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2023 (2) TMI 298 - AT - Income TaxUnexplained cash credit u/s 68 - purchase of shares in off-market - Bogus LTCG - Reliance on Kolkata Investigation Wing report - whether an off market purchase of shares could be taken as a ground to declare the entire transaction as sham? - HELD THAT - The assessee s name or the broker, through whom assessee transacted had not figured in the said list either in the restraint list or in the discharged list. Hence it could be safely concluded that the assessee herein is merely a gullible investor, who had resorted to make investment in the shares of Radford Global Ltd based on market information and had sold the shares in the secondary market in prevailing market prices. Hence the entire addition has been made merely by placing reliance on the Kolkata Investigation Wing report which are more general in nature and does not implicate the assessee herein in any manner whatsoever. We are unable to persuade ourselves to accept to the contentions of the ld. DR that Kolkata Investigation Wing had conducted a detailed enquiry with regard to the scrip dealt by the assessee herein and hence whomsoever had dealt in this scrip, would only result in bogus claim of long term capital gain exemption or bogus claim of short term capital loss. Merely because a particular scrip is identified as a penny stock by the income tax department, it does not mean all the transactions carried out in that scrip would be bogus. So many investors enter the capital market just to make it a chance by investing their surplus monies. They also end up with making investment in certain scrips (read penny stocks) based on market information and try to exit at an appropriate time the moment they make their profits. In this process, they also burn their fingers by incurring huge losses without knowing the fact that the particular scrip invested is operated by certain interested parties with an ulterior motive and once their motives are achieved, the price falls like pack of cards and eventually make the gullible investors incur huge losses. We hold that the entire addition has been made based on mere surmise, suspicion and conjecture and by making baseless allegations against the assessee herein. Whether the ld. AO merely on the basis of Kolkata investigation wing report could come to a conclusion that the transactions carried out by the assessee as bogus? - AO is expected to conduct independent verification of the matter before reaching to the conclusion that the transactions of the assessee are bogus. More importantly, it is bounden duty of the ld. AO to prove that the evidences furnished by the assessee to support the purchase and sale of shares as bogus. This view of ours is further fortified by the decision of PCIT vs Laxman Industrial Resources Ltd 2017 (3) TMI 1521 - DELHI HIGH COURT . It is well settled that the suspicion however strong could not partake the character of legal evidence. Hence the greater onus is casted on the revenue to corroborate the impugned addition by controverting the documentary evidences furnished by the assessee and by bringing on record cogent material to sustain the addition. No evidence has been brought on record to establish any link between the assessee herein and the directors of Radford Global Ltd or any other person named in the assessment order being involved in any price rigging and also the exit provider. This onus is admittedly not discharged by the revenue in the instant case. In the case of CIT vs Shyam S Pawar 2014 (12) TMI 977 - BOMBAY HIGH COURT it was held that where Demat account and contract note showed details of share transaction and the ld.AO had not proved the said transaction as bogus, the long term capital gain earned on said transaction could not be treated as unaccounted income u/s 68 We are not inclined to accept to the stand of the ld. CIT(A) in sustaining the impugned additions on account of denial of exemption for long term capital gains u/s 10(38) of the Act and estimated commission @ 3% against the same. Accordingly, the grounds 2 to 4 raised by the assessee are allowed.
Issues Involved:
1. Denial of exemption claimed under Section 10(38) of the Income Tax Act for long-term capital gain from the sale of shares. 2. Addition of 3% of the transaction amount as unexplained expenditure under Section 69C of the Income Tax Act. Detailed Analysis: 1. Denial of Exemption under Section 10(38): The primary issue in this appeal was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in confirming the Assessing Officer's (AO) action in denying the exemption claimed under Section 10(38) of the Income Tax Act regarding long-term capital gain from the sale of shares of Radford Global Ltd. The AO had reopened the assessment under Section 147 based on an investigation report from the Kolkata Income Tax Department, which labeled the shares as penny stocks and the transactions as bogus. The assessee provided substantial documentary evidence, including purchase bills, payment receipts, newspaper advertisements, bank statements, share certificates, demat statements, balance sheets, sales bills, broker confirmations, and rate publication charts, to support the genuineness of the transactions. The AO, however, relied on the investigation report without conducting independent verification or linking the assessee to the alleged bogus transactions. The Tribunal found that the documentary evidence submitted by the assessee was genuine and unchallenged by the revenue. The transactions were conducted through registered brokers at prevailing market prices, and payments were received via account payee cheques subjected to Securities Transaction Tax (STT). The Tribunal noted that the revenue did not prove any direct involvement of the assessee in price manipulation or connivance with entry operators. The SEBI investigation also did not implicate the assessee or the broker in artificial price rigging, and SEBI's final order acquitted the entities involved. The Tribunal held that merely because a scrip is identified as a penny stock does not mean all transactions in that scrip are bogus. The AO's reliance on the investigation report without independent verification was insufficient to deny the exemption. The Tribunal concluded that the addition was based on mere suspicion and conjecture without cogent evidence. 2. Addition under Section 69C: The interconnected issue was whether the CIT(A) was justified in confirming the addition of 3% of the transaction amount as unexplained expenditure under Section 69C. The AO had added this amount as estimated commission for arranging the alleged bogus transaction. The Tribunal found that the revenue did not provide any evidence to support the addition. The assessee's transactions were documented, and there was no proof of any unexplained expenditure. The Tribunal emphasized that suspicion, however strong, cannot replace legal evidence. Conclusion: The Tribunal concluded that the entire addition was made based on mere surmise, suspicion, and conjecture without any substantial evidence. The AO failed to conduct independent verification and relied solely on the investigation report. The Tribunal allowed the assessee's appeal, granting the exemption under Section 10(38) and deleting the addition under Section 69C. Order: The appeal of the assessee was partly allowed, with the Tribunal directing the deletion of the additions made by the AO and CIT(A). The reopening of the assessment was not challenged by the assessee and was dismissed as not pressed. The order was pronounced on 30/01/2023.
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