2021 (6) TMI 613 - AT - Income Tax

Unexplained cash credit u/s 68 - exemption claimed u/s 10(38) with respect to Long-Term Capital Gains (LTCG) earned on sale of certain shares was denied - HELD THAT - Additions are not sustainable in the eyes of law. The assessee had discharged the primary onus of establishing the genuineness of the transactions whereas the onus as casted upon revenue to corroborate the impugned additions by controverting the documentary evidences furnished by the assessee and by bringing on record, any cogent material to sustain those additions, could not be discharged by the revenue. The whole basis of making additions is third-party statement and no opportunity of cross-examination has been provided to the assessee to confront these parties. As against this, the assessee s position that that the transactions were genuine and duly supported by various documentary evidences, could not be disturbed by the revenue. As going by the factual matrix and respectfully following the binding judicial precedents as enumerated in the order, the additions made by Ld. AO and confirmed by CIT(A), are not sustainable in the eyes of law. Therefore, we are inclined to delete the same. Addition of estimated commission also stands deleted. - Decided in favour of assessee.

Summary

Issues Involved:

1. Denial of exemption under Section 10(38) for Long-Term Capital Gains (LTCG) on sale of shares.
2. Addition of sale proceeds as unexplained cash credit under Section 68.
3. Estimated addition on account of alleged commission expenses at 5%.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 10(38) for LTCG:

The assessee, a resident HUF, was assessed under Section 143(3) and denied exemption under Section 10(38) for LTCG earned on the sale of shares of M/s Moryo Industries Ltd. (MIL). The gains were added to the assessee’s income as unexplained cash credit under Section 68, and an estimated commission expense of ?38.47 Lacs was also added under Section 69C. The assessee claimed to have purchased shares on 27/10/2012 for ?50 Lacs and sold them between January and March 2014, yielding LTCG. The assessee provided documentary evidence, including share allotment advice, bank statements, contract notes, and demat account details, to substantiate the transactions.

2. Addition of Sale Proceeds as Unexplained Cash Credit under Section 68:

The Assessing Officer (AO) alleged that the gains were pre-arranged and bogus, based on an investigation by the Kolkata investigation wing into penny stocks. The AO claimed that the share prices were artificially rigged through circular trading by a cartel of brokers. Statements from various operators and brokers indicated that the scrip of MIL was used to provide accommodation entries for LTCG. Despite the assessee's request for cross-examination of these individuals, it was not provided. The AO concluded that the transactions were non-genuine and added the sale proceeds as unexplained cash credit under Section 68.

3. Estimated Addition on Account of Alleged Commission Expenses:

The AO also made an estimated addition of 5% as commission expenses related to the transactions. The CIT(A) upheld the AO's findings, stating that the transactions were make-believe and pre-meditated to impart a color of genuineness. The CIT(A) rejected the judicial pronouncements relied upon by the assessee and noted that SEBI's proceedings against MIL were ongoing.

Findings and Adjudication:

The Tribunal found that the assessee had furnished all requisite documentary evidence to substantiate the transactions, including contract notes, bank statements, and demat account details. The Tribunal noted that the transactions were conducted through a recognized stock exchange in an online mechanism, where the identity of the buyer was not known. The Tribunal held that the onus was on the revenue to disprove the assessee's claim and establish with cogent evidence that the transactions were non-genuine. However, the revenue failed to provide any direct evidence of the assessee's involvement in manipulating the share prices.

The Tribunal observed that the AO's findings were based on general statements from third parties, which were not corroborated by any material evidence. The Tribunal emphasized that no effective investigation was carried out by the AO to disprove the assessee's claim. The Tribunal also noted that SEBI had revoked its interim order against the assessee, finding no adverse evidence of the assessee's involvement in price manipulation.

The Tribunal concluded that the addition under Section 68 was not sustainable, as the sale proceeds were received through banking channels and the transactions were genuine. The Tribunal also held that the estimated commission expense was not warranted. The Tribunal relied on various judicial precedents to support its findings, including decisions from the Hon'ble Bombay High Court, Gujarat High Court, Rajasthan High Court, and Delhi High Court.

Conclusion:

The Tribunal allowed the appeal, deleting the additions made by the AO and confirmed by the CIT(A). The Tribunal held that the assessee had discharged the primary onus of establishing the genuineness of the transactions, and the revenue failed to provide any cogent evidence to sustain the additions. The appeal was allowed in favor of the assessee.