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2024 (8) TMI 1078 - AT - Income TaxAddition u/s 68 - sale of shares of penny stock treating it as bogus and estimated expenses - denial of exemption u/s. 10(38) - reliance on the report given by the Investigation Wing of the Income-tax Department, Kolkatta in order to arrive at the conclusion that the Long Term Capital Gain reported by the assessee is bogus in nature. HELD THAT - We notice that the investigation report prepared by Investigation Wing, Kolkatta is a generalized report with regard to the modus operandi adopted in manipulation of prices of certain shares and generation of bogus capital gains. We notice that the AO has placed reliance on the said report, without bringing any material on record to show that the transactions entered by the assessee were found to be a part of manipulated transactions, i.e., it was not proved that the assessee has carried out the transactions of purchase and sale of shares in connivance with the people, who were involved in the alleged rigging of prices. We notice that the promoters and their associations of M/s. Pine Animation Ltd., were initially debarred from accessing stock market, but the same has been revoked by the SEBI. We noticed earlier that the assessee has sold the shares during the period from June 05, 2014 to September 15, 2014. Thus, the transactions of purchase and sale of shares by the assessee have happened prior to the passing of initial order by SEBI, which has been later revoked. Hence, we are of the view that the transactions of purchase and sale of shares of M/s. Pine Animation Ltd., by the assessee would not be affected by the above said orders of the SEBI. In the statement recorded from the assessee, she has stated that she was guided by her husband in making the investment, who is a Chartered Accountant by profession. Further, the shares have entered and exited the demat account of the assessee. We notice that the AO himself has not found any defect/deficiencies in the evidences furnished by the assessee with regard to purchase and sale of shares. Further, the AO has not brought on record any material to show that the assessee was part of the group, which involved in the manipulation of prices of shares. Hence, there is no reason to suspect the purchase and sale of shares undertaken by the assessee. CIT(A) was justified in deleting the addition of value of sale consideration arising on sale of shares of M/s. Pine Animation Ltd. Since we have confirmed the decision of Ld CIT(A) in holding that the sale transactions of shares cannot be doubted with, the addition made by the AO with regard to estimated commission expenses is also liable to be deleted - Decided in favour of assessee.
Issues Involved:
1. Legitimacy of Long Term Capital Gain (LTCG) from sale of shares of Pine Animation Ltd. 2. Denial of exemption under Section 10(38) of the Income Tax Act, 1961. 3. Treatment of sale consideration as unexplained cash credit under Section 68. 4. Estimation of commission expenses as unexplained expenditure under Section 69C. 5. Violation of principles of natural justice due to denial of cross-examination. Issue-wise Detailed Analysis: 1. Legitimacy of Long Term Capital Gain (LTCG) from sale of shares of Pine Animation Ltd.: The assessee declared LTCG of Rs. 4,37,82,238/- from the sale of shares of Pine Animation Ltd., which was claimed as exempt under Section 10(38) of the Income Tax Act, 1961. The Assessing Officer (AO) reopened the assessment based on information from the Investigation Wing, Kolkata, which suggested manipulation in the prices of penny stocks to generate bogus capital gains. The AO relied heavily on the investigation report, which indicated that the financial results of Pine Animation Ltd. did not justify the steep rise in share prices and that the shares were sold to certain "Exit Providers" involved in price manipulation. Despite the assessee furnishing evidence supporting the purchase and sale of shares, the AO deemed the transactions non-genuine. 2. Denial of exemption under Section 10(38) of the Income Tax Act, 1961: The AO rejected the assessee's claim for exemption under Section 10(38) by treating the LTCG as bogus, primarily relying on the investigation report without independent verification. The AO also denied the assessee's request for cross-examination of the persons whose statements were relied upon, citing that the Indian Evidence Act is not applicable to Income-tax Proceedings. The AO concluded that the LTCG was a colorable device to show artificial income. 3. Treatment of sale consideration as unexplained cash credit under Section 68: The AO assessed the entire sale consideration of Rs. 4,39,75,148/- as unexplained cash credit under Section 68 of the Act. The AO's decision was based on the premise that the transactions were not genuine and were part of a scheme to generate bogus capital gains. 4. Estimation of commission expenses as unexplained expenditure under Section 69C: The AO estimated that the assessee incurred expenses amounting to 5% of the sale consideration (Rs. 21,98,757/-) to procure the bogus LTCG and assessed this amount as unexplained commission expenditure under Section 69C of the Act. 5. Violation of principles of natural justice due to denial of cross-examination: The Commissioner of Income Tax (Appeals) [CIT(A)] observed that the AO had verbatim copied the investigation report without conducting an independent examination of the assessee's transactions. The CIT(A) also noted that the AO denied the assessee the opportunity to cross-examine the persons whose statements were relied upon, thus violating the principles of natural justice. The CIT(A) deleted both the additions made by the AO, leading to the Revenue's appeal. Tribunal's Observations and Decision: 1. Reliance on Investigation Report: The Tribunal noted that the AO primarily relied on a generalized investigation report without bringing any material on record to show that the assessee's transactions were part of manipulated transactions. The Tribunal emphasized that the SEBI had revoked its earlier order debarring the promoters of Pine Animation Ltd., indicating no adverse findings against them. 2. Genuineness of Transactions: The Tribunal observed that the assessee had provided substantial evidence, including purchase through banking channels, dematerialization of shares, and sale through the stock exchange platform. The AO did not find any defects in these evidences. The Tribunal also noted that the assessee's husband, a Chartered Accountant, guided the investment, and no adverse findings were made in their statements. 3. Jurisdictional High Court Decisions: The Tribunal referred to various decisions of the Bombay High Court, which held that transactions of purchase and sale of shares cannot be considered bogus if documentary evidence establishes their genuineness. The Tribunal found no reason to suspect the transactions in the present case. 4. Violation of Principles of Natural Justice: The Tribunal upheld the CIT(A)'s observation that the AO violated the principles of natural justice by denying the assessee the opportunity for cross-examination. Conclusion: The Tribunal confirmed the CIT(A)'s decision to delete the additions made by the AO, holding that the sale transactions of shares were genuine. Consequently, the addition made under Section 68 for unexplained cash credit and the estimated commission expenses under Section 69C were also deleted. The Tribunal dismissed the Revenue's appeal. Order Pronounced: The appeal of the Revenue was dismissed, and the order was pronounced in the open court on 20th August, 2024.
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