2024 (6) TMI 97 - AT - Income Tax

Reopening of assessment u/s 147 - Notice issued beyond four years - Disallowance of claim of deduction u/s 10(38) - Bogus LTCG - HELD THAT - Admittedly the case of the Assessee was reopened after expiry of four years and there is nothing on record to suggest that the assessee has failed to disclose material facts fully and truly qua said claim of deduction u/s 10(38) of the Act and therefore on this count itself the reopening under section 147 of the Act is liable to be quashed. Addition u/s 68 - We observe that admittedly the assessee though purchased the shares as involved through off market from share broker M/s. VRP Financial Services Ltd., Navi Mumbai, however, subsequently got the same dematerialized and sold the same after the gap of 2.5 years on online platform/stock exchange and there is no specific allegation against the assessee neither any role is attributed to the assessee and/or the share broker qua rigging of scrip involved and also there is no material available on record and it is also not the case of the Revenue Department that M/s. NCL Research Financial Services Ltd. (scrip) has already been suspended by the SEBI and/or not in existence as on today. It is also not in denial that the assessee has duly filed the relevant documents such as purchase note/bills, copy of bank statements, highlighting the payment made towards acquisition, computation of LTCG and contract notes for sale of shares of M/s. NCL Research Financial Services Ltd. and copy of Form No.10DB showing details of Securities Transaction Tax (STT) collected by the broker from the assessee, ledger account of the assessee in the books of broker, Demat account statement for the period 01.04.2008 to 31.03.2011 etc. and it is also a fact that the AO has not doubted any of the documents filed by the assessee to substantiate his claim. Therefore it goes to show that the assessee has discharged its prima-facie onus casted upon him. As decided in Indravadan Jain HUF 2023 (7) TMI 1091 - BOMBAY HIGH COURT has also dealt with the identical issue as involved in the instant case and ultimately affirmed the deletion of the identical addition on account of disallowance of deduction claimed under section 10(38) observed on facts that these shares were purchased by respondent on the floor of Stock Exchange and not from the said broker, deliveries were taken, contract notes were issued and shares were also sold on the floor of Stock Exchange Thus, we are inclined to allow the claim of exemption sought under section 10(38) of the Act by the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Reopening of the case under section 147 of the Income Tax Act.
2. Disallowance of Long Term Capital Gains (LTCG) claimed as exempt under section 10(38) of the Income Tax Act.
3. Validity of the transactions involving shares of M/s. NCL Research & Financial Services Ltd.
4. Allegation of bogus transactions and tax evasion.

Detailed Analysis:

Issue 1: Reopening of the case under section 147 of the Income Tax Act
The case was reopened based on an investigation by the Investigation Directorate, Kolkata, into 84 penny stocks, including M/s. NCL Research & Financial Services Ltd. The notice under section 148 read with section 147 was issued on 30.09.2016. The assessee filed a return of income on 18.10.2016, declaring a total income of Rs. 5,55,996/-. The reopening was challenged on the grounds that there was no failure on the part of the assessee to disclose material facts fully and truly. The Tribunal observed that the reopening after four years was not justified as there was no evidence suggesting non-disclosure of material facts by the assessee.

Issue 2: Disallowance of Long Term Capital Gains (LTCG) claimed as exempt under section 10(38) of the Income Tax Act
The Assessing Officer (AO) disallowed the LTCG of Rs. 26,87,421/- claimed as exempt under section 10(38) by concluding that the transactions were bogus. The AO's findings were based on the investigation report, SEBI order, and the financials of M/s. NCL Research & Financial Services Ltd. The AO noted that the shares were purchased for Rs. 33,750/- and sold for Rs. 27,21,171/-, resulting in an 80-fold increase, which was deemed commercially implausible. The Tribunal, however, noted that the assessee had provided all necessary documents, including purchase bills, bank statements, and Demat account details, and there was no dispute on the authenticity of these documents.

Issue 3: Validity of the transactions involving shares of M/s. NCL Research & Financial Services Ltd.
The AO and the Commissioner relied heavily on the investigation reports and SEBI findings that indicated price rigging and artificial inflation of share prices. However, the Tribunal found no specific allegations against the assessee or the broker M/s. VRP Financial Services Ltd. regarding manipulation. The Tribunal also observed that the shares were dematerialized and sold on an online platform after 2.5 years, and the company was not suspended by SEBI. The Tribunal concluded that the assessee had discharged the prima facie onus by providing all relevant documents and there was no material evidence to prove the transactions were not genuine.

Issue 4: Allegation of bogus transactions and tax evasion
The AO alleged that the transactions were pre-arranged to evade taxes and launder money, citing the unusual rise in share prices and the findings of the Investigation Wing. The Tribunal, however, referred to the case of Pr. Commissioner of Income Tax vs. Indravadan Jain HUF, where similar allegations were dismissed by the High Court. The High Court had observed that the transactions were conducted on the floor of the stock exchange, payments were made by cheque, and shares were held in the Demat account, indicating genuine transactions. The Tribunal applied the same reasoning and allowed the exemption under section 10(38), concluding that the transactions were genuine and the assessee had complied with all legal requirements.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, quashing the reopening under section 147 and disallowing the addition of LTCG under section 68. The Tribunal found that the assessee had provided sufficient evidence to prove the genuineness of the transactions and there was no material evidence to support the allegations of bogus transactions and tax evasion. The exemption under section 10(38) was thus granted to the assessee.