/s 10(38) on long-term capital gains of ?16,24,68,072/-.
5. Addition of ?10,17,000/- towards excess jewelry found during the search.

Detailed Analysis:

1. Jurisdiction of the Assessing Officer:
The issue regarding the jurisdiction of the Assessing Officer was not explicitly discussed in the judgment. The primary focus was on the substantive additions made by the AO.

2. Addition of ?20,00,00,000/- as Undisclosed Income:
The assessee argued that the addition was unwarranted and that the statement recorded during the survey did not have evidentiary value. The Tribunal noted that the addition was based on a statement recorded under section 132(4) during the search. The Tribunal emphasized that statements recorded during the search are important but must be supported by corroborative evidence. The Tribunal found that the discrepancies noted during the search were not linked to the assessee in his individual capacity but to the company. The Tribunal concluded that the addition was based on suspicion and surmise without corroborative evidence and directed the AO to delete the addition of ?20 crores.

3. Addition of ?76,19,00,000/- as Deemed Dividend u/s 2(22)(e):
The AO treated the cumulative credit balance in the books of M/s. AK Exports due to M/s. Infinity Jewellers and M/s. Mariyam Creations as deemed dividend, alleging circuitous transactions to divert funds from LJM to the assessee. The Tribunal found that the transactions between the concerns were normal business transactions and not loans or advances. The Tribunal noted that the AO's conclusion was based on conjectures and surmises without proper appreciation of facts. The Tribunal also observed that the funds were utilized during the course of business and did not benefit the assessee personally. Therefore, the Tribunal directed the AO to delete the addition of ?76,19,00,000/-.

4. Disallowance of Exemption u/s 10(38) on Long-Term Capital Gains of ?16,24,68,072/-:
The AO disallowed the exemption on the grounds that the gains were from penny stocks and part of an organized racket of bogus long-term capital gains. The Tribunal found that the AO's conclusion was based on suspicion and surmise without any specific evidence linking the assessee to the alleged scam. The Tribunal noted that the transactions were conducted through proper banking channels and demat accounts. The Tribunal emphasized that the AO failed to provide any specific evidence to controvert the assessee's claim. Therefore, the Tribunal directed the AO to delete the addition of ?16,24,68,072/-.

5. Addition of ?10,17,000/- Towards Excess Jewelry Found During the Search:
The AO added the value of excess diamonds found during the search as unexplained investment. The Tribunal noted that the assessee failed to substantiate the claim that the diamonds were brought by his wife at the time of marriage. The Tribunal upheld the AO's addition as the assessee did not provide any proper explanation or evidence. Therefore, the Tribunal confirmed the addition of ?10,17,000/-.

Conclusion:
The Tribunal partly allowed the appeal filed by the assessee, directing the deletion of additions towards undisclosed income of ?20 crores, deemed dividend of ?76,19,00,000/-, and disallowance of exemption on long-term capital gains of ?16,24,68,072/-. However, the Tribunal upheld the addition of ?10,17,000/- towards excess jewelry found during the search.