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2022 (12) TMI 781 - AT - Income TaxBogus LTCG - penny stock purchases - genuineness of the claim of exempt income under section 10(38) of the Act in respect of long-term capital gain arising from sale of equity shares - HELD THAT - As respectfully following the decision of this Tribunal 2022 (10) TMI 728 - ITAT KOLKATA as well as in the light of ratio laid down in the case of Swati Bajaj Others 2022 (6) TMI 670 - CALCUTTA HIGH COURT find no infirmity in the orders of the ld. CIT(Appeals) holding the alleged LTCG for sale of equity shares as bogus and not eligible to exemptions under section 10(38) of the Act and also confirming the addition of commission expenditure incurred for arranging bogus LTCG and dismiss the appeals of the assesses.
Issues Involved:
1. Disallowance of claim of exemption under section 10(38) of the Income Tax Act, 1961. 2. Addition under section 68 of the Act for bogus long-term capital gain (LTCG). 3. Addition for unexplained commission expenditure for arranging such LTCG. 4. Disallowance under section 14A of the Act. Detailed Analysis: 1. Disallowance of Claim of Exemption under Section 10(38): The primary issue in all the appeals was the disallowance of the claim of exemption under section 10(38) of the Income Tax Act, 1961, which pertains to the exemption of long-term capital gains (LTCG) arising from the sale of equity shares. The assessees had claimed exempt income from the sale of shares of various companies, which were identified as penny stock companies by the Directorate of Income Tax (Investigation). The Assessing Officers (AOs) observed abnormal increases in the share prices, unsupported by the financials of these companies, and concluded that the transactions were managed to create bogus LTCG entries. The assessees failed to provide satisfactory explanations for the sudden price changes, leading the AOs to dismiss the claims of exempt income and make additions under section 68 of the Act for unexplained cash credits. 2. Addition under Section 68 for Bogus LTCG: In each case, the AO made additions under section 68 of the Act, treating the claimed LTCG as unexplained cash credits. The AOs relied on investigation reports indicating that the companies involved were penny stocks and that the transactions were part of a systematic arrangement to convert unaccounted money into LTCG. The assessees' appeals to the CIT(A) were unsuccessful, with the CIT(A) affirming the AOs' conclusions that the transactions were sham and designed for tax evasion. 3. Addition for Unexplained Commission Expenditure: The AOs also made additions for unexplained commission expenditures incurred for arranging the bogus LTCG. The investigation reports suggested that share brokers and entry operators charged commissions for facilitating these transactions. The AOs added these commission amounts to the total income of the assessees. The CIT(A) upheld these additions, agreeing that the transactions were not genuine and were intended to create bogus claims. 4. Disallowance under Section 14A: In some cases, the AOs made disallowances under section 14A of the Act, which deals with the expenditure incurred in relation to income not includible in total income. These disallowances were also upheld by the CIT(A). Tribunal's Findings: The Tribunal, after hearing the Departmental Representative and the Assessee's Representative (in ITA No. 362/KOL/2019), and considering the material on record, found that the issue of the genuineness of the exempt income claims under section 10(38) was already adjudicated in similar cases. The Tribunal referred to the judgment of the Hon'ble Jurisdictional High Court in the case of Swati Bajaj & Others, which dealt with similar facts and upheld the AOs' conclusions that the transactions were bogus. The Tribunal emphasized the following points from the High Court's judgment: - The test of preponderance of probabilities was applied to ascertain violations of the Income-tax Act. - The burden of proof was on the assessees to establish the genuineness of the transactions. - The steep and unexplained rise in share prices of penny stock companies indicated that the transactions were not genuine. - The Tribunal's role was to consider the totality of circumstances, which it failed to do in previous cases. Conclusion: Respecting the binding nature of the High Court's decision, the Tribunal dismissed all the appeals, affirming the orders of the CIT(A) and the AOs. The Tribunal found no infirmity in the conclusions that the LTCG claims were bogus and not eligible for exemptions under section 10(38), and that the additions for commission expenditures were justified.
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