2023 (6) TMI 1472 - AT - Income Tax

Bogus LTCG - AO held that the assessee has converted his unaccounted cash into accounted one by obtaining entries of long term capital gains - AO rejected the claim for exemption u/s 10(38) of the Act - HELD THAT - In the instant case even though the AO has initially stated that he is rejecting the exemption claimed u/s 10(38) of the Act yet the AO has assessed entire sale proceeds received on sale of shares ad income of the assessee meaning thereby he has made addition u/s 68 of the Income tax Act. The responsibility placed upon the assessee u/s 68 of the Act is different i.e. the initial burden to prove the cash credits is placed upon the shoulders of the assessee. As noticed earlier the assessee herein has discharged the initial onus placed upon him u/s 68. We noticed that the assessee has furnished all documents relating to purchase and sale of securities. The shares have entered and exited his demat account. The purchase and sale transactions have been routed through the bank accounts of the assessee. All these documentary evidences produced by the assessee have not been disproved. However the AO has simply relied upon the report of the investigation department including the statements taken from certain parties and held that the long term capital gains declared by the assessee are not genuine. It is also not the case of the AO that those parties have implicated the assessee nor he could show that the assessee was part of the team which was involved in the triggering of prices. No other material was brought on record by the AO to prove that the assessee has indeed availed only accommodation entries. With regard to questions as to why the shares of the above said company was purchased the assessee has explained that the said decisions were taken by his late father and hence he could not explain the reasons. It was not shown that the said explanation was incorrect and hence in our view the same cannot be rejected. The assessee has sold the shares when the prices have started falling which is the usual tendency of the investors. Had he been part of the wing which triggered the prices he would know the peak price and would have sold the shares at that price only. It was the case here and hence this fact shows that the assessee was not part of that group. We further notice that the assessee is a regular investor in the shares and held shares in many companies. In view of the foregoing discussions and on a conspectus of the matter we are of the view that the decision rendered in the cases of Shyam R Pawar 2014 (12) TMI 977 - BOMBAY HIGH COURT and Ziauddin A Siddique 2022 (3) TMI 1437 - BOMBAY HIGH COURT are squarely applicable to the facts of the present case. Thus hold that the CIT(A) was justified in directing the AO to delete the assessment of sale consideration of shares as income of the assessee. Addition relating to commission expenses - Since we have deleted the assessment of sale consideration of shares the consequential addition made by the AO by way of commission expenses is also liable to be deleted. Accordingly we uphold the decision of CIT(A) in deleting the addition relating to commission expenses. Additions on the basis of SMS messages found in the phones of the assessee - In the instant case the AO has not rejected the books of accounts and hence in our view he cannot ignore the entries made therein. When the payments have been made out of cash balance available in the books of accounts of various family members the sources for the same stand explained. Hence we are of the view that there is no scope of making addition on the suspicion and surmises that the same was an afterthought. Accordingly we hold that the aggregate amount of payments made by the assessee to the interior decorator was Rs. 15.00 lakhs only. Further the assessee has explained the sources for making the above said payment. Accordingly tax authorities are not justified in making the addition of Rs. 5.00 lakhs in AY 2015-16 and Rs. 15.00 lakhs in AY 2016-17. Accordingly we set aside the orders passed by Ld CIT(A) in respect of above said additions in both the years and direct the AO to delete the same in both the years.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the long-term capital gains declared by the assessee from the sale of shares of M/s Matra Kaushal Enterprises Ltd. are genuine or constitute bogus transactions aimed at tax evasion.
• Whether the additions made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, assessing the entire sale proceeds as income of the assessee, were justified.
• Whether the additions made under Section 69C of the Income Tax Act for unexplained expenditure towards cash payments to an interior decorator were justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Long-term Capital Gains from Sale of Shares

• Relevant Legal Framework and Precedents: The case revolves around the application of Section 68 and Section 10(38) of the Income Tax Act. The AO's decision was based on alleged bogus transactions and accommodation entries. The Tribunal referred to precedents such as PCIT vs. Smt. Krishna Devi and others, which emphasize the necessity of corroborative evidence beyond mere reliance on investigation reports.
• Court's Interpretation and Reasoning: The Tribunal observed that the AO relied heavily on investigation reports without conducting independent inquiries. The AO failed to prove that the assessee was involved in price rigging or accommodation entries.
• Key Evidence and Findings: The assessee provided documentation supporting the purchase and sale of shares, including payment through banking channels and dematerialization of shares. The AO did not dispute these documents but relied on general allegations of price manipulation.
• Application of Law to Facts: The Tribunal applied the principles established in previous judgments, emphasizing the need for concrete evidence to support claims of bogus transactions. The Tribunal found that the AO's conclusions were based on assumptions and lacked substantive evidence.
• Treatment of Competing Arguments: The Tribunal considered arguments from both the Department and the assessee, ultimately finding that the Department failed to substantiate its claims with credible evidence.
• Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 2.14 crores and related commission expenses, finding no justification for treating the sale proceeds as income under Section 68.

Issue 2: Unexplained Expenditure towards Cash Payments

• Relevant Legal Framework and Precedents: The additions were made under Section 69C of the Income Tax Act, which deals with unexplained expenditure.
• Court's Interpretation and Reasoning: The Tribunal examined the evidence, including SMS messages and ledger accounts, and found inconsistencies in the AO's findings regarding cash payments.
• Key Evidence and Findings: The assessee provided an explanation for the cash payments, detailing the sources of cash from family members. The Tribunal noted that the AO did not reject the books of accounts, which recorded these transactions.
• Application of Law to Facts: The Tribunal applied the principle that when books of accounts are not rejected, entries therein cannot be ignored without substantive evidence to the contrary.
• Treatment of Competing Arguments: The Tribunal considered the Department's argument that the explanations were an afterthought but found them unsupported by evidence.
• Conclusions: The Tribunal directed the deletion of additions of Rs. 5 lakhs and Rs. 10 lakhs for AY 2015-16 and 2016-17, respectively, finding the explanations for cash payments satisfactory.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The theory of human behaviour and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the respondent."
• Core Principles Established: The judgment reinforces the principle that mere reliance on investigation reports without corroborative evidence is insufficient to justify additions under Sections 68 and 69C. It emphasizes the need for concrete evidence and the importance of respecting statutory exemptions and rights.
• Final Determinations on Each Issue: The Tribunal dismissed the revenue's appeal regarding the addition of Rs. 2.14 crores and related commission expenses. It allowed the assessee's appeals, directing the deletion of additions under Section 69C for unexplained expenditure.