2024 (7) TMI 1612 - AT - Income Tax

Exemption claimed u/s. 10(38) with respect to long term capital gains - AO received information from the Investigation Wing of Income Tax Department that the assessee manipulated accounts to generate entries of bogus long term capital gains - AO has also made an addition of 3% commission payment for getting accommodation entries etc. from various intermediaries As he is a beneficiary to claim exemption of LTCG u/s. 10(38) HELD THAT - As it is already held that the transaction as not genuine and only make-believe agreement the payment of commission is corollary the addition towards commission is also upheld. Hence the additions made with respect to LTCG and commission payment are hereby confirmed and the appeal of Revenue is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The primary issue in this appeal is whether the assessee is entitled to claim the exemption under Section 10(38) of the Income Tax Act, 1961, concerning the long-term capital gains (LTCG) allegedly accrued from the sale of shares in Splash Media & Infra Company. The core legal questions considered include the genuineness of the LTCG claim, the applicability of Section 68 regarding unexplained cash credits, and the legitimacy of the transactions involving penny stocks.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents:

The Income Tax Act, 1961, Section 10(38) provides an exemption for income arising from the transfer of long-term capital assets, being equity shares in a company, provided the transaction is chargeable to securities transaction tax (STT). Section 68 pertains to unexplained cash credits, requiring the assessee to explain the nature and source of any sum credited in the books.

Court's Interpretation and Reasoning:

The Tribunal focused on the investigation conducted by the Kolkata Income Tax Investigation Wing, which revealed a scheme involving the manipulation of penny stocks to generate fictitious LTCG. The modus operandi involved artificially inflating share prices through circular trading, involving shell companies and exit providers, to facilitate the conversion of unaccounted money into tax-exempt income.

Key Evidence and Findings:

The Tribunal noted the financials of Splash Media & Infra Company, which showed negligible business operations and weak fundamentals, inconsistent with the astronomical rise in share prices. Statements from operators and entry providers corroborated the existence of a scheme to provide accommodation entries for bogus LTCG. The assessee's transactions were linked to this scheme, as evidenced by the lack of response from alleged buyers of shares and the involvement of multiple shell companies.

Application of Law to Facts:

The Tribunal applied Section 68 to the transactions, concluding that the assessee failed to establish the genuineness of the LTCG claim. The transactions were deemed sham, as the share price rise lacked any commercial justification, and the documentation provided by the assessee did not prove the genuineness of the transactions.

Treatment of Competing Arguments:

The assessee argued that transactions were conducted through banking channels and stock exchanges, with proper documentation. However, the Tribunal held that the appearance of legality did not suffice to prove genuineness, especially given the extensive evidence of manipulation and the lack of response from share buyers. The Tribunal also dismissed the argument regarding the lack of cross-examination, citing precedents that did not mandate such an opportunity when corroborative evidence was available.

Conclusions:

The Tribunal concluded that the transactions were pre-arranged and lacked commercial substance. The LTCG claim was disallowed, and the addition under Section 68 was upheld. The Tribunal also confirmed the addition of a 3% commission payment under Section 69C, reasoning that such payments were typical in accommodation entry schemes.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning:

"The true nature of such share transactions lacked commercial contents being artificially structured transactions, entered with sole intent to evade taxes."

Core Principles Established:

The Tribunal reinforced the principle that the genuineness of transactions must be substantiated by credible evidence beyond mere documentation. It emphasized the importance of examining the economic substance over the form of transactions, particularly in cases involving penny stocks and artificial price manipulation.

Final Determinations on Each Issue:

The Tribunal reversed the order of the Commissioner of Income Tax (Appeals) and upheld the Assessing Officer's decision to deny the LTCG exemption under Section 10(38). The Tribunal confirmed the addition under Section 68 for unexplained cash credits and upheld the 3% commission addition under Section 69C.