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2025 (3) TMI 91 - AT - Income TaxAddition u/s 68 - Bogus LTCG - Denial of exemption exemption u/s 10(38) - purchase of shares of some penny stock companies controlled at very nominal price and thereafter sale of the same at very high price by rigging the price of these shares - HELD THAT - The Jurisdictional High Court in the case of Affluence Commodities Pvt Ltd. 2024 (4) TMI 199 - GUJARAT HIGH COURT held that where assessee purchased and sold KPL shares and incurred loss since assessee had proved genuineness of transactions and moreover assessee had no control whatsoever on share prices addition made by Assessing Officer on account of disallowance of losses booked in penny stocks was liable to be deleted. Similarly in the case of PCIT vs. Sandipkumar Parsottambhai Patel 2023 (3) TMI 926 - GUJARAT HIGH COURT held that since payments were received through account payee cheques and transactions were done through recognized stock exchange and there was no evidence that assessee had paid cash in return of receipt through cheque therefore the Tribunal rightly deleted addition holding that transactions were genuine. We hereby hold the addition made by AO is not legally correct in making addition on account of LTCG earned from sale of KPL shares done through stock exchange as alleged unexplained cash credit u/s. 68 of the Act and the same liable to be deleted. Thus the Grounds raised by the assessee is allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal issues considered in this judgment include:
2. ISSUE-WISE DETAILED ANALYSIS Relevant Legal Framework and Precedents The case revolves around the interpretation of Sections 10(38) and 68 of the Income Tax Act, 1961. Section 10(38) provides for exemption of income arising from the transfer of long-term capital assets, being equity shares, if the transaction is chargeable to securities transaction tax (STT). Section 68 deals with unexplained cash credits, allowing the addition of unexplained income to the total income of the assessee. Precedents considered include judgments from various High Courts and the Supreme Court, which have consistently held that transactions supported by documentary evidence, conducted through recognized stock exchanges, and involving payment of STT, are genuine and eligible for exemption under Section 10(38). Court's Interpretation and Reasoning The Tribunal analyzed the evidence presented by the assessee, including contract notes, demat account statements, and bank transaction records. It noted that the assessee had provided sufficient documentation to prove the genuineness of the transactions. The Tribunal emphasized that the mere matching of transaction patterns with those of fraudulent activities by third parties does not suffice to classify the assessee's transactions as bogus. The Tribunal also highlighted that the Assessing Officer (AO) had relied heavily on an investigation report without verifying the specific details of the assessee's case. The AO's conclusion that the assessee was not a regular investor was found to be erroneous, as the assessee had been involved in share trading since 2006. Key Evidence and Findings The key evidence included the demat account details, contract notes, and bank statements showing the purchase and sale of KPL shares. The Tribunal found that the transactions were conducted through a recognized stock exchange, and the payment was received through banking channels, satisfying the conditions for exemption under Section 10(38). The Tribunal also referred to the Jurisdictional High Court's decision in the case of Affluence Commodities Pvt Ltd., which held that transactions of KPL shares were genuine and not part of a penny stock scheme. Application of Law to Facts The Tribunal applied the principles established in previous judgments, noting that the assessee's transactions met the criteria for exemption under Section 10(38). The Tribunal found that the AO's reliance on the investigation report was misplaced, as there was no direct evidence linking the assessee to any fraudulent activities. Treatment of Competing Arguments The Tribunal considered the arguments presented by both the assessee and the Revenue. It found the assessee's evidence and reliance on judicial precedents more compelling. The Tribunal dismissed the Revenue's arguments that relied on generalized patterns of fraud without specific evidence against the assessee. Conclusions The Tribunal concluded that the addition made by the AO under Section 68 was not justified. The assessee's transactions were genuine, and the exemption under Section 10(38) was rightly claimed. The Tribunal allowed the appeal filed by the assessee. 3. SIGNIFICANT HOLDINGS The Tribunal's significant holdings include the following:
The appeal filed by the assessee was allowed, and the order of the lower authorities was set aside, with the Tribunal directing the deletion of the addition made by the AO.
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