2021 (7) TMI 943 - AT - Income Tax

Bogus LTCG - Addition u/s 68 - denial of claim of exemption u/s 10(38) - HELD THAT - Tribunal in the case of Shivnarayan Sharma others 2021 (7) TMI 210 - ITAT INODRE is squarely applicable on the common issues raised in the instant appeals and thus taking consistent view and respectfully following decisions and judgments referred hereinabove, we set aside the finding of CIT(A) and direct the AO to allow claim of the exemption of u/s 10(38) of the Act for Long Term Capital Gain earned from sale of listed equity shares of Sunrise Asian Ltd. which have been effected through recognized stock exchange, after making payment of Security Transaction Tax (STT) and holding the equity shares for more than 12 months. Thus, the addition in the case of Smt. Manorama Devi Sharma and in the case of Shri Pratap Bajaj stands deleted.

Issues Involved:
1. Arbitrary and erroneous order by CIT(A).
2. Incorrect application of Section 68 of the Income Tax Act.
3. Classification of shares as "Penny Stock".
4. Denial of cross-examination opportunity.
5. Incorrect analysis of financials and share prices.
6. Non-conduct of inquiries by the AO.
7. Alleged collusion with brokers.
8. Alleged cash purchases.
9. Business activity of the company.
10. Ignoring merger approved by Bombay High Court.
11. Ignoring judicial precedents.
12. Addition under Section 69C without evidence.

Issue-wise Detailed Analysis:

1. Arbitrary and Erroneous Order by CIT(A):
The appellants contested that the order passed by CIT(A) was arbitrary, bad in law, and on facts. The Tribunal found that the CIT(A) had not provided sufficient reasoning or evidence to support the conclusions drawn in the assessment order.

2. Incorrect Application of Section 68:
The appellants argued that Section 68, which deals with unexplained cash credits, was incorrectly applied to their transactions. The Tribunal agreed, noting that the transactions were supported by documentary evidence and were conducted through recognized stock exchanges, thus not falling under the purview of Section 68.

3. Classification of Shares as "Penny Stock":
The CIT(A) classified the shares of Sunrise Asian Limited (SAL) as "Penny Stock," a term not defined under the Income Tax Act. The Tribunal found that this classification was unjust and unsupported by the financial performance of SAL, which had been through a merger approved by the Bombay High Court.

4. Denial of Cross-Examination Opportunity:
The appellants were denied the opportunity to cross-examine individuals whose statements were used against them. The Tribunal emphasized the importance of cross-examination in ensuring natural justice and found that the denial of this opportunity was a serious flaw that invalidated the assessment order.

5. Incorrect Analysis of Financials and Share Prices:
The CIT(A) based the disallowance on an analysis that the spike in share prices was not justified by the company's financials. The Tribunal noted that stock prices can be influenced by various factors and that the transactions were conducted through proper channels, making the analysis by CIT(A) insufficient to disallow the claim.

6. Non-Conduct of Inquiries by the AO:
The appellants contended that the AO did not conduct any inquiries during the assessment proceedings. The Tribunal found that the AO's conclusions were based on assumptions and lacked proper inquiry, thus making the disallowance unjust.

7. Alleged Collusion with Brokers:
The CIT(A) alleged that the appellants colluded with brokers to earn LTCG. The Tribunal found no evidence to support this allegation and noted that the transactions were conducted through recognized stock exchanges and proper banking channels.

8. Alleged Cash Purchases:
The CIT(A) mentioned that the purchases were made in cash. The Tribunal found that the transactions were conducted through banking channels, thus invalidating the claim of cash purchases.

9. Business Activity of the Company:
The CIT(A) mentioned that the company in question had no business or turnover. The Tribunal found this claim to be unsupported by evidence, especially given the merger approved by the Bombay High Court.

10. Ignoring Merger Approved by Bombay High Court:
The CIT(A) ignored the merger of Conart Traders Ltd. with SAL, approved by the Bombay High Court. The Tribunal found that this merger was a significant factor that should have been considered in the assessment.

11. Ignoring Judicial Precedents:
The CIT(A) ignored various judicial precedents cited by the appellants. The Tribunal emphasized the importance of following judicial precedents and found that the CIT(A) had erred in not considering them.

12. Addition under Section 69C Without Evidence:
The CIT(A) made an addition under Section 69C, which deals with unexplained expenditure, without any evidence. The Tribunal found this addition to be unjust and unsupported by any material on record.

Conclusion:
The Tribunal set aside the findings of the CIT(A) and directed the AO to allow the claim of exemption under Section 10(38) for the Long Term Capital Gain earned from the sale of listed equity shares of Sunrise Asian Limited. The appeals of the appellants were allowed, and the additions made by the CIT(A) were deleted.

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