2021 (7) TMI 49 - AT - Income Tax

Bogus LTCG - Addition u/s 68 - exemption u/s 10(38) denied - denial of LTCG computed on sale of shares, treating the same as penny stocks - HELD THAT - Similar issue came up before the coordinate bench of this Tribunal (wherein both the Members are party) in the case of shri Tarun Kumar Goel and Shri Arun Kumar Goel 2021 (4) TMI 1014 - ITAT HYDERABAD wherein the issue has been decided in favour of the assessee. Further, the Hon ble Delhi High Court has decided similar issue in favour of the assessee in the case of Pr. CIT Vs. Smt. Krishna Devi 2021 (1) TMI 1008 - DELHI HIGH COURT wherein held the lower tax authorities are not able to sustain the addition without any cogent material on record - we direct the AO to allow the assessee s claim of exemption u/s 10(38) - Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance of exemption claimed under Section 10(38) of the Income Tax Act.
2. Treatment of sale proceeds of shares as unexplained cash credits under Section 68.
3. Treatment of payment to broker as unexplained expenditure under Section 69C.
4. Validity and genuineness of the share transactions.
5. Applicability of SEBI orders on the transactions.
6. Nexus between the assessee and the purchaser of shares.
7. Relevance of the Income Declaration Scheme (IDS) and lifting of SEBI ban on the scrip.

Issue-wise Detailed Analysis:

1. Disallowance of Exemption Claimed Under Section 10(38):

The assessee, engaged in commodities trading, filed a return declaring an income of ?36,16,340/-. The AO observed that the assessee claimed Long Term Capital Gains (LTCG) of ?37,05,325/- as exempt under Section 10(38). The AO disallowed this claim, treating the shares as penny stocks used to convert unaccounted money into tax-exempt income. The AO relied on a statement from Mr. Jai Kishan Poddar, who explained the modus operandi of rigging penny stock prices to provide accommodation entries for LTCG. The CIT(A) upheld this disallowance, leading to the appeal before ITAT.

2. Treatment of Sale Proceeds of Shares as Unexplained Cash Credits Under Section 68:

The AO treated the sale proceeds of ?37,05,325/- as unexplained cash credits under Section 68, arguing that the assessee used penny stocks to convert unaccounted money into tax-exempt income. The assessee contended that the transactions were genuine, conducted through recognized stock exchanges, and all payments were made through banking channels. The ITAT, referencing a similar case (Pr. CIT Vs. Smt. Krishna Devi), found that the AO's conclusions were unsupported by material evidence and based on assumptions.

3. Treatment of Payment to Broker as Unexplained Expenditure Under Section 69C:

The AO disallowed ?1,14,930/- paid to the broker for arranging the transactions, treating it as unexplained expenditure under Section 69C. The ITAT did not specifically address this issue separately but implied that the disallowance was part of the broader context of the AO's unsupported conclusions about the transactions being sham.

4. Validity and Genuineness of the Share Transactions:

The assessee argued that the transactions were genuine, supported by documentary evidence such as demat account statements, bank statements, and transaction records. The ITAT noted that the AO failed to provide concrete evidence of any agreement to convert unaccounted money. The transactions were conducted through recognized stock exchanges, and the shares were duly dematerialized and sold through banking channels.

5. Applicability of SEBI Orders on the Transactions:

The AO based part of his disallowance on SEBI's order against the scrip "Kailash Auto Finance Ltd." The assessee pointed out that SEBI later lifted the ban on this scrip, indicating its genuineness. The ITAT found this argument persuasive, noting that the lifting of the ban undermined the AO's reliance on the SEBI order.

6. Nexus Between the Assessee and the Purchaser of Shares:

The assessee contended that there was no nexus between him and the party who purchased the shares, and no evidence suggested compensatory payments. The ITAT agreed, stating that the AO did not provide any material evidence to support the claim of a pre-arranged transaction or nexus.

7. Relevance of the Income Declaration Scheme (IDS) and Lifting of SEBI Ban on the Scrip:

The assessee highlighted that he did not declare any income under the IDS related to the scrip "Kailash Auto Finance Ltd." and that SEBI had lifted the ban on this scrip. The ITAT found these points relevant, indicating that the transactions were genuine and not part of any scheme to convert unaccounted money.

Conclusion:

The ITAT concluded that the AO's disallowance of the exemption under Section 10(38) was unsupported by concrete evidence and based on assumptions. The ITAT directed the AO to allow the assessee's claim of exemption for ?37,05,325/- under Section 10(38). The appeal of the assessee was allowed.