2019 (4) TMI 284 - AT - Income Tax

Bogus LTCG - Penny Stock - principle of preponderance of probabilities - Unexplained cash credit u/s 68 - HELD THAT - Transaction of the assessee of deriving long term capital gains of ₹ 1,69,12,820/- by selling shares of M/s Dhanleela Investment & Trading Co. Ltd. was treated as bogus by the Revenue only on the basis of suspicion and probability and without finding any defect in the various documentary evidences filed by the assessee. As transaction of the assessee are supported by the relevant documentary evidences, the additions made by the AO by treating the sale transaction as bogus is unsustainable. We, therefore, delete the addition. The transaction of long term capital gains derived by the assessee as genuine and correct further addition made by the Assessing Officer is also liable to be deleted and accordingly, the same is hereby deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition of ?1,69,12,820/- as unexplained cash credit under Section 68 of the Income Tax Act.
2. Onus of proving the source of funds amounting to ?1,69,12,820/-.
3. Genuineness of the transactions and the evidence provided.
4. Adverse inference drawn based on general modus operandi.
5. Addition based on suspicion, surmises, and conjectures.
6. Addition of ?5,07,385/- as unexplained expenditure under Section 69 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition of ?1,69,12,820/- as unexplained cash credit under Section 68 of the Income Tax Act:
The assessee purchased shares of M/s Dhanleela Investment & Trading Co. Ltd. and received bonus shares, which were later sold through a registered broker in the Bombay Stock Exchange, paying Securities Transaction Tax (STT). The Assessing Officer (AO) observed a significant increase in the company’s share capital without financial backing, suspecting it was a predetermined action to create non-genuine Long Term Capital Gains (LTCG). The AO concluded the transactions were sham and treated the sale proceeds of ?1,69,12,820/- as unexplained cash credits under Section 68, taxed at 30% under Section 115BBE.

2. Onus of proving the source of funds amounting to ?1,69,12,820/-:
The Commissioner of Income Tax (Appeals) upheld the AO’s decision, stating the assessee failed to discharge the onus of proving the source of funds. The documents provided by the assessee were deemed a smoke screen to cover the true nature of transactions, which were considered arranged to create bogus profits under LTCG.

3. Genuineness of the transactions and the evidence provided:
The assessee provided various documents, including ledger accounts, bank statements, demat statements, and annual accounts of M/s Dhanleela Investment & Trading Co. Ltd., indicating the movement and sale of shares. The Tribunal noted that no defects were pointed out in these documents by the AO or CIT(A). The Tribunal emphasized that suspicion alone cannot be the basis to treat LTCG as non-genuine without deeper investigation and concrete evidence.

4. Adverse inference drawn based on general modus operandi:
The AO relied on statements from brokers who admitted the company was used to provide bogus LTCG. However, these statements were not made available to the assessee, nor was the assessee allowed to cross-examine the brokers. The Tribunal cited the Supreme Court decision in Andaman Timber Industries, stating that such statements cannot be used against the assessee without cross-examination.

5. Addition based on suspicion, surmises, and conjectures:
The Tribunal held that transactions supported by documentary evidence cannot be dismissed on suspicion or probabilities. The financial performance of the company improved significantly in the financial year 2012-13, contradicting the AO’s claim that no business activity was conducted. The Tribunal concluded that the AO’s suspicion was insufficient to treat the transactions as sham without proper material or analysis.

6. Addition of ?5,07,385/- as unexplained expenditure under Section 69 of the Income Tax Act:
Since the Tribunal found the LTCG transactions genuine, the related addition of ?5,07,385/- as unexplained expenditure was also deemed unsustainable and was deleted.

Conclusion:
The Tribunal allowed the appeal, deleting the additions of ?1,69,12,820/- and ?5,07,385/-, stating that the transactions were supported by documentary evidence and the Revenue failed to point out any specific defects or provide concrete evidence against the assessee. The decision was pronounced in the open court on 02/04/2019.