2022 (5) TMI 1227 - AT - Income Tax

Addition made under section 68 - bogus long term capital gains claimed as exempt by the assessee - HELD THAT - The sheer denial by the assessee, at the time of recording of his statement under section 131 about any of the information in respect of the transaction also does not provide any basis to allow the claim of exemption under section 10(38) of the Act, in view of the details furnished by various independent bodies about the conduct of the company in whose shares the assessee had transacted and earned long term capital gains. Further, submission of the assessee before lower authorities that the transaction was made through RTGS on the Recognised Stock Exchange also does not prove that the company, whose shares were purchased by the assessee and later on sold, was not engaged in providing bogus long term capital gains to its beneficiaries and its shares were not penny stocks. In view of the above, we find no infirmity in the order passed by the learned CIT(A), inter-alia, upholding the addition made by the Assessing Officer under section 68 of the Act in respect of the long term capital gains claimed as exempt by the assessee and also the commission paid by the assessee in respect of the said transaction. As a result, ground Nos. 3 and 4 raised in assessee s appeal are dismissed. Deemed dividend under section 2(22)(e) - assessee claimed that advances were received as business advances, however, the assessee failed to produce any documentary evidence in support of this submission - HELD THAT - As is evident from the fact as available on record, it is not in dispute that the assessee is holding 25.34% of shares in M/s A.R. International Private Limited from which the assessee has received advance of Rs. 28,53,251. Further, it has not been claimed that the said company is a company in which the public is substantially interested. Thus, the basic conditions of section 2(22)(e) of the Act are satisfied in the present case. Further, such a payment for the purpose of section 2(22)(e) of the Act should be to the extent to which the company possesses accumulated profits. As noted by the Assessing Officer accumulated profit of the company was Rs. 34,92,721. Thus, in view of the above, we do not find any infirmity in the order passed by the learned CIT(A) affirming the addition on account of deemed dividend. As a result, ground No. 5 raised in assessee s appeal is dismissed.

Summary

Issues Involved:
1. Addition under section 68 of the Income Tax Act on account of long-term capital gains.
2. Addition on account of deemed dividend under section 2(22)(e) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition under section 68 of the Income Tax Act on account of long-term capital gains:

The first issue pertains to the addition made under section 68 of the Income Tax Act, 1961, regarding long-term capital gains claimed as exempt by the assessee. The assessee, engaged in the business of trading in paper, filed a return declaring a total income of Rs. 10,57,900. During the assessment proceedings, it was observed that the assessee sold 1,27,000 shares of Kailash Auto Finance Limited for a trade value of Rs. 50,11,000 and claimed long-term capital gains of Rs. 48,59,287 as exempt under section 10(38) of the Act.

To verify the genuineness of the transaction, notices under section 133(6) were issued to SEBI, ROC, and BSE, Mumbai. SEBI's response indicated that Kailash Auto Finance Limited was barred from trading and penalized for artificially rigging prices to provide bogus long-term capital gains. The Assessing Officer, referring to investigations by the Investigation Wing, Kolkata, concluded that the financial transactions were sham and used as a device to evade tax. Consequently, the exemption claimed under section 10(38) was disallowed, and the gains were added as unexplained cash credit under section 68. The commission paid for the transaction was also disallowed.

The assessee appealed, arguing that the transactions were genuine and conducted through recognized channels. However, the CIT(A) dismissed the appeal based on SEBI and Directorate of Investigation reports. The Tribunal upheld this decision, noting the lack of correlation between share price movements and the Sensex, and the evidence from independent authorities confirming the bogus nature of the transactions.

2. Addition on account of deemed dividend under section 2(22)(e) of the Income Tax Act:

The second issue involves the addition made on account of deemed dividend under section 2(22)(e) of the Income Tax Act. During the assessment, it was observed that the assessee received an advance of Rs. 28,53,251 from M/s A.R. International Private Limited, where the assessee held a 25.34% stake. The Assessing Officer treated this advance as deemed dividend, as the conditions under section 2(22)(e) were met, including the company possessing accumulated profits of Rs. 34,92,721.

The assessee claimed that the advance was for business purposes but failed to provide documentary evidence. The CIT(A) dismissed the appeal, and the Tribunal upheld this decision, confirming that the conditions for deemed dividend were satisfied.

Conclusion:

The Tribunal dismissed the appeal, affirming the additions made under sections 68 and 2(22)(e) of the Income Tax Act. The decisions were based on substantial evidence and investigations confirming the non-genuine nature of the transactions and the fulfillment of conditions for deemed dividend.