2024 (8) TMI 1553 - AT - Income Tax

Addition made u/s 68 - denying exemption claimed u/s 10(38) for the sale proceeds of listed equity shares alleged as penny stock - HELD THAT - Assessee cannot be put to the rigors of section 68 in respect of sale proceeds received for sale of shares on the stock exchange (BSE) and gain arising thereon. Assessee is a regular investor with investment in shares of other companies duly reflected in his DMAT account. We note that AO has not brought on record any material to show that assessee was part of any group which was involved in the manipulation of share prices. Suspicion by the ld. Assessing Officer on the purchase and sale of shares is baseless. AO has referred to the theory of preponderance of probability which according to us is applied to weigh the evidence of either side and draw a conclusion in favour of a party which has more favourable factor in his side. The conclusions have to be drawn on the basis of certain admitted facts and materials and not on the basis of presumption of fact that might go against the assessee. Once nothing has been proved against the assessee with the aid of any direct material nothing can be implicated against the assessee on the presumption or suspicion howsoever strong it might appear to be true. We delete the addition made u/s 68 towards proceeds of sale of listed shares of PS IT which gave rise to Long Term Capital Gain on the said sale claimed exempt by the assessee u/s 10(38). Accordingly grounds taken by the assessee in this respect are allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the transactions of purchase and sale of shares by the assessee are genuine and eligible for exemption under section 10(38) of the Income Tax Act.
• Whether the addition made under section 68 of the Income Tax Act for unexplained cash credits is justified.
• Whether the assessee has discharged the burden of proof regarding the genuineness of the transactions and the identity and creditworthiness of the parties involved.
• Whether the reliance on the doctrine of preponderance of human probability by the Assessing Officer is appropriate in this context.
• Whether the findings and conclusions drawn by the Assessing Officer and CIT(A) are supported by cogent evidence or based on mere assumptions and conjectures.

2. ISSUE-WISE DETAILED ANALYSIS

For each identified issue, the analysis is as follows:

Genuineness of Transactions and Exemption under Section 10(38):

• Legal Framework and Precedents: Section 10(38) of the Income Tax Act provides for exemption of long-term capital gains arising from the sale of equity shares on a recognized stock exchange, subject to the payment of Securities Transaction Tax (STT).
• Court's Interpretation and Reasoning: The Tribunal examined the documentary evidence provided by the assessee, including sales bills, contract notes, bank statements, and dematerialization statements, to establish the genuineness of the transactions.
• Key Evidence and Findings: The assessee provided comprehensive documentation supporting the purchase and sale of shares, payment of STT, and receipt of sale proceeds through banking channels.
• Application of Law to Facts: The Tribunal found that the transactions were conducted on a recognized stock exchange through SEBI registered brokers, and no discrepancies were pointed out in the documents furnished by the assessee.
• Treatment of Competing Arguments: The Tribunal considered the arguments of the Revenue regarding the alleged manipulation of share prices but found no substantive evidence to support these claims.
• Conclusions: The Tribunal concluded that the transactions were genuine and eligible for exemption under section 10(38).

Addition under Section 68 for Unexplained Cash Credits:

• Legal Framework and Precedents: Section 68 requires the assessee to explain the nature and source of any sum credited in the books of account, failing which it may be treated as unexplained cash credit.
• Court's Interpretation and Reasoning: The Tribunal emphasized that the burden of proof initially lies with the assessee, which shifts to the Revenue once the assessee provides prima facie evidence.
• Key Evidence and Findings: The Tribunal noted that the assessee had provided sufficient documentary evidence to establish the identity and genuineness of the transactions.
• Application of Law to Facts: The Tribunal found that the addition under section 68 was not justified as the Revenue failed to provide any material evidence to dispute the assessee's claims.
• Treatment of Competing Arguments: The Tribunal rejected the Revenue's reliance on the doctrine of preponderance of human probability, stating that conclusions must be based on evidence rather than assumptions.
• Conclusions: The Tribunal deleted the addition made under section 68.

3. SIGNIFICANT HOLDINGS

• The Tribunal held that transactions conducted on a recognized stock exchange through SEBI registered brokers, with payment of STT and receipt of sale proceeds through banking channels, are genuine and eligible for exemption under section 10(38).
• The Tribunal emphasized that the burden of proof shifts to the Revenue once the assessee provides prima facie evidence of the genuineness of transactions.
• The Tribunal concluded that the addition under section 68 was not justified in the absence of any substantive evidence from the Revenue.
• Key legal reasoning includes the statement: "Once the assessee has produced documentary evidence to establish the veracity of his claim, the burden would shift on the Revenue to establish its case."
• The Tribunal found that reliance on the doctrine of preponderance of human probability without concrete evidence is inappropriate.
• The Tribunal's decision aligns with precedents set by higher courts, emphasizing the need for evidence-based conclusions rather than assumptions.