2024 (4) TMI 19 - AT - Income Tax

Bogus LTCG - Exemption u/s 10(38) denied - addition of presumptive commission @ 3% to the entry operator for providing long term capital gain, treating it as unexplained expenditure - HELD THAT - We draw our force from the decision of Arun Kumar Agarwal (HUF) 2012 (8) TMI 398 - JHARKHAND HIGH COURT wherein it has been held that the long term capital gain realized on sale of penny stocks has to be treated as genuine as the assessee has furnished all the evidences in support of her claim. In the present case, the purchase of shares has not been disputed or doubted. However, the sale has been disputed in the current year to be bogus and in the nature of accommodation entries. Thus we set aside the orders of the authorities below and delete the addition made towards Long Term Capital Gain on sale of shares of CCL. Accordingly, grounds taken by the assessee in this respect are allowed.

Summary

Issues Involved:
1. Addition towards long term capital gain on sale of shares claimed as exempt under Section 10(38) of the Income Tax Act.
2. Payment of presumptive commission to the entry operator, treated as unexplained expenditure.

Summary:

Issue 1: Addition towards long term capital gain on sale of shares claimed as exempt under Section 10(38) of the Income Tax Act

The assessee filed her return of income reporting total income and claiming exemption towards long-term capital gain on the sale of shares of CCL International Ltd. The case was reopened under Section 147 of the Act. The Assessing Officer (AO) held the transaction of long-term capital gain as not genuine, representing undisclosed money introduced in the form of long-term capital gain, and completed the assessment with an increased total income.

The assessee had purchased shares of AAR Infrastructure Ltd., which later amalgamated into CCL International Ltd. The shares were sold on the Bombay Stock Exchange through a registered stockbroker, and the sale proceeds were credited to the assessee's bank account. The assessee furnished various documentary evidence to support the transaction, including purchase bills, bank statements, confirmation by the seller, delivery of shares in the DMAT account, sale contract notes, and STT paid certificates.

The AO, after discussing the modus operandi and several judicial precedents, held that the long-term capital gain was bogus, representing undisclosed money introduced as exempt income. The AO added the amount under the head income from unexplained money and estimated a commission payment for providing capital gains, making a further addition as unexplained expenditure. The CIT(A) confirmed the addition, discussing the theory of preponderance of human probabilities and various judicial precedents.

The assessee's counsel argued that the investment and disinvestment in CCL shares could not be treated as accommodation entries in the garb of LTCG, relying on the decision of the Hon'ble jurisdictional High Court of Jharkhand in the case of Arun Kumar Agarwal, HUF. The counsel contended that no addition could be made based on doubts and suspicion merely on information from the Investigation Wing, without independent inquiry by the AO. The counsel also argued that off-market transactions are not illegal, and the requirement for payment of STT on purchase of shares was brought in by a later amendment.

The Tribunal found force in the contentions raised by the assessee's counsel, supported by corroborative evidence and relevant judicial precedents. The Tribunal noted that the assessee had sufficiently explained her case with cogent evidence, which was not rebutted or found false. The Tribunal upheld the claims made by the assessee in respect of Long Term Capital Gain on the sale of shares of CCL, listing down several points in support of their decision, including the genuineness of the transaction, the legality of off-market transactions, and the lack of independent inquiries by the AO.

Issue 2: Payment of presumptive commission to the entry operator, treated as unexplained expenditure

The Tribunal also addressed the addition made towards brokerage/commission as unexplained expenditure under Section 69C, treating the LTCG as bogus and an accommodation entry. The Tribunal found that the addition was based on surmises, conjectures, and suspicion, with no evidence to establish the payment of the alleged brokerage/commission. The Tribunal deleted the addition made towards brokerage/commission, as it was consequent to the addition made towards LTCG.

In conclusion, the Tribunal set aside the orders of the authorities below, deleted the addition made towards Long Term Capital Gain on the sale of shares of CCL, and also deleted the addition made towards brokerage/commission as unexplained expenditure. The appeal of the assessee was allowed.

Order pronounced in the open court on 29th February, 2024.