2023 (7) TMI 843 - AT - Income Tax

Disallowance u/s 14A - AO has disallowed an amount since the assessee has made investment and has claimed as interest - Appellant has contested that the AO has not established that the investment were made out of loan funds and had sufficient own capital to make investment - HELD THAT - As noted that assessee had sufficient owned fund, as at the start and end of relevant previous year, for making investment for earning exempt income. Assessee, during the year under consideration, received dividend income only to the extent of Rs. 60,134 and CIT(A), NFAC restricted disallowance to the extent of dividend income as earned by the assessee. CIT(A), NFAC has relied on number of decisions for the proposition that no disallowed u/s 14A can be made if the own fund of assessee are more than the investment made to earn exempt income. Disallowance u/s 14A cannot be more than the exempt income earned by assessee. We feel that ld. CIT(A), NFAC has correctly restricted disallowance to the extent of exempt income earned by assessee. Ground of appeal taken by department is dismissed. Bogus LTCG - information as received that racket of generating bogus entries in LTCG in penny stocks had been unearthed - HELD THAT - In the present case, the entire addition has been made by the AO on the basis of report of investigation wing and report of certain persons. No opportunity of cross verification was provided to the assessee. Under such circumstances, no addition can be made to the income of assessee, specifically when entire basis of addition is investigation report, which was never confronted to assessee, and statement of persons, who were neither examined by the AO nor opportunity of cross examination provided to assessee. Taking into consideration various documentary evidences produced by the assessee in support of his claim and further relying upon various decisions of this Tribunal as well as the decision of Pooja Agarwal 2017 (9) TMI 1104 - RAJASTHAN HIGH COURT as well as in case of PCIT vs. Pramod Jain Others 2018 (7) TMI 2161 - RAJASTHAN HIGH COURT we allow the claim of exemption under section 10(38) of the Act and accordingly delete the addition made by the AO. Hence, the order of ld. CIT (A) is upheld. Commission paid for the accommodation entries - HELD THAT - When we have given a finding that the transaction of purchase and sale of shares and consequential Long Term Capital Gain cannot be treated as bogus then the addition made by the AO on account of notional commission paid treating the same as undisclosed expenditure u/s 69C will not be sustainable being consequential. Appeal of the Department is dismissed.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Addition under Section 68 on account of alleged bogus Long Term Capital Gains (LTCG).
3. Addition under Section 69C on account of commission paid towards availing bogus LTCG.

Issue-wise
Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The Revenue challenged the CIT(A)'s decision to restrict the disallowance under Section 14A to the extent of exempt income earned by the assessee (Rs. 60,134). The AO had disallowed Rs. 9,12,493, citing that the assessee had made investments in equity instruments and claimed interest expenses. However, the CIT(A) observed that the assessee had sufficient own funds to make the investments and that the AO had not established a nexus between borrowed funds and the investments. Citing various judicial precedents, the CIT(A) ruled that disallowance under Section 14A cannot exceed the amount of exempt income. The Tribunal upheld this decision, agreeing that the CIT(A) correctly restricted the disallowance to the amount of exempt income earned by the assessee.

2. Addition under Section 68 on account of alleged bogus LTCG:
The AO treated the LTCG earned by the assessee from the sale of shares in Midland Polymers Ltd. and Centron Industrial Alliance Ltd. as bogus, relying heavily on an investigation report which indicated that certain penny stocks were used for laundering unaccounted money. The assessee provided substantial documentary evidence, including purchase bills, bank statements, Demat account details, and sale transactions through recognized stock exchanges, to substantiate the genuineness of the transactions. The CIT(A) found that there was no direct evidence linking the assessee to the alleged bogus transactions and that the AO's conclusions were based on suspicion and general observations from the investigation report. The Tribunal concurred with the CIT(A), noting that the AO did not provide any specific material evidence against the assessee and failed to grant the opportunity for cross-examination of the individuals whose statements were relied upon. The Tribunal emphasized that suspicion alone cannot justify additions without corroborative evidence and upheld the CIT(A)'s decision to delete the addition under Section 68.

3. Addition under Section 69C on account of commission paid towards availing bogus LTCG:
The AO added Rs. 29,89,956 under Section 69C, alleging that the assessee paid a commission for arranging bogus LTCG entries. This addition was based on the same investigation report and statements used for the Section 68 addition. The CIT(A) deleted this addition, stating that there was no evidence of the assessee paying any commission and that the AO's conclusions were based on presumptions. The Tribunal upheld this decision, noting that since the LTCG transactions were found to be genuine, the related commission expense could not be treated as unexplained expenditure under Section 69C.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The disallowance under Section 14A was correctly restricted to the amount of exempt income earned. The additions under Sections 68 and 69C were deleted due to lack of specific evidence against the assessee and procedural lapses, including the failure to provide the assessee with the opportunity for cross-examination. The Tribunal emphasized the need for concrete evidence rather than suspicion to justify such additions.