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2019 (6) TMI 702 - AT - Income TaxLong Term Capital Gain - penny stock - AO assessing the sale proceeds of shares as undisclosed income - HELD THAT - AO has also nowhere in the assessment order referred to any material which can prove the complicity of assessee in the alleged accommodation entry operation. If the assessee has taken advantage of the price rise in an open manner through the transaction conducted in the official online system, no adverse inference can be drawn against the assessee. AO has referred to a SEBI order for drawing adverse inference. It is noted that the said SEBI order has been revoked. As per the Ld. AR the AO/CIT(A) was not justified in invoking the provisions of section 68 in regard to the sale proceeds of shares. There is no evidence on record to disbelieve that the assessee sold shares through registered Stock Exchange and stock broker. The assessee produced all evidences to explain the source of the amounts received by the assessee from the brokers. AO was not justified in assessing the sale proceeds of shares as undisclosed income. So, taking note of the documents referred to in para 4 (supra) and the facts discussed above and in view of the above ratio in a similar case in the case of M/s KAFL, reverse the orders of the lower authorities and allow the claim of assessee.
Issues Involved:
1. Addition of Long Term Capital Gain (LTCG) of ?18,75,000/-. 2. Genuineness of the purchase and sale of shares of M/s Kailash Auto Finance Ltd. (KAFL). 3. Allegations of sham transactions and tax evasion. 4. Application of Section 68 of the Income Tax Act, 1961. 5. Treatment of the transaction as an adventure in the nature of trade. Issue-wise Detailed Analysis: 1. Addition of Long Term Capital Gain (LTCG) of ?18,75,000/-: The sole issue in the appeal was the confirmation of the addition of LTCG of ?18,75,000/- by the Assessing Officer (AO). The AO observed that the assessee claimed LTCG of ?18,18,520/- on the sale of shares of M/s Kailash Auto Finance Ltd. (KAFL), which was claimed exempt under Section 10(38) of the Income Tax Act, 1961. The AO added the entire sale consideration of ?18,75,000/- to the total income of the assessee under the head "undisclosed income," alleging the transaction was a sham to evade taxes. 2. Genuineness of the Purchase and Sale of Shares of M/s Kailash Auto Finance Ltd. (KAFL): The AO questioned the genuineness of the purchase of 50,000 shares of M/s Careful Projects Advisory Limited (merged with KAFL) from M/s Jatadhari Marketing Pvt. Ltd. for ?50,000/- on 17-01-2012. The AO issued a notice under Section 133(6) to M/s Jatadhari Marketing Pvt. Ltd., which was returned unserved. The AO concluded that the purchase was not genuine. However, the Tribunal noted that the purchase was done through off-market transactions and payment was made through banking channels, with supporting documents provided by the assessee. The Tribunal emphasized that the shares were sold through a registered broker at the Bombay Stock Exchange and Securities Transaction Tax (STT) was remitted. 3. Allegations of Sham Transactions and Tax Evasion: The AO received information from the Directorate General of Income Tax (Investigation) and SEBI, indicating that the scrips of KAFL were used for generating bogus LTCG. The AO alleged that the assessee's transaction was a sham to channelize funds from unexpected sources to legitimate income. The Tribunal, however, noted that there was no direct evidence implicating the assessee in any dubious activity. The Tribunal referred to previous cases where similar issues with KAFL were decided in favor of the assessee, establishing that the scrips were not bogus. 4. Application of Section 68 of the Income Tax Act, 1961: The AO invoked Section 68, adding the entire sale consideration as undisclosed income. The Tribunal referred to various judgments, including the Special Bench of Mumbai Tribunal in the case of GTC Industries Ltd., emphasizing that the AO's rejection of the assessee's claim based on surrounding circumstances and probabilities without legal evidence was not justified. The Tribunal highlighted that the SEBI order, which the AO relied upon, did not mention the assessee or the broker as beneficiaries of suspicious transactions. The Tribunal concluded that the AO's addition under Section 68 was not justified. 5. Treatment of the Transaction as an Adventure in the Nature of Trade: The Revenue argued that the transaction should be considered as an adventure in the nature of trade, not an investment, citing the behavior of the assessee and the fantastic rate of return. The Tribunal, however, found that the assessee had provided all necessary documents to prove the genuineness of the transactions. The Tribunal emphasized that the AO did not find any link between the assessee and the alleged nefarious activities. The Tribunal relied on various judgments, including the Hon'ble Supreme Court's decision in Lalchand Bhagat Ambica Ram vs CIT, stating that no addition can be made based on surmises and suspicions. Conclusion: The Tribunal allowed the appeal of the assessee, reversing the orders of the lower authorities. The Tribunal held that the transactions were genuine, and the AO was not justified in treating the sale proceeds as undisclosed income under Section 68. The Tribunal emphasized that the assessee had provided all necessary documents, and there was no direct evidence implicating the assessee in any dubious activities. The Tribunal's decision was pronounced in the open court on 12 June, 2019.
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