2022 (12) TMI 1347 - AT - Income Tax

Unexplained cash credit u/s. 68 - Bogus LTCG - penny stock Transaction - set off of short term capital loss from long term capital gain from the sale of shares - HELD THAT - We find that the assessee has shown long term capital gain on sale of shares from M/s Unishire Urban Infra Ltd.and also short term capital loss from sale of shares of M/s SRK Industries Ltd. According to AO, both these shares are penny stocks. We find that the AO added the entire sale consideration realized from sale of shares of M/s Unishire Urban Infra Ltd. while the entire loss sustained on sale of shares of M/s SRK Industries ltd. was treated as bogus and no set off was allowed. In our considered view, though the case of the assessee falls within the ambit of the ratio laid down by the Hon ble Calcutta High Court in the case of Swati Bajaj ( 2022 (6) TMI 670 - CALCUTTA HIGH COURT that the gains on the penny stocks are taxed and no exemption is available u/s 10(38) of the Act however the long term capital gain has to be computed in totality on all the shares as a whole and should be brought to tax accordingly. In our considered view, the authorities below cannot be allowed to treat one transaction as income and reject on the other on the ground that it has incurred loss and is bogus and suspicious. Accordingly we set aside the order of Ld. CIT(A) and direct the AO to allow the set off of short term capital loss from long term capital gain from the sale of shares of M/s Unishire Urban Infra Ltd. and tax the net income from capital gain which is also in accordance with the provisions of Section 70(3) - Appeal of the assessee is allowed.

Summary

Issues:
1. Confirmation of addition in respect of long term capital gain from sale of shares of M/s Unishire Urban Infra Ltd. under section 68 of the Income Tax Act.
2. Rejection of short term capital loss as not genuine and denial of setting off against long term gain.

Analysis:

Issue 1: Confirmation of addition in respect of long term capital gain from sale of shares of M/s Unishire Urban Infra Ltd. under section 68 of the Income Tax Act.
The assessee appealed against the order of the Ld. Commissioner of Income Tax (Appeals) confirming the action of the Assessing Officer (AO) in treating the sale consideration of shares as unexplained cash credit under section 68 of the Income Tax Act. The grounds of appeal challenged the arbitrary and illegal nature of the order. The Ld. CIT(A) confirmed the addition under section 68 without examining the genuineness of the transactions and solely based on suspicion from the Investigation Wing. The appellant argued for cross-examination of relevant persons, which was denied. However, during the hearing, the appellant conceded that the long term capital gain issue was covered against them by a High Court decision. The Appellate Tribunal found that the AO added the entire sale consideration from the shares of M/s Unishire Urban Infra Ltd., but rejected the short term capital loss as bogus. The Tribunal held that all shares should be considered together for computing long term capital gain and allowed the set off of short term capital loss against it, in accordance with Section 70(3) of the Act.

Issue 2: Rejection of short term capital loss as not genuine and denial of setting off against long term gain.
The AO rejected the short term capital loss on sale of shares of SRK Industries as bogus, leading to the denial of setting off against the long term gain. The Ld. CIT(A) dismissed the appeal based on the suspicion of the transactions being bogus. The Appellate Tribunal, after considering the facts and arguments, directed the AO to allow the set off of the short term capital loss against the long term capital gain, emphasizing the need to compute net income from capital gain as per Section 70(3) of the Act. The Tribunal allowed the appeal of the assessee, highlighting the importance of considering all shares together for tax computation purposes.

In conclusion, the Appellate Tribunal allowed the appeal of the assessee, setting aside the orders of the lower authorities and directing the AO to allow the set off of short term capital loss against long term capital gain for proper tax computation in accordance with the provisions of the Income Tax Act.