2025 (3) TMI 1152 - AT - Income Tax

Bogus LTCG - addition relating to estimated commission expense - assessee and his sister has been exonerated by the SEBI - AO assessed 5% of the long term capital gains as estimated commission expenses incurred by the assessee - HELD THAT -CIT(A) has given a finding that the assessee is a regular investor in shares. We also notice that a statement was taken from the assessee u/s 132(4) of the Act wherein the AO did not find anything wrong. In the statement the assessee had stated that he had purchased shares of Pine Animation Ltd on the advice of his Share broker Shri Bhavesh Shah and he had also confirmed that he only has advised the assessee to buy shares of M/s Pine Animation Ltd. None of these statements were found to be false. It has to be held that the assessee has purchased the shares of M/s.Pine Animation Ltd in the normal course of his investment activities. Hence the long term capital gain earned by the assessee on sale of shares of above said company cannot be considered to be an accommodation entry. Accordingly CIT(A) was justified in deleting the addition of long term capital gains made by the AO. Since the long term capital gains earned by the assessee is held to be genuine one the question of paying any commission expenses does not arise in the facts of the present case. Accordingly we are of the view that the CIT(A) was justified in deleting the estimated commission expenses. Addition on the basis of whatsapp chat - HELD THAT - As decided in case of Designers Point (India) P Ltd 2023 (9) TMI 1664 - ITAT DELHI has held that the addition cannot be made on the basis of whatsapp chat without bringing any material to corroborate the same. AO has not brought any E-certificate as required u/s 65B of the Act before placing reliance on the digital evidence. Hence the AO could not have placed reliance on the said document which is alleged to be print out of whatsapp chat. In the absence of e-certificate the same shall become a third party document and it cannot be relied upon by the AO without bringing any corroborative evidence to show that the assessee has received/paid the money mentioned therein in cash. We are of the view that the CIT(A) was not justified in confirming the addition made by the AO as unexplained cash credit u/s 68 of the Act. Accordingly we set aside the order passed by the CIT(A) and direct the AO to delete this addition. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Tribunal considered the following core legal issues:

(a) Whether the long-term capital gains declared by the assessee from the sale of shares in M/s Pine Animation Ltd. were genuine or constituted bogus gains, thus disqualifying them from exemption under Section 10(38) of the Income Tax Act.

(b) Whether the estimated commission expenses, assumed to have been incurred for generating alleged bogus gains, were justifiable under Section 69C of the Act.

(c) Whether the addition of Rs. 2.00 crores based on a WhatsApp chat, alleged to be unexplained cash credit under Section 68 of the Act, was valid.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Long-term Capital Gains

Relevant Legal Framework and Precedents:

The relevant legal framework includes Section 10(38) of the Income Tax Act, which provides for exemption of long-term capital gains from tax. The Tribunal referred to various precedents, including the Bombay High Court's decision in CIT vs. Jamna Devi Agrawal and other Tribunal decisions, to determine the genuineness of the transactions.

Court's Interpretation and Reasoning:

The Tribunal examined the evidence provided by the assessee, including purchase and sale documentation, demat statements, and SEBI's final order, which exonerated the assessee from any manipulation. The Tribunal found that the assessee had discharged the burden of proving the genuineness of the transactions.

Key Evidence and Findings:

The assessee provided documentary evidence such as allotment advice, demat account statements, and bank statements. The SEBI's final order, which did not implicate the assessee in price manipulation, was pivotal in the Tribunal's decision.

Application of Law to Facts:

The Tribunal applied the principles from relevant case law and SEBI's findings, concluding that the transactions were genuine and not part of any scheme to generate bogus gains.

Treatment of Competing Arguments:

The Tribunal considered the Revenue's reliance on investigation reports and statements from third parties but found them insufficient to disprove the assessee's evidence.

Conclusions:

The Tribunal concluded that the long-term capital gains were genuine and eligible for exemption under Section 10(38).

Issue (b): Estimated Commission Expenses

Relevant Legal Framework and Precedents:

The Tribunal considered Section 69C of the Income Tax Act, which pertains to unexplained expenditure.

Court's Interpretation and Reasoning:

Since the long-term capital gains were found to be genuine, the Tribunal reasoned that there was no basis for assuming commission expenses related to bogus gains.

Key Evidence and Findings:

No direct evidence of commission payments was presented, and the Tribunal found the Revenue's assumptions speculative.

Application of Law to Facts:

The Tribunal applied the principle that without evidence of bogus transactions, there could be no commission expenses related to such transactions.

Treatment of Competing Arguments:

The Tribunal dismissed the Revenue's reliance on statements from alleged exit providers, as these were not corroborated by direct evidence.

Conclusions:

The Tribunal deleted the addition related to estimated commission expenses.

Issue (c): Addition Based on WhatsApp Chat

Relevant Legal Framework and Precedents:

The Tribunal referred to Section 68 of the Income Tax Act concerning unexplained cash credits and Section 65B of the Indian Evidence Act regarding electronic evidence.

Court's Interpretation and Reasoning:

The Tribunal found that the WhatsApp chat lacked evidentiary value as it was undated, found in a third party's premises, and not corroborated with direct evidence. The Tribunal emphasized the necessity of a certificate under Section 65B for electronic evidence, which was absent.

Key Evidence and Findings:

The Tribunal noted the absence of corroborative evidence and the failure to follow legal procedures for admitting electronic evidence.

Application of Law to Facts:

The Tribunal applied the legal requirements for electronic evidence and found the Revenue's reliance on the WhatsApp chat insufficient for sustaining the addition.

Treatment of Competing Arguments:

The Tribunal considered the Revenue's argument but found the lack of procedural compliance and supporting evidence decisive.

Conclusions:

The Tribunal directed the deletion of the Rs. 2.00 crore addition.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

"The SEBI has given a clear cut findings that the appellant was not involved in price manipulation and has no nexus with the promoters or entities related to the PAL."

Core Principles Established:

The Tribunal affirmed the principle that genuine transactions backed by documentary evidence and regulatory findings should not be disallowed based on speculative assumptions.

Final Determinations on Each Issue:

The Tribunal upheld the exemption of long-term capital gains under Section 10(38), deleted the addition of estimated commission expenses, and directed the deletion of the Rs. 2.00 crore addition based on WhatsApp chat.