2021 (6) TMI 923 - AT - Income Tax

Bogus STCG - Disallowance of taxable as Short Term Capital Gain from sale of equity shares chargeable to tax U/s. 111A of the Act And benefit u/s. 10(38) - HELD THAT - Contract note of Eden Financial Services are issued in April, 2009 and the payments have been made almost after 21 months and that too at the time when the share have been sold by the assessee. Surprisingly payment for the purchase has been made after completing 3 transactions of sale of the equity shares of VIP Industries Limited. So one cannot deny that there is some flow in this transaction. However the fact remains that the VIP Industries Limited is a listed company and as on date also it is regularly traded and as submitted by the Ld. Counsel for the assessee the current price are almost four times of the price the assessee received at the time of sale. So sale transaction is far from any dispute as it has been entered through the registered broker on recognized stock exchange and consideration received. As far as purchase is concerned there is a purchase on record and 9000 equity shares have come into the Demat account of the assessee and consideration has been paid. So one cannot doubt the transaction of purchase and sales but doubt can be raised about the period of holding of the equity shares.. So in this case the seller of the shares i.e. Eden Financial Services is itself in dispute having no authority to trade but the moment the share are transferred to the Demat account then from that moment there is hardly any possibility to question the genuineness of purchase unless until anything contrary had been unearthed by the revenue authorities. Since the genuineness of sale is not doubted, the company of which the equity shares are sold i.e. VIP Industries Limited is not a penny stock company and sale effected through registered broker, we are satisfied with the genuineness of sale transactions. As regards purchase which is made by the payment through account payee cheque, there is a corresponding receipt of 9000 equity shares of VIP Industries Limited in the Demat account of the assessee. Had the identity of the broker has not been in doubt then this transaction of earning LTCG would be covered under the provision of Section 10(38) of the Act but since the identity of broker is in dispute the alleged transaction needs to be examined with the period of holding of equity shares in the Demat account of the assessee. As the identity of seller is in doubt and 9000 equity shares are held in the Demat account for less than 12 months, the net gain deserves to be taxed as Short Term Capital Gain. We find that similar type of issue came up before this Tribunal in the case of Smt. Annapurna Maheshwari V/s. ACIT 2018 (11) TMI 131 - ITAT INDORE Thus issue of instant appeal hold that the assessee had earned capital gain after making a genuine sales and claiming cost of acquisition of shares by payment through banking channel and transaction of purchase and sale effected through Demat account. Since the source of purchase has been disputed as the registration of broker was cancelled much before the transaction of purchase made by the assessee, period of holding of equity share is reckoned from the date on which the 9000 equity shares of VIP Industries Limited were credited to the Demat account of the assessee up to the date when the shares were sold and equity shares sold were debited to the Demat account. This period in the instant case is less than 12 months, we therefore hold that the capital gain is Short Term Capital Gain liable to be taxed u/s. 111A of the Act.

Issues Involved:
1. Disallowance of exemption under Section 10(38) of the Income Tax Act.
2. Reliance on information from Financial Investigation Unit and lack of further investigation by the Assessing Officer (A.O.).
3. Genuineness of transactions and the role of a derecognized entity.
4. Bona fide belief of the appellant regarding the recognition status of the entity.
5. Adherence to the principle of natural justice and opportunity for cross-examination.
6. Reliance on judicial precedents and their applicability to the case.

Issue-wise Detailed Analysis:

1. Disallowance of Exemption under Section 10(38):
The appellant claimed an exemption under Section 10(38) for Long Term Capital Gain (LTCG) amounting to ?48,85,547/- from the sale of shares of VIP Industries Ltd. The A.O. disallowed this exemption, citing that the purchase transaction was fraudulent as it was done through a derecognized entity, Eden Financial Services, whose registration was canceled by SEBI. The A.O. concluded that the profit from the sale of shares was obtained fraudulently to enjoy the benefit of the exemption under Section 10(38).

2. Reliance on Information from Financial Investigation Unit:
The A.O. based the addition on information received from the Financial Investigation Unit, New Delhi, and subsequent investigations by the DDIT (Investigation), Indore. The appellant argued that no specific inquiry related to her transactions was conducted by the A.O., and the addition was made solely based on the information and investigation by DDIT without confronting the appellant with the statements and material used against her.

3. Genuineness of Transactions and Role of Derecognized Entity:
The appellant contended that the transactions were genuine, conducted through banking channels, and the shares were held in a Demat account. The A.O. doubted the purchase transaction due to the cancellation of Eden Financial Services' registration. The tribunal noted that while there was a suspicion regarding the timing of the payment for the purchase, the shares were indeed transferred to the appellant's Demat account and sold through a registered broker on a recognized stock exchange.

4. Bona Fide Belief Regarding Recognition Status:
The appellant claimed to be unaware of the cancellation of Eden Financial Services' registration and argued that this alone should not render the entire transaction bogus. The tribunal observed that the appellant had made the payment through an account payee cheque and held the shares in a Demat account, indicating a genuine transaction.

5. Adherence to Principle of Natural Justice:
The appellant argued that the principle of natural justice was not followed as she was not provided an opportunity for cross-examination during the assessment proceedings. The tribunal acknowledged this contention but focused more on the documentary evidence presented by the appellant to substantiate the genuineness of the transactions.

6. Reliance on Judicial Precedents:
The appellant cited several judicial precedents to support her claim of genuine transactions. The tribunal referred to similar cases where transactions were held genuine despite doubts about the brokers involved. The tribunal emphasized that merely because the broker's registration was canceled, it does not automatically render the transactions ingenuine, especially when the shares were transferred to the Demat account, and the sale was conducted through recognized channels.

Conclusion:
The tribunal concluded that the sale transactions were genuine and conducted through recognized stock exchanges. However, due to the disputed identity of the broker and the timing of the payment for the purchase, the tribunal treated the gain as Short Term Capital Gain instead of Long Term Capital Gain. The appellant was granted partial relief, and the capital gain of ?48,85,547/- was taxed as Short Term Capital Gain under Section 111A of the Act.

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