2023 (6) TMI 1399 - AT - Income Tax

Bogus LTCG - Capital gain on sale of shares personal investments held by the Assessee - Addition u/s 68 - penny stock transactions - low net profit from share broking business and mismatch in amount paid to related person under Section 40A(2)(b) - HELD THAT - CIT(A) has stated that the Appellant being very new to trading in penny stock and the earning of such huge income by a person not known to such type of trading is against human probabilities. This is factually incorrect as the Assessee has been registered as subbroker with SEBI and has been making personal investments since 2007. Further, apart from sale of share of Sunrise Asian, the Assessee had also sold share of other companies during the same period and earned a substantial return which have been accepted by the Revenue as genuine. Even as per SEBI all transactions of sale of shares cannot be said to tainted transactions undertaken by parties acting in collusion with the operators, brokers and exit providers. The test of human probabilities when applied to the above set of facts tilts the balance in favour of the Assessee. The preponderance is in favour of the Assessee as the circumstantial evidence and surrounding facts do not support the case of the Revenue as explained in hereinabove. There is no direct or indirect evidence linking Comfort Group Companies (i.e., Comfort Fincorp and Comfort Securities Limited), Mr. Anil Agarwal, Pushpanjali Commotrade Private Limited, Kolkatta and Ranisati Dealer Private Limited, Kolkatta with the Assessee. AO and CIT(A) had proceeded with the understanding that the Assessee was new to trading; he traded in single script and had not earned high returns on sale other investments. This understanding was incorrect and contrary to material on record. Even as per SEBI Order, not every shareholder who sold/purchased shares of Sunrise Asian through stock exchange during the Patch-2 was involved in share price manipulation or booking bogus LTCG. Thus we hold that the material on record supports the case of the Assessee/Legal Heir that transactions of sale of shares of Sunrise Asian were genuine transactions undertaken during normal course by the Assessee who had knowledge of the stock-market and had been making investments in shares since many years. Accordingly, the claim of exemption under Section 10(38) of the Act is allowed in respect of capital gains arising from sale of shares of Sunrise Asian during the previous year relevant to the Assessment Year 2014-15. Ground No. 1.1 and 1.3 are allowed.

Summary

Issues Involved:
1. Disallowance of exemption claimed under Section 10(38) of the Income Tax Act, 1961.
2. Addition made under Section 68 of the Income Tax Act, 1961.
3. Procedural fairness regarding the opportunity to cross-examine and reliance on investigation findings.
4. The applicability of Section 68 to a deceased assessee.

Detailed Analysis:

Issue 1: Disallowance of Exemption Claimed Under Section 10(38)
The appellant, through the legal heir, contested the disallowance of the exemption claimed under Section 10(38) for Long Term Capital Gain (LTCG) amounting to INR 86,12,600/-. The CIT(A) had upheld the AO's decision, which treated the transaction as bogus based on an investigation report and SEBI orders. The appellant argued that the transactions were genuine, conducted through stock exchanges, and supported by proper documentation, asserting that the LTCG should be exempt from tax.

Issue 2: Addition Made Under Section 68
The AO added INR 86,12,600/- to the assessee's income under Section 68, treating the LTCG from the sale of shares of Sunrise Asian Ltd. as unexplained cash credit. The AO relied on the investigation report, SEBI orders, and statements from individuals involved in the alleged bogus transactions. The legal heir argued that the assessee had no relationship with the named operators or brokers and had conducted the transactions through a recognized broker, ITI Financial Services Ltd., not mentioned in the SEBI report.

Issue 3: Procedural Fairness
The appellant contended that the CIT(A) erred by not providing an opportunity to cross-examine key witnesses and solely relying on the investigation findings without considering all the evidence submitted. The legal heir claimed that the AO did not provide copies of statements from key individuals during the assessment, which affected the ability to provide a satisfactory explanation.

Issue 4: Applicability of Section 68 to a Deceased Assessee
The appellant argued that Section 68 requires the assessee to furnish an explanation, which cannot be expected from a deceased individual. The legal heir contended that the responsibility to explain the transactions should not fall on them.

Judgment Analysis:

Analysis of Issue 1:
The tribunal noted that the SEBI order and investigation report identified Sunrise Asian Ltd. as a penny stock used for generating bogus LTCG. However, it emphasized that merely trading through the stock exchange with proper documentation does not automatically legitimize the transactions. The tribunal also acknowledged that not all transactions involving penny stocks are bogus and that the preponderance of probabilities must be considered.

Analysis of Issue 2:
The tribunal found that the AO's reliance on circumstantial evidence and the investigation report was insufficient to conclusively prove that the assessee's transactions were bogus. The tribunal observed that the assessee had been trading in shares for many years and had conducted transactions through a recognized broker. The tribunal also noted the lack of direct evidence linking the assessee to the alleged operators and brokers involved in the bogus transactions.

Analysis of Issue 3:
The tribunal criticized the AO for not providing the legal heir with copies of key statements and for not considering the documents and explanations submitted. The tribunal emphasized the importance of procedural fairness and the need for the AO to consider all relevant evidence.

Analysis of Issue 4:
While the tribunal did not fully accept the argument that Section 68 cannot be applied to a deceased assessee, it acknowledged that the legal heir may not have personal knowledge of the transactions. The tribunal emphasized the need for the AO to consider documentary evidence and the context of the transactions.

Conclusion:
The tribunal allowed the appeal, holding that the transactions of sale of shares of Sunrise Asian Ltd. were genuine and conducted in the normal course of business. The claim for exemption under Section 10(38) was allowed, and the addition under Section 68 was deleted. The tribunal also highlighted the procedural lapses by the AO and CIT(A) and emphasized the need for a fair assessment process. The additional grounds raised by the appellant were dismissed as infructuous due to the main grounds being allowed.