2023 (9) TMI 1566 - AT - Income Tax

Bogus LTCG - Treatment of long-term capital gains as non-genuine - unexplained cash credit u/s 68 - denial of exemption u/s 10(38) - addition based on interim SEBI order - HELD THAT - The entire basis and premise of the AO to draw his adverse inference on the basis of interim SEBI order has no legs to stand. One of the major contentions of the AO was that in the case of exit providers, SEBI has given an adverse remark and all the observation on preliminary investigation by SEBI has been referred and relied upon the AO, therefore, the inference drawn by the AO about the purchase of the scrips by these entities from the assessee, which has now been found by SEBI in its final order that there was no such manipulation by the these entities. In any case, firstly, the said SEBI order has nothing to do with the scrip of M/s. Shreenath Commercial Finance Ltd. and secondly, the revocation of this order by the SEBI in its final order dated 21/09/2017 itself demolishes the entire foundation of the AO s inference. No enquiry either by the SEBI or any Government agencies has been done in the case of M/s. Shreenath Commercial Finance Ltd. or the broker from whom assessee has purchased online or the assessee or the family member. In so far as general observation in respect of share brokers on whom survey action was conducted by Directorate of Investigation Wing of Kolkata who had allegedly accepted the role in providing accommodation entry of bogus/ long term capital gain first of all such a reference is wholly out of context because assessee has not dealt with any of these brokers. Two statements of such brokers were also provided to the assessee by the AO but no way they were connected to the assessee nor assessee has dealt with them nor is assessee s name figuring anywhere. The assessee had made transaction of purchase and sale of shares through RBK Share Broking Limited against which there is no such enquiry or information that this broking entity was involved in any kind of accommodation entry. Although these brokers have given the list of various scrips in which they have done the trading in shares for providing accommodation entry and one of the scrip mentioned was M/s. Shreenath Commercial Finance Ltd. As per the statement of Shri Ritesh Jain, it was also alleged that M/s. Manu Stock Broking is a broking house for some of the exit providers related to sale of shares by Chaturvedi Family, however, in his statement there is no mention about the scrip and M/s. Shreenath Commercial Finance Ltd. The only conclusion which has been drawn by the ld. AO that they had offered a very meager income and do not have any substance. However, in none of the replies which AO has noted, that they have stated that they had any transaction with the assessee. AO has not provided and how these entities were connected with scrip of M/s. Shreenath Commercial Finance Ltd. and how they were involved in the alleged modus operandi adopted by the accommodation entry provider for bogus capital gain including the assessee, at least there has to be some primafacie or some mention about the assessee or about the scrip from such enquiry so as to draw some kind of adverse inference. Once on the same set of facts in case of the assessee s husband Shri Rajendra Chaturvedi and Mrs. Pallavi Pandey 2020 (12) TMI 1276 - ITAT MUMBAI have deleted the said addition, then in the case of the assessee, no different view can be taken. Respectfully following the same, addition made by the ld. AO is deleted including the addition of alleged commission made u/s. 69C, which is deleted - Decided in favour of assessee.

Summary

Issues Involved:

1. Validity of reopening under Section 147.
2. Addition under Section 68 for treating long-term capital gains as bogus.
3. Addition for unexplained expenditure related to alleged bogus accommodation entry.

Detailed Analysis:

1. Validity of Reopening Under Section 147:

The reopening of the assessment under Section 147 was based on information from the Directorate of Investigation, which suggested that the assessee had availed bogus long-term capital gains (LTCG) through penny stocks. The notice under Section 148 was issued after obtaining approval from the Additional CIT. The assessee contested the reopening, arguing that the original return should be treated as a response to the notice. However, the Tribunal did not delve into the validity of reopening, leaving the issue open as the appeal was decided on merits.

2. Addition Under Section 68 for Treating Long-Term Capital Gains as Bogus:

The primary issue was the addition of Rs. 8,29,88,876 under Section 68, treating the LTCG from the sale of shares of Shreenath Commercial & Finance Ltd. as bogus. The Assessing Officer (AO) relied on the investigation report, which alleged that the assessee was part of a larger scheme involving rigged stock prices to generate fake LTCG. The AO noted the poor financials of the company and the sudden rise in share prices as indicators of manipulation.

The assessee countered these claims by providing documentary evidence, including contract notes, Demat account statements, and bank statements, to prove the genuineness of the transactions. The assessee argued that the shares were purchased and sold through recognized stock exchanges and that there was no connection with the alleged exit providers or manipulation activities.

The Tribunal found merit in the assessee's submissions, noting that the transactions were conducted through registered brokers with all payments made through banking channels. The Tribunal also highlighted that similar additions in the case of the assessee's husband had been deleted by the Co-ordinate Bench, emphasizing the lack of specific evidence against the assessee.

3. Addition for Unexplained Expenditure Related to Alleged Bogus Accommodation Entry:

The AO also added Rs. 41,49,444 as unexplained expenditure, alleging it as commission for obtaining the bogus LTCG entry. The assessee denied any such expenditure, stating that there was no evidence of any commission payment. The Tribunal, aligning with its findings on the LTCG issue, deleted this addition as well, citing a lack of evidence and the absence of any corroborative material linking the assessee to such payments.

Conclusion:

The Tribunal allowed the appeal on merits, deleting both the addition under Section 68 for LTCG and the addition for unexplained expenditure. The decision was heavily influenced by the documentary evidence provided by the assessee and the lack of specific evidence from the AO to substantiate the claims of bogus transactions. The issue of reopening under Section 147 was left open, as the appeal was resolved on the substantive issues.