2025 (3) TMI 1375 - AT - Income Tax

Unexplained Cash Credit u/s. 68 - Bogus LTCG - AO disallowed the same on the ground that the assessee had introduced unaccounted income under the guise of bogus/sham LTCG claim u/s 10(38) - HELD THAT - Buying and selling of shares in a concerted way shows a direct connivance between operators and the assessee and proves the entire process is predetermined and synchronized. The company s financials profit dividend earning per share etc. if not sole basis for increase in share price but at least is a paramount fact and in the instant case it is clear that all the criteria has given a go-away. No hesitation to say the scrawny financial parameters cannot command such a high rise of shares in such a small period. Mysterious are ways. In enigmatic ride the assessee has made 400% profit in a span of fat 13 months. This coupled with the investigation conducted by the Income Tax Department with the backing of the statements of the brokers it can be said that the assessee cannot claim ignorance of the unfair trade practices took place in the Security Market with respect to this scrip. Submitting that the assessee is a passive beneficiary of the operation cannot absolve the accountability of the assessee to claim LTCG as exempt. The said scrip has been in dormant and suddenly sprouted to yield profits of the highest order and then went into oblivion. Further coupled with the inquires conducted by the SEBI with regard to the scrip do not instil any confidence about the genuineness of the earning of long-term capital gains. Hence we have no hesitation to hold that NCL Research scrip was a penny stock and used by the assessee to book LTCG. The transactions being ungenuine this will disentitle the assessee the claim of exemption u/s 10(38). The production of contract notes bills invoices payment of STT banking channel evidences per se does not explain and demonstrate genuineness of the share transactions unless and until assessee prima-facie shows to the authorities particularly so when LTCG is claimed in return that rise in prices of scrip was a usual market phenomenon which was driven by market force. In the case of Sanat Kumar 2019 (8) TMI 696 - ITAT DELHI has held that the so-called sale proceeds of shares received and claimed as exempt u/s. 10(38) was held to be sham transaction because of huge price rise of shares at the time of sale despite the fact that company s profits are negligible and did not support such price rise In the case of Somnath Maini 2006 (11) TMI 189 - PUNJAB AND HARYANA HIGH COURT held that claim of genuineness of transactions can be rejected even if the assessee backs the same with evidence which is not trustworthy. Co-ordinate Bench of ITAT Chennai in the case of Rajnish Agarwal 2019 (1) TMI 1216 - ITAT CHENNAI as held that the penny stock not having any financial strength of its own and the sale and purchase of these shares were held to be sham and LTCG u/s. 10(38) was denied to the assessee. We therefore hold that the facts and circumstances of the present case are very tightly knit case where the Revenue has gone behind the transaction of capital gains to know the factual operation of sudden volatility in the prices of the scrip. The present case is therefore required to be adjudicated on the given set of facts and evidence. As rightly observed by the CIT(A) in his order it is relevant to note that price maneuvering occurred in assessee s case as confirmed by the DGIT SEBI statements of the involved persons recorded. In view of the above we find that the assessee s transactions are not genuine and therefore we affirm the well-reasoned order of the Ld. CIT(A). Decided against assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The primary legal issue considered in this judgment was whether the addition of Rs. 59,32,860 as unexplained cash credit under Section 68 of the Income-tax Act, 1961, was justified. This addition was made by the Assessing Officer on the grounds that the Long Term Capital Gains (LTCG) claimed by the assessee from the sale of shares of 'NCL Research' were bogus and manipulated, thereby disqualifying them from exemption under Section 10(38) of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

The legal framework primarily involved Section 68 of the Income-tax Act, which pertains to unexplained cash credits, and Section 10(38), which provides for exemption of LTCG from tax if certain conditions are met. The Tribunal also considered various precedents, including judgments from the Supreme Court and High Courts, which emphasized that mere suspicion cannot replace evidence, and that the onus lies on the assessee to prove the genuineness of transactions when claiming exemptions.

Court's interpretation and reasoning:

The Tribunal scrutinized the facts and circumstances surrounding the transactions. It noted the significant and abnormal rise in the price of the NCL Research shares, which was not supported by the company's financial performance. The Tribunal emphasized that the pattern of buying and selling shares indicated a pre-arranged setup, suggesting that the transactions were not genuine. The Tribunal also considered the findings of the Income-tax Department's investigation, which pointed to market manipulation involving the scrip.

Key evidence and findings:

The Tribunal examined the financial records and trading patterns of the shares in question. It was highlighted that the share price of NCL Research increased by 5128% over a short period, followed by a steep decline, which raised suspicions of manipulation. The Tribunal also considered the investigation reports from the Income-tax Department and SEBI, which indicated irregularities and manipulation in the trading of NCL Research shares.

Application of law to facts:

The Tribunal applied Section 68, emphasizing that the assessee failed to demonstrate the genuineness of the transactions. The Tribunal held that the production of contract notes and banking evidence alone was insufficient to establish the genuineness of the transactions, especially when the market behavior of the shares was inconsistent with normal market operations.

Treatment of competing arguments:

The Tribunal considered the assessee's arguments that the transactions were conducted through recognized stock exchanges and that there was no direct evidence implicating the assessee in manipulation. However, it found these arguments unconvincing in light of the circumstantial evidence and the broader context of the transactions. The Tribunal also addressed the assessee's reliance on precedents, distinguishing them based on the facts and circumstances of the case.

Conclusions:

The Tribunal concluded that the transactions in question were not genuine and upheld the addition made by the Assessing Officer under Section 68. It affirmed that the assessee was not entitled to claim the LTCG exemption under Section 10(38) due to the lack of genuineness in the transactions.

3. SIGNIFICANT HOLDINGS

The Tribunal preserved the following crucial legal reasoning:

"The transactions being ungenuine, this will disentitle the assessee the claim of exemption u/s 10(38) of the Act. The production of contract notes, bills, invoices, payment of STT, banking channel evidences per se does not explain and demonstrate genuineness of the share transactions unless and until assessee prima-facie shows to the authorities particularly so when LTCG is claimed in return that rise in prices of scrip was a usual market phenomenon which was driven by market force."

Core principles established:

The Tribunal emphasized that the mere execution of transactions through recognized stock exchanges does not automatically render them genuine. The genuineness of transactions must be established beyond procedural compliance, especially when claiming tax exemptions. The Tribunal also highlighted the importance of examining the economic rationale and market behavior of traded shares.

Final determinations on each issue:

The Tribunal dismissed the appeal of the assessee, affirming the addition of Rs. 59,32,860 as unexplained cash credit under Section 68 and denying the LTCG exemption under Section 10(38). The Tribunal's decision was based on the lack of evidence supporting the genuineness of the transactions and the findings of market manipulation involving the shares in question.