2025 (2) TMI 1078 - AT - Income Tax

Reopening of assessment u/s 147 - Addition u/s 68 - bogus Long-Term Capital Gains (LTCG) from the sale of shares - primary contention of the assessee is that the shares were acquired through preferential allotment from the company itself and not through off market transactions thereby ruling out the possibility of price rigging by the assessee. HELD THAT - The issue of penny stock transactions and their taxability u/s 68 of the Act requires a comprehensive and well-founded approach. The mere fact that a stock has exhibited significant price fluctuations or has been categorized as a penny stock does not by itself render transactions in such shares non-genuine. The stock market operates under a regulatory framework where shares irrespective of their financial fundamentals are allowed to be traded on stock exchanges. Additionally if the sale or purchase is alleged to be non-genuine the revenue must demonstrate that the entire money trail from the purchase to the final realization of sale proceeds was a fa ade used to introduce unaccounted income. It is settled principle of law that the primary onus lies on the assessee to substantiate the genuineness of the transaction by furnishing documentary evidence. If the fundamental aspects are satisfied the burden then shifts to the revenue to bring on record specific material evidence proving that the transactions were merely a colourable device aimed at tax evasion. The mere fact that a share has been subject to price manipulation does not automatically lead to addition under section 68 of the act unless it is conclusively demonstrated that the assessee was part of the scheme and the transactions were structured to generate artificial gains or losses. In the present case such detailed investigation by AO is absent. Assessee s grounds challenging the addition u/s 68 on account of bogus LTCG and penny stock transactions allowed. Treating the entire sale consideration as undisclosed income without allowing the purchase cost - We find merit in the assessee s contention. Even if the transaction was to be doubted the entire sale consideration cannot be taxed as undisclosed income. Taxing the full sale value without allowing for the cost of acquisition is contrary to established judicial principles. Since the AO s approach in making the addition is against settled legal principles the addition of the entire sale consideration is deleted.

Summary

ISSUES PRESENTED and CONSIDERED

The Tribunal considered two primary issues in this appeal:

1. The validity of the addition of Rs. 1,07,92,400/- under Section 68 of the Income Tax Act, 1961, concerning alleged bogus Long-Term Capital Gains (LTCG) from the sale of shares of Looks Health Services Ltd. (LHSL).

2. The validity of the reopening of the assessment under Section 147 of the Act.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of Addition under Section 68

Relevant Legal Framework and Precedents

Section 68 of the Income Tax Act allows the Assessing Officer (AO) to treat any unexplained credit in the books of an assessee as income. The burden of proof initially lies with the assessee to substantiate the genuineness of the transaction. Once the assessee provides documentary evidence, the burden shifts to the revenue to disprove the evidence. Judicial precedents such as Varun Nagjibhai Patel and Rakesh Ramanlal Shah emphasize the need for the AO to provide concrete evidence when alleging that transactions are non-genuine.

Court's Interpretation and Reasoning

The Tribunal noted that the AO disallowed the LTCG exemption claimed by the assessee under Section 10(38) and treated the sale proceeds as unexplained cash credits under Section 68. The AO's decision was based on the identification of LHSL as a penny stock, with alleged price manipulation and negligible business activity.

Key Evidence and Findings

The assessee provided substantial documentary evidence, including bank statements, demat account statements, share allotment letters, and sale invoices. The transactions were executed through recognized stock exchanges, and payments were made via banking channels. The AO did not dispute the authenticity of these documents.

Application of Law to Facts

The Tribunal found that the AO failed to provide direct evidence linking the assessee's transactions to any alleged price manipulation. The Tribunal emphasized that stock price fluctuations alone could not justify the conclusion that transactions were bogus. The financial turnaround of LHSL, as evidenced by increased net worth and EPS, was ignored by the AO.

Treatment of Competing Arguments

The assessee argued that the shares were acquired through preferential allotment and not through off-market transactions, ruling out price rigging. The Tribunal agreed, noting the absence of cash transactions and the mandatory lock-in period for the shares. The Tribunal also considered judicial precedents where similar additions were deleted due to lack of evidence.

Conclusions

The Tribunal concluded that the addition under Section 68 was based on suspicion and assumptions rather than concrete evidence. The Tribunal allowed the assessee's grounds challenging the addition and deleted the addition of Rs. 1,07,92,400/- under Section 68.

2. Validity of Reopening under Section 147

Relevant Legal Framework and Precedents

Section 147 allows the AO to reopen an assessment if there is reason to believe that income has escaped assessment. The assessee must be provided with the reasons for reopening and an opportunity to respond.

Court's Interpretation and Reasoning

The Tribunal noted that the assessee did not press the grounds challenging the validity of reopening under Section 147 during the hearing. Accordingly, these grounds were dismissed as not pressed.

SIGNIFICANT HOLDINGS

Core Principles Established

The Tribunal reaffirmed that mere stock price fluctuations or categorization as a penny stock does not automatically render transactions non-genuine. The burden of proof lies with the revenue to provide concrete evidence of non-genuineness.

Final Determinations on Each Issue

The Tribunal allowed the appeal in full, deleting the addition under Section 68 and dismissing the grounds challenging the validity of reopening under Section 147 as not pressed.