2022 (7) TMI 174 - AT - Income Tax

Bogus LTCG - exemption u/s.10(38) denied - as per AO assessee failed to prove the genuineness of the transactions except for the document produced - CIT (A) upholding the action of the AO in treating the long term capital gain as income from other sources and applying the provisions of section 115BBE - HELD THAT - It is an admitted fact that the assessee in the original return of income had claimed the exemption u/s 10(38) on account of sale of 70000 shares of Jackson Investment Ltd. As find during the course of search when it was noticed that the assessee had used the stock exchange mechanism for routing unaccounted money by using scrips of the company, which is a penny stock company, the assessee submitted a letter withdrawing the LTCG claim u/s 10(38) and offered the same as income. Therefore, once the assessee had withdrawn her claim, now the assessee cannot claim the same as long term capital gain and the income in my opinion has to be treated as income from other sources . If the contention of the learned Counsel for the assessee that the same is to be allowed as LTCG is accepted, then the natural corollary will be to allow the same as exempt u/s 10(38) of the I.T. Act and the very nature of the declaration will be defeated. Arguments of assessee that the AO cannot change the head of income is concerned, the same also is without any force especially when the assessee withdrew her claim of exemption u/s 10(38) and offered the same as income of the assessee. So far as the various decisions relied upon by the learned Counsel for the assessee are concerned, the same in my opinion are distinguishable and not applicable to the facts of the present case especially when the assessee in the instant case has herself withdrew the claim and accepted the income from sale of shares of the penny stock company as her income. Alternate argument of the assessee that the same should be added u/s 68 of the Act and the provisions of section 115BBE should not be attracted the same in my opinion, is without any force. The Assessing Officer as well as the learned CIT (A) in this case has correctly applied the provisions of section 115BBE of the I.T. Act. Therefore, the alternate contention of the learned Counsel for the assessee does not have any force and accordingly, the same is dismissed. - Decided against assessee.

Issues Involved:
1. Validity of treating Long Term Capital Gains (LTCG) as "income from other sources."
2. Application of provisions under section 115BBE of the Income Tax Act.
3. Legitimacy of the transactions involving penny stocks.
4. Admissibility of evidence and burden of proof in tax evasion cases.

Detailed Analysis:

1. Validity of Treating LTCG as "Income from Other Sources":
The assessee initially claimed LTCG exemption under section 10(38) of the I.T. Act for the sale of shares of M/s. Jackson Investments Ltd. During a search and seizure operation, it was discovered that the assessee used the stock exchange mechanism to route unaccounted money. Consequently, the assessee voluntarily withdrew the LTCG claim and offered the amount as income. The Assessing Officer (AO) treated this income as "income from other sources" rather than LTCG, citing that the transactions were sham and premeditated for tax evasion. The CIT (A) upheld this view, noting that the transactions were not genuine and were part of an organized effort to evade taxes.

2. Application of Provisions Under Section 115BBE:
The AO applied the provisions of section 115BBE, which imposes a higher tax rate on income from undisclosed sources. The assessee argued that this section should not apply and that any addition should be made under section 68. However, the tribunal found that the AO and CIT (A) correctly applied section 115BBE, as the income was from unaccounted money routed through sham transactions.

3. Legitimacy of the Transactions Involving Penny Stocks:
The tribunal examined the nature of the transactions involving M/s. Jackson Investments Ltd, identified as a penny stock company. The evidence suggested that these transactions were manipulated to create artificial profits and evade taxes. The tribunal noted that the assessee and related parties received abnormally high returns on their investments, which were not supported by the company's financial performance. The CIT (A) concluded that the transactions were not genuine and were used to convert unaccounted money into tax-exempt income.

4. Admissibility of Evidence and Burden of Proof:
The tribunal emphasized that the burden of proving the genuineness of the transactions lies with the assessee. The assessee's reliance on banking channels and stock market transactions was insufficient to prove the legitimacy of the LTCG claim. The tribunal cited various judicial precedents, including the Hon'ble Supreme Court's rulings in CIT vs. Durga Prasad More and Sumati Dayal vs. CIT, which support the view that apparent transactions can be disregarded if the surrounding circumstances indicate they are not genuine.

Conclusion:
The tribunal dismissed all the appeals filed by the respective assessees, upholding the AO's decision to treat the LTCG as "income from other sources" and apply the provisions of section 115BBE. The tribunal found that the transactions were sham and premeditated for tax evasion, and the assessee failed to provide sufficient evidence to prove their genuineness. The tribunal's decision reinforces the principle that the burden of proof lies with the assessee to establish the legitimacy of their claims and that tax authorities are entitled to look beyond apparent transactions to uncover the reality.

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