2021 (6) TMI 966 - AT - Income Tax

Bogus LTCG - sudden rise and fall in the share prices of a listed company - genuineness of claim of Long Term Capital Gain as exempt income u/s 10(38) of the Act arising out of the transactions of sale of equity shares of Kappac Pharma Limited - HELD THAT - There are various factors for the sudden rise and fall in the share prices of a listed company which are majorly linked to the market sentiments, performance of the sector, availability of shares i.e demand and supply, holding of the promoters, future prospects etc. In the instant case, nothing on record is available to show that any enquiry was conducted by department at the business premises of Kappac Pharma Ltd. and its involvement in this alleged racket of managing bogus LTCG. Kappac Pharma Ltd. is registered with Registrar of Companies and is still live at the portal of Registrar of companies. All transfers of shares of particular listed company is well recorded in the Registrar of shareholders. Even the purchase of shares by assessee is directly from a shareholder company, being original allottee of equity shares of Kappac Pharma Ltd. which were subsequently transferred in the name of respective assessee(s). Assets are in the nature of equity shares which are not part of a business stock and have been held for more than 12 months so will comes under the category of Long Term Capital Asset. The equity shares are sold through recognized stock exchange (Bombay Stock Exchange) and security transactions tax have been paid on this transaction. Part of purchase and sale - Purchase is off line and made in cash. AO has raised doubt on the purchases being made in cash but there is no bar under the law to make purchase in cash. In all these cases equity shares were purchase from Shah Sons Propon Private Limited. PAN No. of the seller was provided before both the lower authorities. The seller namely Shah Sons Propon Private Limited purchased equity shares in November 2010 and was originally allotted the shares by Kappac Pharma Ltd. which is a company registered at Mumbai. Genuineness of the documents namely share certificate placed is not doubted. For sure the details of shareholder would be available on the portal of the Registrar of Company where annual returns are filed by the Companies. Further has this certificate being bogus then how could the shares are dematerialized. Because once a share are lodged for dematerialization the original share certificate is to be deposited and the correctness of the certificate is verified through the company which has issued the share certificate. Once the details are found to be correct the shares are dematerialized. Sale part - The assessee has opened DMAT account with Kotak Securities Ltd. which is known to be a reputed company engaged in the providing services as share broker. Kotal Security is registered with Bombay Stock Exchange. Sale is effected on the portal operated and controlled by Bombay Stock Exchange. The seller has no idea as to who is the buyer on the other side. On the portal the payment for the sale is received by broker which in this case is Kotak Security Limited who after deducting the brokerage and other applicable tax including Security Transactions Tax remits the balance amount in the bank account of the assessee which is registered in the DMAT Account. In the instant case, no flaw or any inconsistency has been found by the Revenue authorities with all these transaction of purchase and sale. Whether Kappac Pharma Ltd is a penny stock company or not has been dealt in detail in CANARA BANK VERSUS JOINT COMMISSIONER OF INCOME-TAX, LTU AND VICE VERSA 2017 (11) TMI 1425 - ITAT BANGALORE held the transaction from sale of equity shares of Kappac Pharma Limited as genuine and also allowed the claim of assessee of LTCG from the sale of equity shares of Kappac Pharma Ltd. and also deleted the alleged commission expenditure added by Ld. AO for arranging the bogus LTCG. Records placed before us also shows that report of the investigation wing or any enquiry conducted from 3rd persons were not made available to the assessee which thus grossly violates the principles of natural justice. As the assessee never got opportunity to go through these reports this action of the lower authorities was not justified. Thus alleged transaction of purchase and sale of equity shares of Kappac Pharma Ltd. are not bogus as the respective assessee(s) have duly charged there onus to prove the genuineness of purchase and sale of equity shares of listed company KPL (listed in Bombay Stock Exchange) by placing necessary documents to prove that the purchase are directly from the shareholder and sold through a registered broker and nothing adverse has been found by the revenue authorities and KPL is not held to be a penny stock company. Addition is purely based on the report of the investigation wing carried out in the case of other persons finding no mention or the involvements of assessee(s) in any of such report and thus, the claim of the LTCG has been rightly made as exempt income u/s 10(38) - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)].
2. Confirmation of additions under Section 68 of the Income Tax Act.
3. Consideration of the script as "Penny Stock".
4. Disallowance of exempted Long Term Capital Gain (LTCG) claims.
5. Analysis of financial and share prices for disallowance.
6. Inquiry conducted by the Assessing Officer (AO).
7. Treatment of genuine transactions as sham.
8. Ignoring judgments quoted by the assessee.

Issue-wise Detailed Analysis:

1. Validity of the order passed by CIT(A):
The appellants contended that the orders passed by the CIT(A) were "bad in law and on facts." The Tribunal reviewed the orders and the grounds raised by the appellants, noting that the common issue pertained to the genuineness of LTCG claims from the sale of equity shares of Kappac Pharma Limited (KPL).

2. Confirmation of additions under Section 68:
The CIT(A) had confirmed additions under Section 68, considering the transactions as sham. The Tribunal observed that the assessee had provided necessary documents and evidences, including purchase bills, contract notes, and dematerialization records. The Tribunal found no material evidence from the AO to prove that the transactions were bogus.

3. Consideration of the script as "Penny Stock":
The CIT(A) had treated KPL as a "Penny Stock" based on the Income Tax Department's portal. The Tribunal noted that the term "Penny Stock" is not defined under the Income Tax Act. It referred to previous judgments where transactions involving KPL were considered genuine and not classified as penny stock transactions.

4. Disallowance of exempted LTCG claims:
The CIT(A) disallowed the LTCG claims based on information from the investigation wing, without providing the assessee an opportunity to cross-examine or comment on the documents. The Tribunal emphasized the violation of natural justice principles and referred to the Supreme Court’s judgment in Sona Builders, which invalidated such actions without due process.

5. Analysis of financial and share prices for disallowance:
The Tribunal highlighted that the abnormal rise in share prices alone cannot be evidence of bogus transactions. It acknowledged various factors influencing share prices, such as market sentiment and demand-supply dynamics. The Tribunal found no evidence of KPL’s involvement in malpractices or being a bogus company.

6. Inquiry conducted by the AO:
The Tribunal noted that the AO had raised doubts based on the investigation report but did not conduct any direct inquiry with KPL or the involved parties. The absence of a direct inquiry and reliance solely on the investigation report were deemed insufficient to substantiate the AO's claims.

7. Treatment of genuine transactions as sham:
The Tribunal found that the transactions fulfilled all conditions under Section 10(38) of the Act, including holding the shares for more than 12 months, selling through a recognized stock exchange, and paying Securities Transaction Tax (STT). The Tribunal ruled that the transactions were genuine, and the assessee had discharged the onus of proof.

8. Ignoring judgments quoted by the assessee:
The Tribunal referred to multiple judgments where LTCG claims from KPL shares were accepted as genuine. It criticized the CIT(A) for ignoring these precedents and relying solely on the investigation report.

Conclusion:
The Tribunal concluded that the additions made by the AO and confirmed by the CIT(A) were not justified. It directed the AO to allow the LTCG claims under Section 10(38) and delete the disallowance of brokerage expenses. The appeals were decided in favor of the assessee, and the orders of the lower authorities were set aside.