2024 (11) TMI 756 - AT - Income Tax

Addition u/s 68 and 69C - bogus LTCG - denial of exemption u/s 10(38) concluding that the case was within the ambit of 'Penny Stocks - transaction of purchase and sale were of shares were not genuine - HELD THAT -Assessee has furnished various documentary evidences in support of purchase and subsequent sale of the shares leading to earning of LTCG by the assessee, as mentioned in brief herein above and mentioned in detail in the submission of the ld. AR. The assessee has purchased 265 shares for Rs. 53,000/- and made payment through banking channel which stood debited in the bank account of the assessee. These shares were dematerialized on 22.01.2011 and deposited in the D- MAT account maintained by Zuari Investments Ltd., an independent third party. Thus, it is clear that 265 shares were purchased by the assessee and same is quite evident not only from the books on accounts of the assessee but also D- MAT account of the assessee maintained by independent third party, duly recognized by the concerned authorities. The amount of purchase consideration stood debited in the bank account of assessee. These facts and evidences more particularly the shares being reflected in D-MAT account of the assessee, maintained by independent third party, clearly lead to infer the holding of the share and consequently also the purchase of these shares by assessee cannot be disputed. Now coming to the sale of share, it is seen that assessee has sold these shares (shares of Bakra Pratisthan Ltd.) through online transaction via recognized stock broker M/s Fix Fit Securities Pvt. Ltd. Transaction of sale is supported by contract note and as per the contract note, these shares were sold on 30.03.2012. The contract note is having time stamped, trade number, order time and trade time etc. As the sale of shares have been made through online system on stock exchange, obviously same has been made at the prevailing market rate of the shares. Accordingly, the sale rate so shown by the assessee cannot be doubted. Once the assessee has produced all the supporting evidences not only of sales but also of the purchase of the shares which include purchase bill, bank account showing payment of the purchase consideration, DMAT account reflecting holding of the shares in the D-MAT account of the assessee, sale of shares through online on stock exchange which are also reflected in the D-MAT account, contract notes for sale and receipt of sale consideration in the bank account of the assessee as is evident from the bank account, then in absence of any contrary material or evidence brought on record by the ld. AO, the transaction of purchase and sale of shares in question cannot be held as bogus merely on the basis of investigation carried out by the department in some other case behind the back of the assessee where some persons were found to be indulged in providing accommodation entry and more particularly when even those persons have not specifically stated anywhere in their statement that the assessee is one of the beneficiary of arrangement of accommodation entry provided by them. In the entire assessment order the AO has not made any reference to any documentary evidence which can be said to be an incriminating material against the assessee which may reflect that the assessee has availed the accommodation entry of bogus long term capital gain. Mere uncorroborated statement of third person with which assessee has not at all dealt with in purchase and sale of share and even the person has not named the assessee being beneficiary from him / them or through his / their companies cannot be a ground for treating the transaction of purchase and sale of shares so made by the assessee as bogus, in absence of any cogent evidence or material brought on record by the AO. The statement of those third person about accommodation entry may be the starting point for doubting the transaction (though it is evident that assessee has not carried out any transaction through these persons or their companies) but for converting a doubt into certainty, the AO is required to produce the contrary material evidence and evidence produced by the assessee need to be controverted, but the AO has failed to do so - Thus, as per Pooja Agarwal 2017 (9) TMI 1104 - RAJASTHAN HIGH COURT and Pramod Jain ORs. 2018 (7) TMI 2161 - RAJASTHAN HIGH COURT it is held that claim of long term capital gain of exemption u/s 10(38) of I.T. Act does not suffer from infirmities and cannot be held as bogus and accordingly, the addition so made by the AO and confirmed by the CIT(A) is hereby deleted. Decided in favour of assessee. Addition u/s 69C - As the transaction of purchase and sale of shares and consequent long term capital gain so earned has been held to be not bogus, therefore, addition made by the AO on account of notional commission allegedly paid, is not sustainable too.

Summary

Issues Involved:

1. Legitimacy of additions made under sections 68 and 69C of the Income Tax Act.
2. Denial of exemption under section 10(38) based on the classification of the transaction as involving 'Penny Stocks'.
3. Evaluation of the genuineness of the transaction of purchase and sale of shares.
4. Alleged denial of the right to cross-examine witnesses.
5. Relevance of judicial precedents cited by the CIT(A) in the appellant's case.

Issue-Wise Detailed Analysis:

1. Legitimacy of Additions under Sections 68 and 69C:

The appeal challenges the addition of Rs. 9,37,172/- under section 68 and Rs. 18,743/- under section 69C of the Income Tax Act. The Assessing Officer (AO) treated the long-term capital gain (LTCG) as an accommodation entry and therefore bogus, further adding a commission allegedly paid for obtaining such entries. The appellant contended that the purchase and sale of shares were genuine, supported by documentary evidence such as purchase invoices, bank statements, and demat account statements. The AO's reliance on third-party statements recorded by the Investigation Wing, which were not directly linked to the appellant, was deemed insufficient to justify the additions. The Tribunal found that the AO failed to provide any direct evidence linking the appellant to the alleged bogus transactions, thus rendering the additions unsustainable.

2. Denial of Exemption under Section 10(38):

The appellant argued against the denial of exemption under section 10(38), which was based on the presumption that the transaction involved 'Penny Stocks'. The Tribunal noted that the appellant had fulfilled all conditions for claiming the exemption, including holding the shares for more than a year and paying the Securities Transaction Tax (STT). The AO's decision was primarily based on a generalized report from the Investigation Wing without specific evidence against the appellant. The Tribunal emphasized that the burden of proof lies with the AO to establish that the transactions were not genuine, which was not met in this case.

3. Evaluation of the Genuineness of the Transaction:

The appellant provided comprehensive evidence to prove the genuineness of the transactions, including purchase and sale invoices, demat account statements, and bank records. The Tribunal found that these documents were not disputed by the AO, and there was no evidence of cash transactions or recycling of funds. The Tribunal concluded that the appellant's transactions were genuine, and the AO's reliance on third-party statements without corroborative evidence was insufficient to declare the transactions as bogus.

4. Alleged Denial of the Right to Cross-Examine Witnesses:

The appellant contended that the denial of the opportunity to cross-examine witnesses whose statements were used against them violated principles of natural justice. The Tribunal agreed, citing the Supreme Court's decision in Andaman Timber Industries, which emphasized the necessity of allowing cross-examination when statements are relied upon. The Tribunal found that the AO's failure to provide this opportunity rendered the assessment process flawed.

5. Relevance of Judicial Precedents Cited by the CIT(A):

The CIT(A) relied on various judicial precedents, including the Calcutta High Court's decision in Swati Bajaj, to support the AO's findings. However, the Tribunal noted that these precedents were distinguishable based on the specific facts of the appellant's case. The Tribunal highlighted that the appellant had provided substantial evidence to support their claims, and the CIT(A)'s reliance on generalized judgments without addressing the appellant's specific circumstances was misplaced.

Conclusion:

The Tribunal allowed the appeal, finding that the additions made by the AO were not justified based on the evidence presented. The Tribunal emphasized the importance of adhering to principles of natural justice and the need for the AO to provide specific evidence when challenging the genuineness of transactions. The decision underscores the necessity for tax authorities to substantiate their claims with concrete evidence rather than relying on generalized reports or assumptions.