2022 (5) TMI 1000 - AT - Income Tax

Addition u/s 68 - Penny stock purchases - addition on account of Long Term Capital Gains (LTCG) which the assessee derived from sale of scrip - exemption u/s 10(38) denied - HELD THAT - D.R. except relying heavily on the orders of the lower authorities could not bring to our attention any material to show that the documents placed before us were sham, bogus or there was any factual infirmity therein. The Ld. D.R. also could not controvert the Ld. A.R s submissions that the disallowance was made solely on the basis of the report of the Investigation Wing in the shares of M/s GCM. D.R. could not bring to our attention any material or evidence from which one could infer that the transactions in shares of M/s GCM Securities Limited were either manipulated or sham or that any enquiry was conducted either by the Investigation Wing or by the AO in respect of assessee s transactions in shares of M/s GCM Securities Limited. We may gainfully refer to the decision in the case of CIT Vs Odeon Builders Pvt Ltd 2014 (9) TMI 100 - ITAT DELHI wherein the Hon ble Court upheld the deletion of the disallowance in this case is based on third party information gathered by the Investigation Wing of the Department, which have not been independently subjected to further verification by the AO. In the present case we find that the entire addition is on the basis of some investigation report, the relevant portions of which is also not cited in the show cause or the assessment order, there is nothing against the assessee and no inquiry whatsoever has been done by the AO or the Ld CIT (A). In such circumstances the assessee having discharged her onus and nothing adverse being found against her, the addition cannot be sustained. We hold that both the lower authorities were not justified in not allowing the appellant s claim for exemption u/s 10(38) in respect of the profit derived by the appellant on sale of 120,000 shares of M/s GCM Securities Limited. We accordingly set aside the order of Ld. CIT(A) and direct the AO not to treat the long term capital gain as bogus and delete the consequential addition and the AO is directed to allow the exemption u/s 10(38) of the Act as claimed by the assessee. - Decided in favour of assessee.

Issues Involved:
1. Addition on account of Long Term Capital Gains (LTCG) from sale of shares.
2. Validity of the assessment and show cause notice.
3. Genuineness of transactions and supporting documents.
4. Burden of proof under Section 68 of the Income Tax Act.
5. Reliance on investigation reports and absence of direct evidence.

Issue-wise Detailed Analysis:

1. Addition on account of Long Term Capital Gains (LTCG) from sale of shares:
The assessee's main grievance was against the addition of Rs. 77,78,476/- as LTCG derived from the sale of shares of M/s GCM Securities Ltd., which the AO considered as bogus. The assessee had declared a total income of Rs. 4,83,980/- for AY 2015-16, and the case was selected for scrutiny. The AO treated the scrip as a 'penny stock' used for generating bogus LTCG and added the amount as unexplained cash credit under Section 68 of the Income Tax Act. The CIT(A) confirmed this addition, leading the assessee to appeal before the ITAT.

2. Validity of the assessment and show cause notice:
The Tribunal noted that the AO's show cause notice was vague and lacked specific information or tangible material linking the assessee to any bogus transactions. The notice merely reproduced a summary of findings from the investigation wing without any direct evidence against the assessee. The Tribunal emphasized that a show cause notice should be specific, clear on facts and legal provisions, and supported by relevant documents, none of which were present in this case.

3. Genuineness of transactions and supporting documents:
The assessee provided substantial documentary evidence to support the genuineness of the transactions, including IPO application form, bank statements, demat statements, contract notes, and details of share transactions. The Tribunal found that these documents were not proven to be false or fabricated. The transactions were conducted through recognized stock exchanges, and payments were made through banking channels, with securities transaction tax (STT) paid on the sale of shares.

4. Burden of proof under Section 68 of the Income Tax Act:
The Tribunal highlighted that under Section 68, the burden of proof lies on the taxpayer to explain the nature and source of any credit. The assessee had provided sufficient evidence to discharge this burden. The AO, however, did not produce any evidence to prove that unaccounted money was involved or that the transactions were sham. The Tribunal reiterated that suspicion or conjecture cannot replace concrete evidence.

5. Reliance on investigation reports and absence of direct evidence:
The Tribunal criticized the AO's reliance on the investigation wing's report without conducting any independent inquiry or verification of the assessee's transactions. The AO did not bring any direct evidence linking the assessee to any bogus transactions. The Tribunal referred to several judicial precedents emphasizing that additions cannot be made based on suspicion or general reports without specific evidence against the assessee.

Conclusion:
The Tribunal concluded that the AO and CIT(A) failed to provide any concrete evidence to prove the transactions were bogus. The assessee had discharged her onus by providing all necessary documents, and the AO did not conduct any meaningful inquiry. The Tribunal directed the AO to allow the exemption under Section 10(38) of the Income Tax Act and delete the addition of Rs. 77,78,476/-. The appeal of the assessee was allowed.

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