2024 (7) TMI 1581 - AT - Income Tax

Addition u/s. 68 - bogus LTCG - long term capital gains arising on sale of alleged penny stock - HELD THAT - The investigation report prepared by Investigation wing, Kolkatta is a generalized report with regard to the modus operandi adopted in manipulation of prices of certain shares and generation of bogus capital gains. AO has placed reliance on the said report without bringing any material on record to show that the transactions entered by the assessee were found to be a part of manipulated transactions, i.e., it was not proved that the assessee has carried out the transactions of purchase and sale of shares in connivance with the people who were involved in the alleged rigging of prices. A.R submitted that the transactions carried on by the assessee were not subjected to scrutiny by SEBI at all. Assessee has purchased the shares from Stock exchange platform and also sold the shares in the stock exchange platform. Both the transactions have been carried out at the prevailing market rates only. The assessee has furnished evidences to prove the factum of purchase and sale of shares. The financial transactions have also been carried out through banking channels. The shares have entered into and exited from Demat account of the assessee. We notice that the AO did not find any fault with the documents so furnished by the assessee. There is no reason to suspect the transactions of purchase and sale of shares of above said company declared by the assessee in both the years under consideration. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the addition of long-term capital gains on the sale of shares as "unexplained income" under Section 68 of the Income Tax Act, 1961, is justified.
• Whether the estimated commission expenses related to the alleged bogus capital gains should be upheld.
• Whether the transactions of purchase and sale of shares by the assessee were genuine and entitled to exemption under Section 10(38) of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition of Long-term Capital Gains as "Unexplained Income"

• Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act, 1961, deals with unexplained cash credits. The case referenced is the decision of the Bombay High Court in PCIT vs. Indravadan Jain, HUF.
• Court's Interpretation and Reasoning: The Tribunal found that the Assessing Officer (AO) relied on a generalized report from the Investigation Wing without specific evidence linking the assessee's transactions to the alleged manipulation.
• Key Evidence and Findings: The assessee provided evidence of purchase and sale transactions conducted through the Stock Exchange, with payments made and received via banking channels. No discrepancies were found in the documentation.
• Application of Law to Facts: The Tribunal applied the precedent set in the Indravadan Jain case, where similar transactions were deemed genuine due to the absence of evidence suggesting manipulation.
• Treatment of Competing Arguments: The Tribunal dismissed the Revenue's argument that the transactions were part of a scheme to generate bogus capital gains, citing a lack of specific evidence.
• Conclusions: The Tribunal concluded that the long-term capital gains should not be treated as unexplained income under Section 68.

Issue 2: Estimated Commission Expenses

• Relevant Legal Framework and Precedents: The AO estimated commission expenses related to the alleged bogus transactions.
• Court's Interpretation and Reasoning: The Tribunal found no basis for the estimation of commission expenses, as there was no evidence of the assessee incurring such expenses.
• Key Evidence and Findings: The AO did not provide any material evidence to support the estimation of commission expenses.
• Application of Law to Facts: The Tribunal determined that, in the absence of evidence, the estimated commission expenses could not be justified.
• Treatment of Competing Arguments: The Tribunal rejected the AO's estimation due to a lack of supporting evidence.
• Conclusions: The Tribunal directed the deletion of the estimated commission expenses from the assessee's income.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "Accordingly, we are of the view that there is no reason to suspect the transactions of purchase and sale of shares of above said company declared by the assessee in both the years under consideration."
• Core Principles Established: The Tribunal reinforced the principle that without specific evidence of manipulation or collusion, transactions conducted through recognized stock exchanges and banking channels should be considered genuine.
• Final Determinations on Each Issue: The Tribunal set aside the orders of the Commissioner of Income Tax (Appeals) and directed the AO to delete the additions related to both the long-term capital gains and the estimated commission expenses for the assessment years 2014-15 and 2015-16.

In conclusion, the Tribunal ruled in favor of the assessee, allowing the appeals and directing the deletion of the additions made by the AO, thereby recognizing the transactions as genuine and entitled to the claimed exemptions.