2024 (2) TMI 1414 - AT - Income Tax

Reopening of assessment u/s 147 - Bogus LTCG transaction in penny stock - Addition u/s 68 - as argued 'reasons' are based on 'general information' without establishing any connection with assessee and without reflecting any wrong doing by assessee - HELD THAT - Transaction entered into by the assessee are not looks to be clear. As investee is showing in Schedule IV-Fixed Assets, computers only whereas as mentioned its main activities are of financing and real estate. There is no indication in the financials of the investee company about its indulgence in the area of finance and real estate. Investee Company s EPS only 0.06. With such a low/negligible EPS, how the price of shares can be so high? Simply by producing contract note, bank statement, sale note, assessee cannot absolve himself from a duty caste upon him to prove his genuineness. Further to explain the reasons and basis for acquisition/ purchases of the shares, it was submitted that the shares are purchased through the stock exchange and has filed a statement explaining the purchase details that the assessee has purchased 30,000 shares on 04.03.2011 as per the contract note issued and similarly purchased in small lots of 6,000 shares on 29-03-2011, 500 shares on 1704-2011 as per contract note issued - Further the Ld. AR mentioned that 3,500 shares were purchased but no evidence of contract note was furnished. The assessee has sold 70,000 shares in the financial year 1213, in particular November 2012 to January 2013. Whereas on considering the share holding discussed above it works out to only 40,000 shares. When a query was raised to explain the difference in the holding of shares, the Ld. AR submitted that the company has issued the bonus Shares and the shares of 30,000 purchased on 4-03-2011 have become 60,000 shares. AR could not support the issue of bonus shares with any allotment letter or evidence issued by the company. AR referred to the demat account which discloses credit of 60,000 shares on 30-03-2011. Whereas the assessee has purchased 30,000 shares on 4-03-2011 and the credit for the shares in the demat account is higher, the explanations of the Ld.AR are not satisfactory and are without any supporting evidences on credit of additional shares for the first time in the demat account. Therefore, we considering the facts, circumstances and to meet the ends of justice shall provide with one more opportunity of hearing to the assessee to explain and produce the evidences in support of allotment of shares and also the assessing officer to consider the financial aspects of the investee company as discussed above and adjudicate afresh - we allow the grounds of appeal of the assessee for statistical purposes.

Summary

Issues Involved:
1. Validity of notice under section 148 of the Income Tax Act.
2. Addition under section 68 for unexplained cash credits.
3. Addition under section 69C for unexplained expenditure.
4. Procedural fairness and opportunity for cross-examination.
5. Genuineness of Long-Term Capital Gains (LTCG) claim.
6. Evaluation of evidence and investigation reports.

Detailed Analysis:

Issue 1: Validity of Notice under Section 148 of the Income Tax Act
The assessee challenged the validity of the notice issued under section 148, arguing that the reasons recorded were based on general information received from the DGIT (INV) Kolkata without specific connection to the assessee. The notice was issued after the AO received information about the assessee's involvement in bogus LTCG transactions in penny stocks. The AO recorded reasons in writing and obtained approval from the competent authority before reopening the case under section 147.

Issue 2: Addition under Section 68 for Unexplained Cash Credits
The AO added Rs. 51,48,580/- under section 68, treating the sale proceeds from shares of Shreenath Commercial & Finance Ltd. as unexplained cash credits. The assessee argued that the transactions were supported by documentary evidence, including bill cum contract notes, dematerialized shares, and banking channel transactions. However, the AO relied on the investigation report indicating that the transactions were pre-arranged to evade taxes.

Issue 3: Addition under Section 69C for Unexplained Expenditure
The AO added Rs. 1,54,487/- under section 69C, considering it as commission paid to obtain the bogus LTCG entry. The assessee contended that there was no evidence of such expenditure recorded in the books of accounts, and the AO failed to prove the incurrence of this expense.

Issue 4: Procedural Fairness and Opportunity for Cross-Examination
The assessee claimed that the assessment proceedings were vitiated as the AO relied on various evidences and statements without providing copies or the opportunity for cross-examination. The tribunal observed that the assessee did not demonstrate specific prejudice due to non-furnishing of the investigation report or non-production of persons for cross-examination. The investigation targeted individuals dealing with penny stocks, and the assessee was not named in the report.

Issue 5: Genuineness of Long-Term Capital Gains (LTCG) Claim
The AO disallowed the LTCG claim under section 10(38), treating it as bogus. The tribunal noted that the assessee failed to prove the genuineness of the transactions, which were stage-managed to plough back unaccounted income as fictitious LTCG. The assessee's reliance on documents like contract notes, bank statements, and demat accounts was insufficient to establish the genuineness of the steep rise in share prices within a short period.

Issue 6: Evaluation of Evidence and Investigation Reports
The tribunal emphasized the importance of circumstantial and direct evidence gathered from the investigation. The modus operandi involved rigging share prices through circular trading and using penny stock companies to provide accommodation entries for LTCG. The tribunal found that the assessee's transactions were suspicious and lacked credibility, as evidenced by the unnatural rise in share prices and the involvement of multiple brokers.

Conclusion:
The tribunal upheld the AO's actions and findings, concluding that the assessee failed to discharge the onus of proving the genuineness of the LTCG transactions. The appeal was allowed for statistical purposes, providing the assessee with another opportunity to present evidence supporting the allotment of shares and the financial aspects of the investee company. The tribunal directed the AO to re-evaluate the case, ensuring procedural fairness and adequate opportunity for the assessee to present their case.