2024 (11) TMI 636 - AT - Income Tax

Addition u/s 68 - gain accrued on the sale of shares as bogus - HELD THAT - AO and CIT(A) has applied the concept of Human probabilities and held the above said scrips to be a penny stock without bring on record how the assessee is involved in any of the scrupulous activities or directly linked to one of the person who has involved in manipulation/rigging of share prices, entry operator or exit provider as observed by the Hon ble Bombay High Court in the case of Ziauddin A Siddique 2022 (3) TMI 1437 - BOMBAY HIGH COURT Therefore, there is no material with the tax authorities to substantiate their findings that the impugned transaction is non-genuine. Therefore, we are inclined to allow the ground raised by the assessee. Accordingly the grounds raised by the assessee are allowed.

Issues Involved:

1. Legitimacy of the capital gains claimed by the assessee from the sale of shares, treated as penny stocks by the Assessing Officer (AO).
2. Alleged violation of principles of natural justice by the AO.
3. Validity of the addition made under Section 68 of the Income-tax Act, 1961.
4. Reopening of assessment under Sections 147/148 of the Act.
5. Assessee's involvement in alleged price rigging or manipulation of shares.
6. Reliance on investigation reports without corroborative evidence.
7. Denial of cross-examination rights to the assessee.

Detailed Analysis:

1. Legitimacy of Capital Gains and Penny Stock Allegation:
The AO observed that the assessee earned substantial capital gains from the sale of shares, which were treated as penny stocks due to their significant price increase not supported by the financials of the companies. The AO relied on investigation reports and treated the transactions as accommodation entries, disallowing the gains under Section 68 of the Act. However, the Tribunal found no discrepancies in the documents submitted by the assessee, such as contract notes, DEMAT account statements, and bank statements, which substantiated the transactions. The Tribunal emphasized that mere substantial profits do not justify treating a transaction as bogus without concrete evidence linking the assessee to any dubious activities.

2. Violation of Principles of Natural Justice:
The assessee contended that the AO violated principles of natural justice by relying on materials and statements collected without offering an opportunity for cross-examination. The Tribunal agreed with the assessee, highlighting that the AO's conclusions were based on surmises and conjectures without independent inquiry or evidence against the assessee. The Tribunal emphasized the necessity of confronting the assessee with any adverse material relied upon by the AO.

3. Addition under Section 68:
The AO's addition under Section 68 was based on the presumption that the capital gains were fictitious. However, the Tribunal noted that the AO failed to provide any direct evidence of the assessee's involvement in price manipulation or any illegitimate operations. The Tribunal referenced multiple judicial precedents where similar additions were deleted due to lack of evidence, reiterating that suspicion alone cannot replace legal evidence.

4. Reopening of Assessment:
For AY 2016-17, the assessment was reopened under Sections 147/148 based on information from a search operation. The assessee challenged the reopening as bad in law, arguing that the AO should have invoked Section 153C instead. The Tribunal found that the AO's reliance on investigation reports without further corroboration was insufficient to justify the reopening, aligning with its findings for AY 2014-15.

5. Assessee's Involvement in Price Rigging:
The Tribunal observed no evidence in the assessment order or CIT(A)'s order indicating the assessee's involvement in price rigging or manipulation. The Tribunal emphasized that the assessee's transactions were conducted through recognized stock exchanges and banking channels, with no evidence of cash recycling or nexus with entry operators.

6. Reliance on Investigation Reports:
The AO heavily relied on investigation reports without conducting independent inquiries or corroborating the findings with concrete evidence. The Tribunal criticized this approach, noting that reliance on such reports without substantiating evidence does not justify the conclusion that the transactions were bogus.

7. Denial of Cross-Examination:
The assessee was not granted the opportunity to cross-examine individuals whose statements were relied upon by the AO. The Tribunal underscored the importance of cross-examination as a fundamental right, especially when adverse material is used against a taxpayer.

Conclusion:
The Tribunal allowed the appeals for both assessment years, emphasizing that the AO and CIT(A) failed to substantiate their findings with credible evidence. The Tribunal reiterated that mere suspicion or reliance on investigation reports without corroborative evidence cannot justify additions under Section 68. The Tribunal's decision aligned with established jurisprudence, ensuring adherence to principles of natural justice and evidentiary standards.

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