2024 (8) TMI 628 - AT - Income Tax

Bogus LTCG - Addition u/s 68 - denying exemption claimed under section 10(38) for the sale proceeds of listed equity shares alleged as penny stock - HELD THAT - As we notice that assessee has a. purchased the shares under accepted off-line mode by making payment through banking channel. b. dematerialized the shares purchased by credit to the DMAT account and part of it were later sold out of the holding. c. sold the shares on the platform of recognised stock exchange on the then prevailing prices. d. received the sale proceeds through stock market process in his bank 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 AO on the purchase and sale of shares is baseless. We also note that AO did not allow the assessee to cross examination the parties whose statements were relied upon by him for drawing the adverse conclusion. Such an approach adopted by ld. Assessing Officer is not in compliance with the provisions of section 142(3) of the Act which is a statutory mandatory procedural requirement for making a valid assessment. We note that the required compliance with section 142(3) has not been met. 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. Thus, we uphold the finding arrived at by the CIT(A) and accordingly delete the addition made u/s 68 towards proceeds of sale of listed shares 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 Revenue in this respect are dismissed. Commission for arranging alleged artificial capital gains @ 3% also deleted. Decided against revenue.

Issues Involved
1. Deletion of addition made under section 68 of the Income-tax Act, 1961.
2. Denial of exemption claimed under section 10(38) for the sale proceeds of listed equity shares.
3. Addition under section 69C as unexplained expenditure towards commission.
4. Applicability of judicial precedents and principles of natural justice.

Detailed Analysis

Issue 1: Deletion of Addition under Section 68
The Revenue challenged the deletion of the addition of Rs. 62,45,275/- made under section 68 of the Income-tax Act, 1961, which was the sale proceeds of shares of Surbhi Chemicals & Investments Ltd. The Assessing Officer (AO) had concluded that the transactions were bogus, based on the Investigation Wing's findings that the shares were penny stocks used for creating artificial gains. However, the CIT(A) deleted the addition, noting that the AO did not provide specific findings against the assessee and did not allow cross-examination, violating principles of natural justice.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee had provided sufficient documentary evidence to prove the genuineness of the transactions, including bank statements, purchase bills, demat statements, and sale bills. The AO failed to point out any discrepancies in these documents. The Tribunal referenced the decision in CIT vs. Jamnadevi Agrawal [2012] and PCIT v. Krishna Devi [2021], which supported the genuineness of transactions when backed by documentary evidence.

Issue 2: Denial of Exemption under Section 10(38)
The AO denied the exemption under section 10(38) for long-term capital gains on the sale of shares, alleging that the transactions were part of a scheme to evade taxes. The CIT(A) reversed this decision, and the Tribunal agreed, noting that the transactions were conducted through a recognized stock exchange and involved payment of Securities Transaction Tax (STT). The Tribunal found no evidence to suggest that the assessee was involved in price rigging or that the transactions were not genuine.

The Tribunal emphasized that the burden of proof shifted to the Revenue once the assessee provided documentary evidence. The AO's reliance on the Investigation Wing's report without specific evidence against the assessee was insufficient to deny the exemption.

Issue 3: Addition under Section 69C for Unexplained Expenditure
The AO made an addition of Rs. 1,87,358/- under section 69C as unexplained expenditure towards commission, estimated at 3% of the sale proceeds. This addition was consequential to the primary addition under section 68. Since the Tribunal deleted the addition under section 68, the consequential addition under section 69C also lacked a foundation and was deleted.

Issue 4: Applicability of Judicial Precedents and Principles of Natural Justice
The Tribunal criticized the AO for not allowing the assessee to cross-examine the parties whose statements were relied upon, violating section 142(3) of the Act. The Tribunal also noted that the AO's conclusions were based on assumptions and conjectures rather than concrete evidence.

The Tribunal referenced several judicial precedents, including decisions from the Hon'ble High Court of Bombay, which held that transactions conducted through recognized stock exchanges and supported by documentary evidence could not be considered bogus. The Tribunal also noted the principle established by the Hon'ble Supreme Court in Union of India vs. Kamalakshi Finance Corporation Ltd, emphasizing the need for judicial discipline and adherence to higher appellate authorities' decisions.

Conclusion
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the additions under sections 68 and 69C and to allow the exemption under section 10(38). The Tribunal emphasized the importance of documentary evidence, the burden of proof, and adherence to principles of natural justice.

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