2018 (2) TMI 300 - AT - Income Tax

Capital gain declared by the assessee treated as unexplained income - Held that - Addition made by the AO is based on mere suspicion and surmises without any cogent material to show that the assessee has brought back his unaccounted income in the shape of long term capital gain. On the other hand, the assessee has brought all the relevant material to substantiate its claim that transactions of the purchase and sale of shares are genuine. Even otherwise the holding of the shares by the assessee at the time of allotment subsequent to the amalgamation/merger is not in doubt, therefore, the transaction cannot be held as bogus. Accordingly we delete the addition made by the AO on this account. Addition on account of payment of commission to Shri Deepak Patwari - Held that - This issue is consequential to the issue involved in ground no. 1 and 2 therefore, when we have given a finding the transaction of purchase and sale shares and consequential long term capital gain cannot be treated as bogus then the addition made by the AO on account of notional commission paid to Shri Deepak Patwari will not be sustainable being consequential to the first issue and hence deleted. Disallowance of legal expenditure - Held that - We find that the assessee claimed the payment of ₹ 12,500/- to M/s R. Mangal & Co., Chartered Accountants towards legal fees for filing the income tax return. The genuineness of the payment has not be doubted by the authorities below. Therefore, the said expenditure is allowable claim against income declared by the assessee under the head income from other sources for which the assessee has filed the return of income and paid taxes. Accordingly we allow the claim of the assessee.

Issues Involved:
1. Treatment of long-term capital gain as unexplained income.
2. Application of Section 68 of the Income Tax Act, 1961.
3. Addition based on presumptions and assumptions.
4. Disallowance of legal expenditure.

Issue-wise Detailed Analysis:

1. Treatment of Long-term Capital Gain as Unexplained Income:
The primary issue was whether the long-term capital gain declared by the assessees should be treated as unexplained income. The assessees claimed exemption under Section 10(38) of the Income Tax Act, 1961, for long-term capital gains from the sale of shares. The Assessing Officer (AO) treated these transactions as bogus, based on information from the Investigation Wing of Kolkata and statements from entry operator Shri Deepak Patwari. The AO issued a show-cause notice to the assessees, who provided extensive documentation, including purchase and sale bills, dematerialization records, and High Court orders approving company mergers. Despite these submissions, the AO doubted the genuineness of the transactions, primarily due to the extraordinary profits realized and the involvement of companies linked to Shri Deepak Patwari. The Tribunal found that the assessees had sufficiently demonstrated the genuineness of the transactions through documentary evidence and ruled that the AO's conclusions were based on mere suspicion and not supported by concrete evidence. The Tribunal emphasized the importance of giving the assessees an opportunity to cross-examine Shri Deepak Patwari, which was not provided, thus violating principles of natural justice.

2. Application of Section 68 of the Income Tax Act, 1961:
The AO applied Section 68, which pertains to unexplained cash credits, to the long-term capital gains, treating them as unexplained income. The Tribunal noted that Section 68 applies to cases where the assessee maintains books of accounts, which was not applicable here as the assessee was a salaried individual not required to maintain such books. The Tribunal found that the AO had not provided any material evidence to show that the transactions were not genuine or that the assessees had introduced their unaccounted money in the guise of long-term capital gains. Consequently, the Tribunal ruled that the application of Section 68 was inappropriate and the additions made under this section were unsustainable.

3. Addition Based on Presumptions and Assumptions:
The AO made an addition of ?1,32,020/- on the presumption that the assessees paid this amount as commission to brokers for facilitating the alleged bogus transactions. This addition was based on the statement of Shri Deepak Patwari without any corroborative evidence. The Tribunal held that the addition was based on mere assumptions and lacked any documentary proof. The Tribunal reiterated that suspicion, however strong, cannot replace concrete evidence. Since the primary issue of treating long-term capital gains as unexplained income was resolved in favor of the assessees, the consequential addition of commission was also deleted.

4. Disallowance of Legal Expenditure:
The AO disallowed a claim of ?12,500/- for legal expenditure on the grounds that it did not pertain to the long-term capital gain, which was treated as bogus. The Tribunal found that the expenditure was incurred for filing the income tax return and was genuine. The Tribunal held that such expenditure is allowable under Section 57 of the Income Tax Act, as it was incurred to earn income chargeable to tax. Therefore, the disallowance was deleted, and the claim was allowed.

Conclusion:
The Tribunal concluded that the AO's additions were based on suspicion and lacked concrete evidence. The assessees had provided sufficient documentation to substantiate the genuineness of their transactions. The Tribunal emphasized the need for adherence to principles of natural justice, including the right to cross-examine witnesses. Consequently, all additions made by the AO were deleted, and the appeals of the assessees were allowed.

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