2023 (3) TMI 85 - AT - Income Tax

Bogus LTCG - exemption u/s.10(38) denied - unexplained cash credit - HELD THAT - We find that the assessee had duly proved the nature and source of credit representing sale proceeds of shares of Radford Global Ltd and Blazon Marbles Ltd within the meaning of section 68 of the Act. The sale proceeds have been received by the assessee from the stock exchange through the SEBI registered share broker by account payee cheques through regular banking channels. Hence the three ingredients of section 68 of the Act are duly fulfilled by the assessee in the instant case. Hence there is no question of making any addition as unexplained cash credit u/s 68 of the Act in the instant case. Considering 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 @ 6% against the same. Accordingly, the ground nos. 1 2 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 Gains (LTCG) from sale of shares.
2. Addition made on account of estimated commission expenditure as unexplained under Section 69C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Denial of Exemption Claimed under Section 10(38) of the Income Tax Act for LTCG from Sale of Shares:

The primary issue was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in confirming the action of the Assessing Officer (AO) in denying the exemption claimed under Section 10(38) of the Income Tax Act in respect of LTCG derived from the sale of shares of various companies. The AO had treated the transactions as bogus and merely accommodation entries, considering the sale proceeds as unexplained cash credit under Section 68 of the Act.

The assessee contended that the transactions were genuine, supported by documentary evidence such as bank statements, demat statements, contract notes, and payment proofs. The AO, however, relied on the findings of the investigation wing and SEBI's interim orders, alleging artificial price rigging and manipulation of share prices.

The Tribunal found that the documentary evidence submitted by the assessee was genuine and no adverse inferences were drawn by the revenue. The transactions were carried out through registered brokers at prevailing market prices, and payments were received through account payee cheques. The Tribunal noted that no independent inquiries were conducted by the revenue with the brokers or stock exchanges. The SEBI's final orders, which acquitted the assessee and the concerned companies from allegations of price manipulation, were also considered.

The Tribunal held that the transactions could not be treated as sham merely because they were done off-market, as long as the shares were dematerialized and sold through the demat account. The Tribunal emphasized that the revenue failed to prove any link between the assessee and the alleged price rigging operators. The Tribunal relied on various judicial precedents, including the Hon'ble Jurisdictional High Court's decisions, to conclude that the transactions were genuine and the exemption under Section 10(38) was rightly claimed by the assessee.

2. Addition Made on Account of Estimated Commission Expenditure as Unexplained under Section 69C of the Income Tax Act:

The interconnected issue was whether the CIT(A) was justified in upholding the addition made on account of estimated commission expenditure as unexplained under Section 69C of the Act. The AO had added an estimated commission expenditure at the rate of 6% of the sale proceeds, assuming that the assessee must have paid commission to accommodation entry providers.

The Tribunal found that the AO's conclusion was based on mere assumptions and surmises without any cogent evidence. The Tribunal noted that the revenue failed to establish any link between the assessee and the alleged entry operators or brokers involved in price rigging. The Tribunal emphasized that suspicion, however strong, could not partake the character of legal evidence.

The Tribunal relied on judicial precedents, including the Hon'ble Jurisdictional High Court's decisions, to hold that the revenue must prove the evidences furnished by the assessee as bogus. Since the revenue failed to discharge this onus, the Tribunal concluded that the addition on account of estimated commission expenditure under Section 69C was not justified.

Conclusion:

The Tribunal allowed the appeals of the assessee, holding that the denial of exemption under Section 10(38) for LTCG and the addition of estimated commission expenditure under Section 69C were not justified. The Tribunal emphasized the need for cogent evidence to support such additions and relied on various judicial precedents to conclude in favor of the assessee. The appeals were partly allowed, with the levy of interest under Sections 234B and 234C being consequential and the initiation of penalty proceedings under Section 271(1)(c) being premature for adjudication at this stage.

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