2023 (7) TMI 1286 - HC - Income Tax

Bogus loss incurred in penny stock - addition made as transaction was pre-arranged as well as sham and was carried out through penny scripts companies / paper companies - ITAT deleted addition - whether the assessee genuinely purchased and sold the shares of the above referred two companies through stock exchange? - HELD THAT - As the conclusion drawn by the AO was on the assumption that there was an agreement to convert unaccounted money by taking fictitious LTCG. On appreciation of facts, tribunal held that the decision of the AO was unsupported by any material on record and the finding was purely on assumption basis. Tribunal has also observed that the respondent had successfully discharged the initial burden cast upon it under the provisions of Section 68 - It is not in dispute that the shares of the aforesaid two companies were purchased online and the payments were made through banking channel and the shares were dematerialized and the shares have been routed from demat account and the consideration was also received through bank channels. AO does not have any independent source or evidence to show that there was an agreement between the assessee and any other party. The learned tribunal has also observed that in absence of any specific finding against the assessee, the assessee cannot be held to be linked to the wrong acts merely on the basis of surmises and assumptions. No substantial question of law.

Summary

Issues involved:
The judgment involves the interpretation of the Income Tax Act, 1961, specifically related to the disallowance of bogus losses incurred in penny stock trading and the addition made on account of a bogus transaction. The key issues include the genuineness of the transactions, the burden of proof on the assessee, and the application of Section 68 of the Act.

Detailed Summary:

Issue 1: Disallowance of bogus loss in penny stock trading

The appellant filed a Tax Appeal under Section 260A of the Income Tax Act, challenging the order of the Income Tax Appellate Tribunal regarding the disallowance of a bogus loss incurred in penny stock trading. The Revenue contended that the transactions were pre-arranged and sham, carried out through penny scripts companies. The Tribunal dismissed the Revenue's appeal, stating that the AO's conclusion was unsupported by material and based on assumptions. The Tribunal noted that the shares were purchased online, payments made through banking channels, and shares dematerialized, with no evidence of an agreement between the assessee and any other party. The Tribunal held that the initial burden under Section 68 of the Act was discharged by the respondent, and the appellant could not be linked to wrong acts based on assumptions.

Issue 2: Addition on account of a bogus transaction

The appellant also challenged the addition made on account of a bogus transaction, arguing that it was prearranged and sham. The Tribunal found that the appellant had followed proper procedures in purchasing and selling shares through stock exchanges, with transactions conducted via banking channels and shares dematerialized. The Tribunal concluded that the appellant had not been linked to any wrongdoing and that the AO's decision was based on assumptions rather than concrete evidence.

The appellant proposed substantial questions of law related to these issues, which were found by the Court not to involve substantial questions of law but rather factual aspects. Citing previous decisions, the Court emphasized that findings of the Tribunal based on facts could not be disturbed unless there was a substantial question of law involved. The Court found no reason to interfere with the Tribunal's findings, as they were based on factual aspects. Consequently, the Tax Appeal was dismissed for lack of merit, with no order as to costs.

This summary provides a detailed overview of the judgment, highlighting the key issues and the Court's reasoning in addressing them.