2024 (10) TMI 1081 - AT - Income Tax

Addition u/s 68 - denial of claim of exemption u/s 10(38) - Bogus share transactions - abnormal price rise in penny stock shares - HELD THAT - When AO is having the details about the call record of the person who sold the shares to the assessee, wherein the question now remains of failure on the part of the assessee to produce the seller before the AO. In view of such overwhelming evidence of purchase of the shares, we find that existence of the shares in the Demat account of the company cannot be denied or rejected. Even the grounds of appeal raised by the learned AO before us is reliance on circumstantial evidence mentioned in the assessment order wherein abnormal price rise in the share of Surabhi chemical and investment Ltd without having strong financial status is challenged. The ground did not challenge that the impugned capital gain earned by the assessee has been proved as a sham transaction by the AO. Merely based on circumstantial evidence, the addition under section 68 could not have been made when assessee has discharged her initial onus by producing all the evidence. AO should have penetrated those evidence and thrown back onus on the assessee, which is lacking. Regarding the ignorance of the assessee with respect to the financial statements of the company who shares assessee purchased, it is clear from the statement that assessee stated that Mr Lalit Jain has carried out these transactions being part of the family. It is not unusual that brother-in-law of the assessee carried on these transactions. Mr Jain in statement has replied to most of the queries. However admittedly, he failed to answer who are the directors and what is the business of the company, but those questions are not so important, when overwhelming evidence are produced, that the capital gain exemption to the assessee can be denied. No infirmity in the order of CIT-A in deleting the addition - Decided in favour of assessee.

Summary

Issues Involved:

1. Whether the CIT(A) erred in allowing the assessee's appeal without appreciating the evidence of abnormal price rise in penny stock shares.
2. Whether the CIT(A) erred in allowing the assessee's appeal without considering the assessee's inability to explain the long-term capital gain transaction.

Issue-wise Detailed Analysis:

1. Abnormal Price Rise in Penny Stock Shares:

The primary issue revolves around the abnormal price rise in the shares of Surabhi Chemicals & Investments Ltd., which the Assessing Officer (AO) claimed were manipulated to provide tax-exempt long-term capital gains to the assessee. The AO argued that the price increase was not commensurate with the company's financial performance and was part of a scheme involving accommodation entries. The AO's assessment was based on a report from the Principal Director of Income Tax (Investigation), Kolkata, which identified the shares as part of a syndicate operation to manipulate stock prices.

The CIT(A), however, found that the assessee had provided substantial evidence to support the genuineness of the transactions, including purchase bills, bank statements, Demat statements, and contract notes. The CIT(A) also noted that the shares were purchased and sold at market rates through a recognized stock exchange, and the transactions were supported by documentary evidence. The appellate authority relied on judicial precedents, including decisions from the ITAT and High Courts, which held that transactions supported by documentary evidence and conducted at market rates could not be dismissed as bogus without concrete evidence of manipulation or involvement in rigging.

2. Assessee's Inability to Explain Long-term Capital Gain Transaction:

The AO contended that the assessee was ignorant of the details of the transactions and the financials of the company, suggesting that the transactions were sham. The AO recorded statements from the assessee and her brother-in-law, who managed the share transactions, to support this claim. However, the CIT(A) found that the lack of detailed knowledge about the company and its directors did not invalidate the transactions, especially when substantial documentary evidence was provided to support the genuineness of the capital gains.

The CIT(A) emphasized that the AO did not provide any evidence linking the assessee to the alleged syndicate or manipulation activities. Furthermore, the CIT(A) noted that the AO's reliance on circumstantial evidence and the absence of direct evidence against the assessee weakened the case for treating the transactions as non-genuine. The appellate authority concluded that the AO's findings were based on assumptions and suspicions rather than concrete evidence, and the assessee had successfully discharged her initial onus by providing all necessary documentation.

Conclusion:

The appeal by the AO was dismissed, as the CIT(A) found no infirmity in the assessee's transactions. The CIT(A) allowed the exemption of the long-term capital gain under section 10(38) of the Income Tax Act, 1961, and deleted the additions made under sections 68 and 69C. The judgment emphasized the importance of concrete evidence over circumstantial assumptions and upheld the principle that transactions conducted at market rates with proper documentation should not be disallowed without substantial proof of wrongdoing. The tribunal's decision was pronounced in the open court, affirming the CIT(A)'s order.