2024 (4) TMI 1145 - HC - Income Tax

Bogus Long Term Capital Gain on sale of shares - transaction was pre-arranged as well as sham and was carried out through penny scripts companies/paper companies - ITAT deleted addition - HELD THAT - Assessee with regard to the purchase and sale of shares and it is also found by the appellant that the respondent was holding shares of other fifteen companies and it has continued to hold the shares over three years and therefore, sale of the shares cannot be said to be bogus merely on the basis of suspicion on account of the fact that the substantial quantum of capital gain and has been earned by the assessee on account of trading in respect of the said shares. Merely because trading in the shares of the said company was suspended on the Stock Exchange, in absence of any material brought on record to suggest that purchase and sales of said shares was bogus, the AO was not justified in absence of any material to support his finding that there has been collusion or connivance between the broker and the assessee for the introduction of his own unaccounted money, resulting into a bogus transaction. Decided in favour of assessee.

Summary

Issues:
1. Whether the ITAT erred in deleting the addition of Rs. 2,88,72,634/- made on account of bogus Long Term Capital Gain on sale of shares without appreciating the pre-arranged and sham nature of the transaction?

Analysis:
The case involved a Tax Appeal filed under Section 260A of the Income Tax Act, 1961, challenging the deletion of an addition of Rs. 2,88,72,634/- representing Long Term Capital Gain on the sale of shares of a specific company. The Assessing Officer had disallowed the claim of Long Term Capital Gain on the grounds of the transaction being pre-arranged and sham. The respondent assessee had purchased shares at face value and later sold them, claiming exemption under Section 10(38) of the Act. The CIT (A) allowed the appeal, emphasizing the genuineness of the transaction supported by documentary evidence like share application, allotment letter, and bank records. The Tribunal dismissed the revenue's appeal, noting that the purchase of shares was through legitimate channels and held for over three years, rejecting the suspicion of collusion or connivance. The Tribunal relied on various legal precedents to support its decision, ultimately upholding the findings of the CIT (A) and concluding that the addition of Long Term Capital Gain was unjustified.

The appellate authorities considered the documentary evidence provided by the assessee, including contract memos for share transactions and the holding of shares in multiple companies for an extended period. They highlighted the lack of material suggesting the transactions were bogus or involved collusion. The Tribunal emphasized that the substantial capital gain and trading suspension did not inherently make the transactions suspect without concrete evidence of wrongdoing. The absence of proof of collusion between the broker and the assessee led to the dismissal of the revenue's appeal. The Tribunal's decision was based on a thorough analysis of the facts and legal principles, ultimately affirming the genuineness of the share transactions and rejecting the addition of Long Term Capital Gain as unsupported by evidence. The reliance on established legal precedents further strengthened the Tribunal's conclusion that the transaction was legitimate and not subject to additional tax liability.