2023 (11) TMI 439 - AT - Income Tax

Bogus LTCG on sale of shares - Addition u/s 68 - Exemption u/s 10(38) denied - onus to prove - HELD THAT - As decided in ASHOK AGARWAL, RITU AGARWAL, SEEMA AGARWAL, AJAY AGARWAL 2020 (11) TMI 650 - ITAT JAIPUR there is no finding which proves assessee s connection, involvement or collusion with so called accommodation entry providers. Further in the aforesaid case, the issue as to whether the legal evidence produced by the assessee has to guide our decision in the matter or the general observations based on statements, probabilities, human behavior and discovery of the modus operandi adopted in earning alleged bogus LTCG and STCG, that have surfaced during investigations, should guide the authorities in arriving at a conclusion as to whether the claim is genuine or not has been discussed at length. And referring to legal proposition laid down that the burden of proving a transaction to be bogus has to be strictly discharged by adducing legal evidence held that the modus operandi, generalisation, preponderance of human probabilities cannot be the only basis for rejecting the claim of the assessee unless specific evidence is brought on record to controvert the validity and correctness of the documentary evidences produced, the same cannot be rejected. We are in complete agreement with the said view and in the instant case, we find that evidence produced by the assessee in support of his claim of purchase and sale of shares on the stock exchange have not been refuted by any adverse findings or material which could demonstrate involvement of the assessee or collusion with so called accommodation entry providers to obtain bogus LTCG as so alleged by the authorities below. As assessee has discharged the necessary onus cast on him in terms of claim of exemption of long term capital gains u/s 10(38) of the Act by establishing the genuineness of transaction of purchase and sale of shares and satisfying the requisite conditions specified therein and the gains so arising on sale of shares therefore has been rightly claimed as exempt u/s 10(38) - Decided in favour of assessee.

Summary

Issues Involved:
1. Confirmation of addition under Section 68 of the IT Act.
2. Mechanism of purchase of shares challenged.
3. Denial of claim of LTCG on mechanical and irrelevant factors.
4. Applicability of Section 68 of the IT Act to the appellant's case.
5. Right to add, amend, alter, or substitute the grounds of appeal.

Summary:

Issue 1: Confirmation of Addition under Section 68 of the IT Act
The primary issue raised by the assessee was the confirmation of the addition of Rs. 95,43,251/- under Section 68 of the IT Act, which the assessee claimed as exempt long-term capital gain under Section 10(38) of the IT Act. The assessee argued that the statement of Shri Anuj Agrawal, Director of Korp Securities Ltd, recorded by DDIT (Inv), Kolkata, lacked evidentiary value as it was recorded in the absence of the appellant. The assessee was not provided with copies of the recorded statement and was denied the opportunity to cross-examine Shri Anuj Agrawal. The appellant also presented documentary evidence to prove the long-term capital gain, which was neither controverted nor disproved by the CIT(A)/AO. The AO, however, found that the DDIT Kolkata's investigation identified 84 companies, including M/s Sunrise Asian Ltd, involved in providing bogus long-term capital gains through rigged stock prices. The AO concluded that the assessee's transactions were identical to those identified in the investigation and held the long-term capital gain as bogus, disallowing the claim.

Issue 2: Mechanism of Purchase of Shares Challenged
The AO challenged the mechanism of the appellant's share purchase without bringing any material on record. The shares of M/s Santoshima Tradelink Ltd, acquired by the appellant, were not listed on the stock exchange, leading to an arrangement where shares of M/s Conart Traders Ltd were issued to the appellant. The AO doubted the acquisition process, stating that the appellant failed to explain how she got the shares of Conart Trader Ltd when she applied for shares of M/s Santoshima Tradelink Ltd. The CIT(A) upheld the AO's findings, stating that the appellant could not substantiate the purchase of shares and that the transactions were illegal and void under the Companies Act and SEBI rules.

Issue 3: Denial of Claim of LTCG on Mechanical and Irrelevant Factors
The appellant argued that the AO's order was based on arbitrary and surmises, denying the claim of LTCG without any adverse material on record. The AO allowed the purchase cost of Rs. 4,00,000/- while denying the exempted capital gain of Rs. 95,43,251/-, leading to an inconsistent order. The CIT(A) supported the AO's findings, stating that the appellant failed to provide verifiable proof for the purchase and delivery of shares, casting serious doubts on the genuineness of the transactions.

Issue 4: Applicability of Section 68 of the IT Act
The appellant contended that the provisions of Section 68 of the IT Act were not applicable to her case. The CIT(A) disagreed, stating that the appellant failed to discharge the burden of proof and that the AO had established that the claim of LTCG was bogus. The CIT(A) relied on various judicial precedents to support the view that the right to cross-examine is not absolute and depends on the circumstances of each case. The CIT(A) concluded that the transactions were sham, arranged to evade tax, and upheld the addition made by the AO.

Issue 5: Right to Add, Amend, Alter, or Substitute Grounds of Appeal
The appellant reserved the right to add, amend, alter, or substitute the grounds of appeal before the hearing. However, this issue was not elaborated upon in the judgment.

Conclusion:
The appeal was allowed by the ITAT, following the precedent set by the Jaipur ITAT and confirmed by the Hon'ble Rajasthan High Court, which involved identical facts and circumstances. The ITAT directed the AO to delete the addition made, thereby allowing the grounds of appeal of the assessee.