2022 (6) TMI 744 - AT - Income Tax

Bogus LTCG - disallowance u/s 10(38) - Penny stock purchases - unexplained cash credit u/s 68 - HELD THAT - AO has not doubted the purchase of shares were through banking channels. While making the additions, AO has not brought any material how the assessee has brought its own unaccounted money for the acquisition of the shares specially when the purchase of shares was not doubted and shares have been sold on Stock Exchange. AO has not brought on record statement of any persons through whom assessee s own unaccounted money has been brought in. As stated above, the appellant has held the shares for over 3 years and it would be incorrect to treat sale of shares as bogus merely on the basis of suspicion and on account of fact that a substantial quantum of capital gains has been made by the assessee. In the present case, no material has been brought on record to suggest that purchase and sale of shares were bogus. Assessing Officer has not brought any material to support his finding that there has been collusion or connivance between the broker and the assessee for the introduction of his own unaccounted money. In the present case, despite the assessee s specific request, no opportunity of cross examination was provided to the assessee on the basis of whose statements reliance has been placed to hold that the sale of shares was sham / bogus. - Decided in favour of assessee.

Issues Involved:

1. Disallowance under section 10(38) of the I.T. Act and deletion of addition under section 68 of the I.T. Act.
2. Allegation of bogus long-term capital gains from penny stock transactions.
3. Validity of the Assessing Officer's order under section 143(3) of the Act.
4. Organized tax evasion scam involving penny stocks.

Issue-wise Detailed Analysis:

1. Disallowance under section 10(38) and deletion of addition under section 68:

The Revenue contended that the assessee's claim of long-term capital gains exemption under section 10(38) was erroneous, arguing that the gains were bogus and the transactions were non-genuine. The Assessing Officer (AO) added the sale proceeds of ?18,54,800 as unexplained cash credit under section 68, citing findings from the Directorate of Investigation that the company involved, M/s Sunrise Asian Ltd., was a penny stock company with artificially inflated share prices.

2. Allegation of bogus long-term capital gains from penny stock transactions:

The AO argued that the assessee engaged in sham transactions to evade taxes, using bogus accommodation entries to claim fictitious long-term capital gains. The modus operandi involved purchasing physical shares at low prices, artificially inflating their value through circular transactions, and then selling them at a peak to book fictitious gains. The AO relied on the principle of preponderance of human probabilities, as established by the Supreme Court in Sumati Dayal v. CIT and Durga Prasad More, to declare the transactions non-genuine.

3. Validity of the Assessing Officer's order under section 143(3):

The CIT(A) overturned the AO's decision, stating that the assessee had provided complete documentation, including bank statements and demat account entries, which could not be manipulated. The CIT(A) noted that the AO's reliance on the investigation report and price variations was insufficient without cross-examination of the persons whose statements were used against the assessee. The CIT(A) also emphasized that the shares were purchased before the merger and held for over 12 months, qualifying for long-term capital gains.

4. Organized tax evasion scam involving penny stocks:

The Revenue argued that the case involved an organized tax evasion scam, as indicated by a CBDT Circular exempting such cases from monetary limits for filing appeals. However, the CIT(A) and the Tribunal found no material evidence to support the AO's claims of collusion or unaccounted money being introduced through the transactions. The Tribunal referenced multiple judgments (e.g., PCIT vs. Smt. Krishna Devi, Achal Gupta vs. ITO, Dipesh Ramesh Vardhan vs. DCIT) to support the view that mere suspicion or third-party statements without cross-examination were insufficient to declare the transactions bogus.

Conclusion:

The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal. It concluded that the AO failed to provide concrete evidence of bogus transactions or collusion, and the assessee had adequately demonstrated the genuineness of the transactions through documentary evidence. The Tribunal reiterated that suspicion alone could not override documented proof, and the principles of natural justice required that the assessee be given an opportunity for cross-examination, which was not provided. As a result, the addition of ?18,54,800 under section 68 was deleted, and the assessee's claim for exemption under section 10(38) was allowed.

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