2019 (7) TMI 526 - AT - Income Tax

Bogus LTCG - Penny stock - prices of the shares were artificially hiked to create non-genuine LTCG to the beneficiaries - unexplained cash credit u/s 68 - exemption of income u/s 10 (38) denied - HELD THAT - Transactions of the assessee of purchase of shares of M/s Esteem Bio and M/s Turbotech., holding of the shares for more than one year and the sale of shares through a registered share broker in a recognized Stock Exchange and payment of Securities Transaction Tax thereon, all were supported by documentary evidences which were placed before the lower authorities. Revenue could not point out any specific defect with regards to the documents so submitted by assessee. In our considered view, effect of a transaction which is supported by documentary evidences cannot be brushed aside on suspicion or probabilities without pointing out any defect therein. AO himself observed that the movement in price of shares of M/s Esteem Bio and M/s Turbotech were without any backing of financial performance of the said companies. In our considered view, the above factor at best was a pointer or cause for careful scrutiny of the transaction by the AO but from it cannot be concluded that transactions were sham. It is a matter of common knowledge that prices of shares in the share market depends upon innumerable factors and perception of the investor and not alone on the financial performance of the company. We also find from record that Ld. AO also didn't confront copies of statements recorded by Investigation Wing, Kolkata of Sh, Nikhil Jain, Sh. Sanjay Vora, Sh. Rakesh Somani, Sh. Anil Kumar Khemka and Sh. Bidyoot Sarkar to the appellant during assessment proceedings and merely extracted copies of their statement in the assessment order only. AO has not confronted any material to the assessee nor provided any adequate opportunity to the assessee to defend her case. Since the statements were not confronted to the assessee, she was deprived of her right to cross examine the witnesses. Also whatever they have stated in their statement is no gospel truth and cannot be applied blindly to all the persons who have brought the scrips in the entire country. Atleast some inquiry should have done from these persons, whether they have provided any entry to the assessee, if the request for cross examination was not possible at that stage. Cross examination of a person in whose basis any adverse inference is drawn, then it cannot be primary evidence or material to nail the assessee and simply based on the statement no addition can be made. Entire documentary evidence on record has not been disputed by the authorities below and there is no rebuttal to the explanation of assessee. No other adverse materials have been brought on record against the assessee. Further, no proper enquiry has been conducted by the A.O. on the documentary evidences filed by assessee. Whatever statements have been referred to in the order was general in nature with whom assessee did not have any transaction. Assessee has entered into genuine transaction of sale and purchase of shares and therefore, satisfied the conditions of Section 10(38) - Decided in favour of assessee.

Issues Involved:
1. Disallowance of exemption claimed on account of long-term capital gains (LTCG) from the sale of shares.
2. Treatment of LTCG as unexplained cash credit under section 68 read with section 115BBE of the Income Tax Act, 1961.
3. Examination of documentary evidence submitted by the assessee.
4. Reliance on statements by brokers and entry providers.
5. Cross-examination of witnesses.
6. Reliance on SEBI orders and subsequent findings.
7. Applicability of judicial precedents.

Detailed Analysis:

1. Disallowance of Exemption Claimed on Account of Long-Term Capital Gains (LTCG) from the Sale of Shares:
The assessee challenged the disallowance of exemption claimed on account of LTCG from the sale of shares of M/s Turbo Tech Engineering Ltd. and M/s Esteem Bio Organic Food Processing Ltd. The assessee had declared these gains as exempt under section 10(38) of the Income Tax Act, 1961, as the transactions were conducted through recognized stock exchanges and securities transaction tax (STT) was duly paid.

2. Treatment of LTCG as Unexplained Cash Credit Under Section 68 Read with Section 115BBE:
The Assessing Officer (AO) treated the LTCG as unexplained cash credit under section 68, to be taxed under section 115BBE, citing that the share prices of the companies in question skyrocketed without any financial strength, suggesting that the increase was artificial. The AO relied on statements from brokers and entry providers who admitted that the companies were used to provide bogus LTCG.

3. Examination of Documentary Evidence Submitted by the Assessee:
The assessee provided various documentary evidences, including share purchase documents, share certificates, transfer forms, contract notes, bank statements, and Demat statements. The AO and the Commissioner of Income Tax (Appeals) did not find any defects in these documents but still disallowed the exemption, considering the transactions as sham.

4. Reliance on Statements by Brokers and Entry Providers:
The AO relied on statements from brokers and entry providers recorded by the Investigation Wing, which indicated that the companies were used to provide bogus LTCG. However, these statements were not confronted to the assessee during the assessment proceedings, nor was the assessee given an opportunity to cross-examine the witnesses.

5. Cross-Examination of Witnesses:
The Tribunal noted that the AO did not allow the assessee to cross-examine the witnesses whose statements were used as the basis for the addition. This was considered a violation of the principles of natural justice, as the assessee was deprived of the opportunity to discredit the testimony of these witnesses.

6. Reliance on SEBI Orders and Subsequent Findings:
The AO also relied on interim orders from SEBI, which temporarily suspended trading in the securities of the companies. However, subsequent SEBI orders found no irregularities in the trading of these scrips. The Tribunal observed that the SEBI orders relied upon by the AO were not applicable for the transactions under consideration, as no adverse action was taken during the period when the assessee held the shares.

7. Applicability of Judicial Precedents:
The assessee cited various judicial precedents supporting the genuineness of transactions conducted through recognized stock exchanges. The Tribunal found that the AO did not conduct proper inquiries or provide specific material evidence against the assessee. The Tribunal also distinguished the case from the judgment in Udit Kalra vs ITO, noting that the facts were different and no substantial question of law was formulated in that case.

Conclusion:
The Tribunal allowed the appeals of the assessees, holding that the transactions were genuine and supported by documentary evidence. The addition made by the AO was deleted, and the exemption under section 10(38) was granted. The Tribunal emphasized the importance of adhering to the principles of natural justice and conducting thorough investigations before making adverse additions.

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