2024 (12) TMI 857 - AT - Income Tax

Bogus LTCG - Unexplained cash credit u/s 68 - disallowance of exemption claimed u/s 10(38) on long term capital gain - HELD THAT - Addition could have been made in the hands of the assessee on the basis of preponderance of the probabilities by merely citing a judgment or judicial precedents. It is needless to state that question of fact of earning of the long term capital gain by the assessee must be decided on the principles of preponderance of the probabilities giving due weight to the specific facts as found so as to draw the conclusion that reasonable person appointed with the relevant acknowledge would draw on the basis of same fact. To find the facts, they should have been at least investigated which Assessing Officer has failed to do. AO even did not question the assessee that how he came to know about a non-descript company and purchase the shares when he is an investor and holding shares of many companies. Even the rational of purchases made by the assessee was also not questioned. In this case neither the assessee was examined, and no enquiries were made. In the case of assessee s wife, the Coordinate bench has deleted the addition. On identical facts, in the case of Arnav Goyal 2024 (2) TMI 1488 - RAJASTHAN HIGH COURT has also confirmed the deletion of addition and allowing exemption u/s. 10(38) of the Act. Thus, if the addition is made in the hands of the assessee without disproving the evidence produced by the assessee, the addition could not have been made. Decided in favour of assessee.

Issues Involved:

1. Denial of exemption under Section 10(38) of the Income Tax Act for long-term capital gains.
2. Addition of unexplained cash credit under Section 68 of the Income Tax Act.
3. Addition of commission expenditure under Section 69C of the Income Tax Act.
4. Alleged violation of principles of natural justice and lack of independent enquiry by the Assessing Officer.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 10(38) of the Income Tax Act:

The core issue in the appeal was the denial of exemption under Section 10(38) of the Income Tax Act for long-term capital gains amounting to Rs. 49,27,649/-. The assessee had claimed that the capital gains were exempt as they were derived from the sale of shares which were held for the long term. The Assessing Officer, however, rejected this claim, citing a report from the Investigation Wing of Kolkata, which classified the shares involved as "penny stocks" and alleged that the transactions were bogus. The Tribunal found that the Assessing Officer did not conduct any independent enquiry to substantiate these allegations and relied solely on the investigation report. The Tribunal emphasized that the assessee had provided comprehensive documentation, including purchase details, payment proofs, dematerialization records, and sale contracts, which were not contested by the Assessing Officer. The Tribunal concluded that without disproving the evidence submitted by the assessee, the denial of exemption under Section 10(38) was unjustified.

2. Addition of Unexplained Cash Credit under Section 68:

The Assessing Officer made an addition under Section 68 of the Income Tax Act, treating the long-term capital gains as unexplained cash credits. The Tribunal noted that the assessee had adequately demonstrated the nature and source of the credit, which was the sale of shares through a recognized stock exchange, with all transactions documented and supported by bank statements. The Tribunal criticized the Assessing Officer for failing to conduct further investigation into the transactions and for not questioning the authenticity of the evidence provided. The Tribunal highlighted that the mere reliance on the investigation report without further enquiry was insufficient for making additions under Section 68. Consequently, the Tribunal directed the deletion of the addition made under this section.

3. Addition of Commission Expenditure under Section 69C:

The Assessing Officer also added Rs. 2,46,382/- as unexplained commission expenditure under Section 69C of the Income Tax Act. This addition was linked to the alleged bogus nature of the share transactions. The Tribunal, however, found that since the primary addition under Section 68 was not sustainable, the related commission expenditure could not be upheld. The Tribunal emphasized that there was no independent evidence or enquiry to support the claim of unexplained expenditure. As a result, the Tribunal ordered the deletion of the addition under Section 69C.

4. Alleged Violation of Principles of Natural Justice and Lack of Independent Enquiry:

The assessee contended that the principles of natural justice were violated as the Assessing Officer relied on third-party statements and reports without providing an opportunity for cross-examination or conducting an independent enquiry. The Tribunal agreed with the assessee, noting that the Assessing Officer did not make any efforts to verify the transactions independently or to examine the parties involved. The Tribunal underscored the necessity of conducting a thorough enquiry before making adverse findings and criticized the arbitrary reliance on external reports without due process. The Tribunal concluded that the lack of independent enquiry and the failure to provide an opportunity for cross-examination constituted a breach of natural justice principles.

Conclusion:

The Tribunal allowed the appeal in favor of the assessee, directing the deletion of the additions made under Sections 68 and 69C, and granting the exemption under Section 10(38) of the Income Tax Act. The Tribunal emphasized the importance of independent enquiry and adherence to principles of natural justice in tax assessments.

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