2022 (12) TMI 1537 - AT - Income Tax

Addition u/s 68 - exemption claimed u/s 10(38) denied - bogus LTCG - adding 2% of the transaction amount as unexplained expenditure u/s 69C - as argued addition has been made based on mere surmise, suspicion and conjecture and by making baseless allegations against the assessee herein - whether the AO merely on the basis of Kolkata investigation wing report could come to a conclusion that the transactions carried out by the assessee as bogus? HELD THAT - We are unable to persuade ourselves to accept to the contentions of the ld. DR that Kolkata Investigation Wing had conducted a detailed enquiry with regard to the scrip dealt by the assessee herein and hence whomsoever had dealt in this scrip, would only result in bogus claim of long term capital gain exemption or bogus claim of short term capital loss. Merely because a particular scrip is identified as a penny stock by the income tax department, it does not mean all the transactions carried out in that scrip would be bogus . So many investors enter the capital market just to make it a chance by investing their surplus monies. They also end up with making investment in certain scrips (read penny stocks) based on market information and try to exit at an appropriate time the moment they make their profits. In this process, they also burn their fingers by incurring huge losses without knowing the fact that the particular scrip invested is operated by certain interested parties with an ulterior motive and once their motives are achieved, the price falls like pack of cards and eventually make the gullible investors incur huge losses. In this background, the only logical recourse would be to place reliance on the orders passed by SEBI pointing out the malpractices by certain parties and taking action against them. Since assessee or his broker is not one of the parties who had been proceeded against by SEBI, the transaction carried out by the assessee cannot be termed as bogus. We hold that the entire addition has been made based on mere surmise, suspicion and conjecture and by making baseless allegations against the assessee herein. Now another issue that arises is as to whether the ld. AO merely on the basis of Kolkata investigation wing report could come to a conclusion that the transactions carried out by the assessee as bogus. In our considered opinion, the ld. AO is expected to conduct independent verification of the matter before reaching to the conclusion that the transactions of the assessee are bogus. More importantly, it is bounden duty of the ld. AO to prove that the evidences furnished by the assessee to support the purchase and sale of shares as bogus. It is well settled that the suspicion however strong could not partake the character of legal evidence. Hence the greater onus is casted on the revenue to corroborate the impugned addition by controverting the documentary evidences furnished by the assessee and by bringing on record cogent material to sustain the addition. No evidence has been brought on record to establish any link between the assessee herein and the directors of Sunrise Asian Limited or any other person named in the assessment order being involved in any price rigging and also the exit provider. This onus is admittedly not discharged by the revenue in the instant case. Thus we are not inclined to accept to the stand of the ld. CIT(A) in sustaining the impugned additions on account of denial of exemption for long term capital gains u/s 10(38) of the Act and estimated commission @ 2% against the same. Accordingly, the grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Justification of denying exemption claimed under Section 10(38) of the Income Tax Act for long-term capital gain from the sale of shares.
2. Justification of adding 2% of the transaction amount as unexplained expenditure under Section 69C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Justification of Denying Exemption Claimed Under Section 10(38) of the Income Tax Act:

The assessee, an individual and partner in a firm, filed a return for the Assessment Year 2014-15, declaring an income of Rs 13,49,500/- and claimed an exemption under Section 10(38) for long-term capital gains from the sale of shares of Sunrise Asian Ltd. The return was initially processed under Section 143(1) but later reopened under Section 147 due to suspicions from the Kolkata Income Tax Department's investigation report, which labeled the shares as penny stocks and bogus.

The assessee provided substantial documentary evidence supporting the purchase and sale of shares, including debit notes, bank statements, demat account statements, and contract notes. The Assessing Officer (AO) relied on the Kolkata investigation report, claiming the share price rise was artificial and transactions were pre-structured to generate bogus long-term capital gains. The AO treated the sale proceeds as unexplained cash credit under Section 68 and added an estimated commission of 2% as unexplained expenditure under Section 69C.

The appellate tribunal found that the documentary evidence submitted by the assessee was genuine and transactions were conducted through a registered broker at prevailing market prices, with payments received via account payee cheques. The revenue did not conduct independent inquiries with the broker or stock exchange and solely relied on the Kolkata investigation report without directly linking the assessee to the allegations.

The tribunal emphasized that no cogent evidence was presented to prove the assessee's involvement in price manipulation or connivance with brokers and entry operators. The transactions were carried out in the secondary market, and the shares were held in the demat account before being sold. The tribunal cited the Hon'ble Jurisdictional High Court's decision in CIT vs Jamnadevi Agarwal, which supports the validity of off-market transactions if the shares are dematerialized and held in a demat account.

The tribunal also noted that the Securities and Exchange Board of India (SEBI) conducted an independent investigation and did not implicate the assessee or the broker in price manipulation. The assessee held the shares for over two years and sold them at prevailing market prices, with no evidence of direct involvement in price rigging.

2. Justification of Adding 2% of the Transaction Amount as Unexplained Expenditure Under Section 69C of the Income Tax Act:

The AO added an estimated commission of 2% for arranging the bogus transaction as unexplained expenditure under Section 69C. However, the tribunal found that the revenue did not provide any evidence to support this addition. The tribunal highlighted that the AO should have conducted independent verification and proved the evidences furnished by the assessee as bogus. The tribunal referenced the Hon'ble Delhi High Court's decision in PCIT vs Laxman Industrial Resources Ltd, which states that suspicion cannot replace legal evidence.

The tribunal concluded that the entire addition was based on mere suspicion and conjecture without any substantial evidence. The tribunal also referred to the decision in Mukesh Ratilal Marolia vs Additional CIT, where documented and supported transactions were upheld despite the AO's personal knowledge and excitement over events. The tribunal emphasized that the revenue failed to discharge the onus of proving the transactions as bogus.

The tribunal further cited the Hon'ble Jurisdictional High Court's decision in CIT vs Shyam S Pawar, which held that transactions reflected in the demat account and supported by contract notes could not be treated as unaccounted income under Section 68 if not proven bogus by the AO.

Conclusion:

The tribunal allowed the appeal, rejecting the revenue's contentions and supporting the assessee's claim for exemption under Section 10(38) and dismissing the addition of 2% transaction amount as unexplained expenditure under Section 69C. The tribunal's decision was based on the lack of substantial evidence from the revenue, genuine documentary evidence from the assessee, and supporting judicial precedents.