2019 (10) TMI 439 - AT - Income Tax

Addition u/s 68 - penny stock transaction - Bogus LTCG - bogus transactions of sale of shares of listed companies - addition on the basis of presumption that the assessee has paid commission for alleged accommodation entries of long term capital gain and added the same under section 69C - HELD THAT - AO has been guided by the report of the investigation wing prepared with respect to bogus capital gains transactions. The assessing officer has not brought out any part of the investigation wing report in which the assessee has been investigated and /or found to be a pan of any arrangement for the purpose of generating bogus long term capital gains. Nothing has been brought on record to show that the persons investigated including entry operators or stock brokers have named that the assessee was in collusion with them. In absence of such findings how is it possible to link their wrong doings with the assessee. In fact the investigation wing is a separate department which has not been assigned assessment work and has been delegated the work of only making Investigation. The Act has vested widest powers on this wing. It is the duty of the investigation wing to conduct proper and detailed inquiry in any matter where there is allegation of tax evasion and after making proper inquiry and collecting proper evidences the matter would be sent to the assessment wing to assess the income as per law. We find no such action executed by investigation wing against the assessee. In absence of any findings specifically against the assessee in the investigation wing report the assessee cannot be held to be guilty or linked to the wrong acts of the persons investigated. In this case the AO at best could have considered the investigation report as a starting point of Investigation. The report only Informed the AO that some persons may have misused the scrip for the purpose of collusive transactions. The AO was duty bound to make inquiry from all concerned parties relating to the transactions and then to collect evidences that the transaction entered into by the assessee was also a collusive transaction. However the AO has not brought on record any evidence to prove that the transactions entered by the assessee which are otherwise supported by proper third party documents are collusive transactions. Common issue as regards to addition under section 68 of surplus arising out of sale of shares of listed companies and consequent addition under section 69C on the presumption that commission at the rate of 3% was paid is hereby deleted - Decided in favour of assessee Assessment u/s 153A - HELD THAT - addition to the income of the assessee can only be made on the basis of incriminating record found during the course of search . In the present case there is no such incriminating material and therefore the AO has no jurisdiction to make addition in the unabated assessment . The case of the assessee is squarely covered by the decision of Hon ble Bombay High Court decision in the case of Continental Warehousing Corporation (Nhava Sheva) Ltd 2015 (5) TMI 656 - BOMBAY HIGH COURT - Decided in favour of assessee.

Issues Involved:
1. Treatment of transactions of sale of shares as bogus and addition under section 68 of the Income-tax Act, 1961.
2. Addition under section 69C of the Income-tax Act, 1961 for alleged commission on accommodation entries.
3. Jurisdiction of the Assessing Officer (AO) in making additions without incriminating material found during the search.

Detailed Analysis:

1. Treatment of Transactions of Sale of Shares as Bogus and Addition under Section 68:
The first common issue pertains to the AO treating the transactions of sale of shares of listed companies as bogus, thereby making additions under section 68 of the Income-tax Act, 1961. The AO's additions were based on the presumption that the sale proceeds of such transactions were unexplained income. The CIT(A) confirmed the AO's action, relying on data from the Bombay Stock Exchange (BSE), findings from general investigations, and third-party statements without establishing a direct connection to the appellant.

The Tribunal noted that the assessee had provided comprehensive evidence, including share application forms, bank statements, contract notes, broker's ledger, and SEBI's final order, to prove the genuineness of the transactions. The SEBI's final order exonerated the assessee, finding no adverse evidence against them regarding price manipulation or connection with the promoters/directors of Pine Animation Ltd. (PAL).

The Tribunal emphasized that the AO and CIT(A) had relied heavily on general reports and statements without confronting the assessee with specific evidence or providing an opportunity for cross-examination. The Tribunal concluded that the assessee had satisfactorily explained the nature and source of the sale proceeds and that the additions under section 68 were based on mere suspicion and conjecture, which is not permissible. Consequently, the Tribunal deleted the additions made under section 68.

2. Addition under Section 69C for Alleged Commission on Accommodation Entries:
The second interconnected issue involved the AO's addition under section 69C of the Income-tax Act, 1961, based on the presumption that the assessee had paid a commission for alleged accommodation entries of long-term capital gains. The CIT(A) upheld this addition.

The Tribunal found that the AO had not provided any direct evidence to prove that the assessee had paid any commission for accommodation entries. The Tribunal reiterated that additions based on assumptions and presumptions without concrete evidence are not sustainable. Therefore, the Tribunal deleted the additions made under section 69C.

3. Jurisdiction of the AO in Making Additions without Incriminating Material Found During the Search:
The third common issue was whether the AO had the jurisdiction to make additions in the absence of any incriminating material found during the search. The Tribunal noted that the assessments for the relevant years had not abated on the date of the search, and the additions were made based on information gathered after issuing notices under section 133(6) of the Income-tax Act, 1961.

The Tribunal referred to the decision of the Hon'ble Bombay High Court in the case of Continental Warehousing Corporation (Nhava Sheva) Ltd., which held that in cases of unabated assessments, additions can only be made based on incriminating material found during the search. Since no such material was found during the search in the present case, the Tribunal concluded that the AO had no jurisdiction to make the additions. Accordingly, the Tribunal set aside the order of the CIT(A) and directed the AO to delete the additions.

Conclusion:
The Tribunal allowed the appeals of the different assessees, deleting the additions made under sections 68 and 69C of the Income-tax Act, 1961, and holding that the AO had no jurisdiction to make additions in the absence of incriminating material found during the search. The Tribunal's decision was based on the lack of direct evidence against the assessees and the reliance on general reports and statements without confronting the assessees or providing an opportunity for cross-examination.

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