2025 (2) TMI 292 - AT - Income Tax

Bogus LTCG - unearthed accommodation entry operations in penny stocks - onus to prove - AO rejected the argument that the purchase and sale were genuine and concluded that penny stock frauds operate as an ecosystem - LTCG was treated as unexplained cash credit u/s 68 - CIT(A) deleted the addition holding that the assessee had furnished all supporting documents such as bank statements contract notes Demat account records and audited financials proving the genuineness of the transaction. HELD THAT - In the present case the assessee has duly discharged the onus by producing all necessary evidence and the Revenue has failed to rebut them with substantive material. AO has neither examined the counterparty to establish collusion nor provided any direct evidence of price rigging. The addition therefore appears to be made on the basis of suspicion and generalization rather than concrete facts. No reason to interfere with the well-reasoned order of the CIT(A). Revenue has failed to establish that the LTCG earned by the assessee is non-genuine and the addition made under Section 68 is unsustainable. Decided against revenue.

ISSUES PRESENTED and CONSIDERED

The primary issue in this case was whether the addition of Rs. 1,17,78,534/- made under Section 68 of the Income Tax Act, 1961, treating the Long-Term Capital Gain (LTCG) on the sale of shares of Kappac Pharma Ltd. as non-genuine, was justified. The Tribunal considered whether the transactions were genuine or if they were part of a penny stock manipulation scheme.

ISSUE-WISE DETAILED ANALYSIS

Legal Framework and Precedents:

The relevant legal framework involves Section 68 of the Income Tax Act, which deals with unexplained cash credits. The Tribunal also considered precedents such as the decisions in the cases of ITO vs. Shamim M. Bharwani and judgments from the Gujarat High Court, which emphasize the need for concrete evidence to prove transactions as sham or collusive.

Court's Interpretation and Reasoning:

The Tribunal examined the detailed findings of the CIT(A), who had deleted the addition by the AO. The CIT(A) had concluded that the assessee provided sufficient documentary evidence to prove the genuineness of the transactions, including bank statements, Demat account records, and audited financials. The Tribunal found that the Revenue failed to provide conclusive evidence to counter these findings.

Key Evidence and Findings:

The assessee had purchased 51,000 shares of Kappac Pharma Ltd. and later sold them, resulting in significant LTCG. The AO suspected the transactions due to the sharp price increase and the nature of the stock as a penny stock. However, the CIT(A) noted that the assessee had provided all necessary documentation to substantiate the transactions, and there was no direct evidence linking the assessee to any manipulation or collusion.

Application of Law to Facts:

The Tribunal applied the principles from relevant case law, which require specific evidence to prove that a transaction is a sham. The Tribunal found that the AO's reliance on general observations about penny stock manipulation was insufficient without direct evidence against the assessee. The Tribunal also considered the Gujarat High Court's judgment in the case of Affluence Commodities Pvt. Ltd., which treated the purchase of the same shares as genuine.

Treatment of Competing Arguments:

The Departmental Representative argued that the transactions were non-genuine due to the offline purchase and the nature of the stock. However, the Authorized Representative for the assessee demonstrated that the transactions were conducted through recognized stock exchanges, with STT paid, and that the assessee had a history of investing in multiple shares. The Tribunal found the assessee's arguments more persuasive, given the lack of contrary evidence from the Revenue.

Conclusions:

The Tribunal concluded that the Revenue failed to establish that the LTCG was non-genuine. The addition under Section 68 was based on suspicion rather than concrete evidence, and the CIT(A)'s order to delete the addition was upheld.

SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning:

The Tribunal noted, "The Revenue has not brought any conclusive evidence to rebut these findings," emphasizing the lack of substantial evidence from the Revenue to counter the assessee's documented transactions.

Core Principles Established:

The Tribunal reinforced the principle that mere suspicion or reliance on general reports of manipulation is insufficient to justify additions under Section 68. Concrete evidence is required to prove that transactions are sham or collusive.

Final Determinations on Each Issue:

The Tribunal determined that the CIT(A)'s order deleting the addition of Rs. 1,17,78,534/- was correct, as the Revenue did not provide adequate evidence to prove the transactions were non-genuine. The appeal by the Revenue was dismissed.

← Previous Next →