2024 (4) TMI 1239 - AT - Income Tax

Unexplained cash credit u/s 68 - Addition of sale proceeds of shares of alleged penny stock - AO has primarily placed reliance on the report given by the Investigation wing of the Income tax department Kolkatta in order to arrive at the conclusion that the long term capital gains reported by the assessee is bogus in nature HELD THAT - We notice that the investigation report prepared by Investigation wing Kolkata 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. AR also submitted that the regulator of stock market SEBI has not conducted any enquiry against the assessee. AO has assessed the Sale consideration of shares as unexplained cash credit u/s 68. It is pertinent to note that the purchase of shares made in an earlier year has been accepted by the revenue. The sale of shares has taken place in the online platform of the Stock exchange and the sale consideration has been received through the stock broker in banking channels. Hence in the facts of the case the sale consideration cannot be considered to be unexplained cash credit in terms of sec. 68 of the Act. In the instant case the AO has not established that the assessee was involved in price rigging and further the AO did not find fault with any of the documents furnished by the assessee. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issue in this case revolves around whether the sale proceeds from the shares of M/s Sunrise Asian Ltd., claimed as long-term capital gains by the assessee and consequently exempt under Section 10(38) of the Income Tax Act, should be treated as unexplained cash credit under Section 68 of the Act. The Tribunal considered whether the transactions in question were genuine or part of a scheme involving the manipulation of share prices, commonly referred to as "penny stock" transactions.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents:

The legal framework involves Section 68 of the Income Tax Act, which pertains to unexplained cash credits, and Section 10(38), which provides for the exemption of long-term capital gains from the sale of equity shares. The Tribunal also considered various precedents, including decisions from the Bombay High Court and other judicial bodies, which emphasize the necessity of concrete evidence to substantiate claims of bogus transactions.

Court's Interpretation and Reasoning:

The Tribunal scrutinized the reliance of the Assessing Officer (AO) on a generalized report from the Investigation Wing, which alleged manipulation of share prices. The Tribunal noted that the AO did not provide specific evidence linking the assessee to the alleged manipulation activities. It highlighted that the AO did not conduct further investigations to substantiate the claim that the transactions were part of a scheme to generate bogus capital gains.

Key Evidence and Findings:

The assessee provided evidence of the purchase and sale of shares through banking channels, the dematerialization of shares, and transactions conducted via the stock exchange platform. The Tribunal observed that the AO did not find any discrepancies in the documentation provided by the assessee. Additionally, the Tribunal noted that the AO did not receive responses to notices issued to various parties, including the stock exchange and brokers, which further weakened the AO's position.

Application of Law to Facts:

The Tribunal applied the principles from relevant case law, emphasizing that mere reliance on a generalized investigation report without specific evidence linking the assessee to fraudulent activities is insufficient to classify the transactions as unexplained cash credits. The Tribunal found that the assessee had discharged the initial burden of proof by providing detailed documentation of the transactions.

Treatment of Competing Arguments:

The Tribunal considered the Department's arguments, which were based on the investigation report and the alleged confession of an operator involved in the scheme. However, it found these arguments unconvincing due to the lack of direct evidence implicating the assessee. The Tribunal also referenced several judicial precedents that supported the assessee's position, noting that the AO failed to establish a direct connection between the assessee and the alleged price manipulation.

Conclusions:

The Tribunal concluded that the AO's reliance on the investigation report, without further substantiating evidence, was insufficient to classify the transactions as unexplained cash credits. It determined that the assessee's transactions were genuine based on the evidence provided.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning:

The Tribunal emphasized: "The AO has assessed the Sale consideration of shares as unexplained cash credit u/s 68 of the Act. It is pertinent to note that the purchase of shares made in an earlier year has been accepted by the revenue. The sale of shares has taken place in the online platform of the Stock exchange and the sale consideration has been received through the stock broker in banking channels."

Core Principles Established:

The Tribunal reinforced the principle that the burden of proof lies with the Department to establish that transactions are bogus. Mere reliance on generalized reports without specific evidence is inadequate. The Tribunal also highlighted the importance of examining the factual matrix of each case individually.

Final Determinations on Each Issue:

The Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition of sale proceeds of shares made under Section 68 of the Act. It concluded that the transactions were genuine and the assessee's appeal was allowed.