2022 (11) TMI 311 - AT - Income Tax

Addition u/s 68 - penny stock purchases - Bogus LTCG - Conversion of unaccounted income into genuine long term capital gains - HELD THAT - Except stating that the assessee is one of the beneficiary of alleged bogus long term capital gains transaction of these two companies, but nothing was brought on record to link the transaction of the assessee with investigation report as well as any other evidences which suggest that the assessee is also part of that group of people who were involved in alleged scam. At the same time, although, the assessee claims to have purchased and sold shares of two companies through recognized stock exchange, but that itself is not a ground to accept arguments of the assessee when other evidences clearly prove that these shares were used to provide accommodation entries to various beneficiaries. Therefore, we are of the considered view that neither assessee nor the AO has conclusively proved their case with necessary evidences. Hence, we deem it appropriate to set aside the issue to the file of the AO and direct the AO to provide necessary information used against assessee to take an adverse view on capital gain derived from sale of shares of two companies and further provide an opportunity of hearing to the assessee to refute allegations made by the Department and also if necessary to cross-examine the persons who gave statement on the issue. AO is directed to follow the principles of natural justice while dealing with the issue and also decide the issue in accordance with law. Appeal filed by the assessee is allowed for statistical purposes.

Issues:
1. Denial of exemption of long term capital gains on shares.
2. Allegations of involvement in a scam related to penny stock companies.
3. Addition of undisclosed income under section 68 of the Act.
4. Reliance on statements recorded by DIT, Kolkata without providing an opportunity for cross-examination.
5. Failure to link the assessee to the alleged scam.

Issue 1: Denial of exemption of long term capital gains on shares:
The appellant contested the denial of exemption under section 10(38) of the Act by the CIT(A), arguing that the shares were purchased and sold online through proper channels, with Security Transaction Tax paid. The appellant emphasized holding the shares for over a year and disclosing all transactions in the tax return. The tribunal noted the lack of conclusive evidence linking the appellant to the alleged scam and directed the AO to provide necessary information and an opportunity for the appellant to refute the allegations.

Issue 2: Allegations of involvement in a scam related to penny stock companies:
The AO based the addition of undisclosed income on the belief that the appellant was involved in a scam related to penny stock companies, benefiting from accommodation entries. However, the tribunal found insufficient evidence linking the appellant to the alleged scam, especially regarding converting unaccounted income into genuine long term capital gains. The tribunal emphasized the importance of establishing a clear connection between the appellant's transactions and the alleged fraudulent activities.

Issue 3: Addition of undisclosed income under section 68 of the Act:
The AO treated the consideration received from the sale of shares as unexplained cash credit taxable income under section 68 of the Act. The tribunal noted the AO's reliance on the investigation report and statements recorded by DIT, Kolkata, without providing the appellant an opportunity for cross-examination. The tribunal directed the AO to adhere to the principles of natural justice and allow the appellant a chance to respond to the allegations.

Issue 4: Reliance on statements recorded by DIT, Kolkata without providing an opportunity for cross-examination:
The appellant raised concerns about the AO heavily relying on statements recorded by DIT, Kolkata, without furnishing them for cross-examination or providing an opportunity to challenge the deponents. The tribunal highlighted the importance of allowing the appellant to cross-examine witnesses and refute any adverse evidence used against them.

Issue 5: Failure to link the assessee to the alleged scam:
Despite the allegations of the appellant benefiting from accommodation entries in penny stock companies, the tribunal found a lack of concrete evidence linking the appellant to the fraudulent activities. The tribunal stressed the need for clear evidence establishing the appellant's involvement in the alleged scam before making additions to their income. The tribunal set aside the issue to the file of the AO for further examination and directed a fair and lawful decision-making process.

This detailed analysis of the judgment addresses the issues raised by the appellant regarding the denial of exemption, allegations of involvement in a scam, addition of undisclosed income, reliance on statements without cross-examination, and the failure to establish a direct link to the alleged fraudulent activities. The tribunal's decision emphasizes the importance of evidence, natural justice principles, and providing a fair opportunity for the appellant to respond to the allegations.

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