2022 (6) TMI 1236 - AT - Income Tax

Bogus LTCG - genuineness of transaction not proved - exemption under section 10(38) in respect of capital gain arising from sale of shares denied - HELD THAT - In the case of Smt. M.K. Rajeshwari 2018 (10) TMI 1649 - ITAT BANGALORE Tribunal held that where assessee claimed exemption under section 10(38) in respect of capital gain arising from sale of shares, in view of fact that financial worth of said company was meagre and, moreover, there was abnormal rise in price of shares, it could be concluded that assessee introduced her own unaccounted money in garb of long term capital gain and, thus, claim raised by her was to be rejected. In the present case Assessing Officer held amount so received as unexplained cash credit under section 68 and made addition on ground that assessee failed to discharge burden of proof and explain nature and source of transaction and huge profit in all shares traded by assessee against human probability. AO held that it was found that assessee failed to justify manifold increase in prices of shares despite weak financials of companies. Investigation carried out by Department had brought facts on record that share prices had been manipulated artificially, purchased by a set of accommodation entry provider companies controlled by cartel of brokers, entry operator, etc. Moreover, fact that prices of all shares purchased by assessee went up, that too without any corresponding profit or prospects of company, and not even in single case price of share came down, was against human probabilities and impugned year was an isolated year of such profits with no such profits made in earlier or subsequent years. In such circumstances, the Tribunal held that assessee failed to prove genuineness of transaction and long-term capital gain on sale of shares by assessee was an arranged affair to convert its own unaccounted money and thus, exemption claimed under section 10(38) on sale of shares had rightly been disallowed. Thus we are of the considered view that the Ld. CIT(Appeals) has not erred in facts and in law in confirming the addition made in respect of LTCG claimed as exempt in the instant facts. - Decided against assessee.

Issues Involved:
1. Ex-parte order passed by CIT(A).
2. Confirmation of addition of ?51,62,206 as bogus LTCG.
3. Sham transaction involving shares of Kailash Auto Finance Ltd.
4. Non-appearance of the assessee before CIT(A) and ITAT.
5. Judicial precedents supporting the disallowance of LTCG exemption.

Detailed Analysis:

1. Ex-parte Order Passed by CIT(A):
The assessee contended that the CIT(A) erred in passing an ex-parte order without the appearance of the Authorized Representative (AR) despite several notices. The CIT(A) proceeded with the order based on the available records due to the assessee's non-cooperation.

2. Confirmation of Addition of ?51,62,206 as Bogus LTCG:
The assessee purchased 1,50,000 shares of Kailash Auto Finance Ltd at ?2 per share and sold them within 18 months at a total sale value of ?51,62,206, claiming exemption on the LTCG. The AO disallowed the exemption, treating the transaction as bogus, citing the unusual 17-fold increase in share value and the suspension of share transactions of the company as a surveillance measure.

3. Sham Transaction Involving Shares of Kailash Auto Finance Ltd:
The AO and CIT(A) concluded that the transaction was a sham, designed to convert unaccounted money into accounted money under the guise of LTCG. The CIT(A) observed that the appellant engaged in a modus operandi involving penny stocks to claim bogus LTCG, highlighting the abnormal price increase despite the company's poor credentials and the rigging of share prices.

4. Non-appearance of the Assessee Before CIT(A) and ITAT:
Despite multiple opportunities and notices, the assessee failed to appear before the CIT(A) and ITAT. The ITAT noted the assessee's non-cooperation and proceeded to decide the appeal based on the merits and information available on record.

5. Judicial Precedents Supporting the Disallowance of LTCG Exemption:
The ITAT referenced several judicial precedents where courts and tribunals disallowed LTCG exemptions on similar grounds:
- PCIT v. Swati Bajaj [2022] 139 taxmann.com 352 (Calcutta): The Kolkata High Court held that unreasonable price rises in penny stocks need to be substantiated by the assessee.
- Smt. M.K. Rajeshwari v. ITO [2018] 99 taxmann.com 339 (Bangalore - Trib.): The Tribunal concluded that abnormal price rises in shares with meager financial worth indicated the introduction of unaccounted money.
- Sanjay Bimalchand Jain v. PCIT [2018] 89 taxmann.com 196 (Bombay): The Bombay High Court held that unexplained price jumps in penny stocks indicated an attempt to hedge undisclosed income.
- Satish Kishore v. ITO (2019) 110 Taxman.com 307 (Delhi Tribunal): The Tribunal held that the assessee failed to prove the genuineness of transactions involving penny stocks, leading to the disallowance of LTCG exemption.

Conclusion:
The ITAT upheld the CIT(A)'s decision, confirming the addition of ?51,62,206 as bogus LTCG and dismissing the assessee's appeal. The judgment emphasized the assessee's failure to prove the genuineness of the transactions and the circumstantial evidence pointing to a sham transaction. The ITAT relied on judicial precedents to support its decision, highlighting the improbability of such high returns from penny stocks without any substantial company credentials.

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