2022 (9) TMI 1657 - AT - Income Tax

Addition u/s 68 - long-term capital gain as a bogus accommodation entry - onus to prove - HELD THAT - We observe that the assessee has purchased these scrips and the transactions were all routed through proper banking channel and in Registered Stock Exchange. We also observed that the AO has merely relied on the report from investigation wing and just because assessee has declared some profit and claimed deduction u/s. 10(38) of the Act he proceeded to make the additions. As decided in M/s. Pratibha S. Mhatre 2021 (6) TMI 660 - ITAT MUMBAI Error upholding the action of the AO in bringing the long term capital gains on sale of shares as unexplained income of the assessee treating the same as just an accommodation entry. The ld AO is directed to grant exemption u/s 10(38). Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment revolve around the tax treatment of long-term capital gains (LTCG) claimed by the assessee from the sale of shares, specifically whether these gains were genuine or part of a scheme to evade taxes through penny stock transactions. The issues include:

• Whether the transactions involving the sale of shares in M/s. Shree Shalin Textiles Limited were genuine or pre-arranged to evade taxes.
• Whether the assessee's claim for exemption under Section 10(38) of the Income Tax Act for LTCG should be upheld.
• Whether the addition made by the Assessing Officer (AO) under Section 68 of the Act, treating the sale proceeds as unexplained cash credit, was justified.
• Whether the disallowance of a 2% commission under Section 69C of the Act was appropriate.
• Whether the principles of natural justice were violated due to the lack of opportunity for cross-examination of evidence relied upon by the AO.

ISSUE-WISE DETAILED ANALYSIS

1. Genuine Nature of Transactions

• Relevant Legal Framework and Precedents: The court examined the legal standards for determining the genuineness of transactions, particularly in the context of alleged penny stock manipulations. Precedents from various High Courts and the ITAT were considered, emphasizing that transactions must be supported by credible evidence and not merely dismissed based on suspicion or generalized reports from investigation wings.
• Court's Interpretation and Reasoning: The Tribunal noted that the AO relied heavily on investigation reports without substantiating the claims with direct evidence against the assessee. The court emphasized that each case must be assessed on its merits, and the burden of proof lies with the revenue to demonstrate that the transactions were not genuine.
• Key Evidence and Findings: The Tribunal found that the transactions were conducted through recognized stock exchanges, payments were made through banking channels, and Security Transaction Tax (STT) was duly paid. These factors supported the genuineness of the transactions.
• Application of Law to Facts: The Tribunal applied the principles from precedents, which require concrete evidence to classify transactions as bogus. The absence of such evidence in the present case led to the conclusion that the transactions were genuine.
• Treatment of Competing Arguments: The Tribunal considered the department's reliance on investigation reports but found them insufficient to override the documentary evidence provided by the assessee.
• Conclusions: The Tribunal concluded that the transactions were genuine, and the assessee's claim for LTCG exemption under Section 10(38) was valid.

2. Addition Under Section 68

• Relevant Legal Framework and Precedents: Section 68 deals with unexplained cash credits, requiring the assessee to prove the identity, creditworthiness, and genuineness of the transactions.
• Court's Interpretation and Reasoning: The Tribunal noted that the AO failed to provide evidence that the credits were unexplained. The assessee had furnished sufficient evidence, including contract notes, demat statements, and bank records, to support the transactions.
• Key Evidence and Findings: The evidence presented by the assessee, such as the demat account statements and bank transactions, was found to be credible and consistent with genuine transactions.
• Application of Law to Facts: The Tribunal held that the AO's reliance on investigation reports without direct evidence against the assessee was insufficient to justify the addition under Section 68.
• Treatment of Competing Arguments: The department's arguments were based on generalized findings from investigation reports, which the Tribunal found inadequate to counter the specific evidence provided by the assessee.
• Conclusions: The Tribunal directed the deletion of the addition made under Section 68, affirming the genuineness of the transactions.

3. Disallowance Under Section 69C

• Relevant Legal Framework and Precedents: Section 69C pertains to unexplained expenditure, requiring the revenue to substantiate claims of such expenditure.
• Court's Interpretation and Reasoning: The Tribunal found that the AO's estimation of a 2% commission as unexplained expenditure was based on assumptions without evidence.
• Key Evidence and Findings: There was no evidence of any commission payments made by the assessee, and the AO's estimation lacked factual basis.
• Application of Law to Facts: The Tribunal applied the principle that assumptions cannot replace evidence, leading to the conclusion that the disallowance under Section 69C was unwarranted.
• Treatment of Competing Arguments: The Tribunal rejected the department's argument due to the lack of evidence supporting the alleged commission payments.
• Conclusions: The Tribunal directed the deletion of the disallowance under Section 69C.

4. Violation of Natural Justice

• Relevant Legal Framework and Precedents: The principles of natural justice require that parties be given a fair opportunity to present their case and challenge evidence used against them.
• Court's Interpretation and Reasoning: The Tribunal found that the assessee was not provided an opportunity to cross-examine the evidence from the investigation reports, which was a violation of natural justice.
• Key Evidence and Findings: The lack of cross-examination opportunities was highlighted as a significant procedural flaw.
• Application of Law to Facts: The Tribunal emphasized that the denial of cross-examination rights undermined the fairness of the proceedings.
• Treatment of Competing Arguments: The Tribunal considered the department's reliance on investigation reports but found that procedural fairness was compromised.
• Conclusions: The Tribunal held that the proceedings were flawed due to the violation of natural justice principles.

SIGNIFICANT HOLDINGS

• The Tribunal held that the transactions were genuine and directed the deletion of additions made under Sections 68 and 69C.
• It affirmed the assessee's entitlement to exemption under Section 10(38) for LTCG.
• The Tribunal emphasized the importance of procedural fairness and the right to cross-examination.
• It reiterated the principle that suspicion or generalized reports cannot replace concrete evidence in tax assessments.
• Final determinations were made in favor of the assessee, allowing the appeals and setting aside the orders of the lower authorities.