2021 (7) TMI 493 - AT - Income Tax

Bogus LTCG - Disallowing exemption u/s 10(38) - penny stock - Addition of Long Term Capital Gain on the listed equity shares treating it as income from undisclosed sources - HELD THAT - In the instant case the entire transaction was carried out through the Demat account and banking channel upon which STT has been paid by the assessee before us. In order to hold the transaction is bogus and / or ingenuine the Assessing Officer is required to bring in cogent/clinching evidence to prove the same. It is pertinent to mention that no observation is forthcoming from the orders passed by the revenue pointing out any material defect in the procedure followed by the assessee in such purchase and sale of the shares in question. Neither any cogent/corroborative evidence is brought on record by the revenue to hold otherwise and therefore there is no doubt that the Assessing Officer has merely proceeded to arrive at his conclusion that the transaction. As taking into consideration the entire aspect of the matter in the absence of any independent enquiry made by the Ld. A.O as already observed by us respectfully relying upon the judgment passed by Hon ble Delhi Bench in the case of Swati Luthra 2019 (7) TMI 526 - ITAT DELHI on the identical facts keeping in view of the orders passed by SEBI we do not hesitate to observe that holding the said M/s Turbo Tech Engineering Ltd as a penny stock company by the authorities below without any corroborative evidence is uncalled for and unjustified. Such action is erroneous arbitrary whimsical and suffers from the principle of surmise and conjecture. Thus the disallowance of the claim made by the assessee towards the Long Term Capital Gainbeing bogus based only on mere surmise and conjecture.Thus the disallowance of the claim made by the assessee towards the Long Term Capital Gain is bad in law and liable to be quashed. Consequentially the addition of 3% of brokerage is also of no basis - Decided in favour of assessee.

Issues Involved:
1. Disallowance of exemption under Section 10(38) of the Income Tax Act for Long Term Capital Gain (LTCG) on listed equity shares.
2. Allegation of the transaction being managed through accommodation entries and treating it as income from undisclosed sources under Section 68 of the Income Tax Act.
3. Addition of brokerage and commission charges to the total income.

Issue-wise Detailed Analysis:

1. Disallowance of Exemption under Section 10(38):
The assessee claimed an exemption under Section 10(38) of the Income Tax Act for LTCG derived from the sale of shares of M/s Turbo Tech Engineering Ltd. The Assessing Officer (A.O) concluded that the transaction was managed through accommodation entries, treating the shares as penny stocks used for manipulation to earn exempt LTCG. Consequently, the exemption was disallowed, and the LTCG was added to the total income as income from undisclosed sources. The assessee provided several documents to prove the genuineness of the transaction, including statements of LTCG, debit notes, share transfer forms, broker receipts, and returns filed for relevant assessment years. The A.O's decision was based on the suspicion that the transactions were bogus, without establishing a direct link between the assessee and any alleged manipulation or insider trading.

2. Allegation of Managed Transactions and Income from Undisclosed Sources:
The A.O alleged that the transactions were planned and executed through accommodation entries, suggesting that the LTCG was introduced from undisclosed sources. The assessee argued that the purchase of shares in cash does not justify treating the same as unexplained cash credit under Section 68, especially when the primary onus was discharged satisfactorily. The Revenue failed to establish a live link between the cash deposited by the assessee and the LTCG. The assessee also contended that the SEBI investigation and the company's alleged involvement in money laundering and insider trading do not implicate the assessee, as there was no direct evidence linking the assessee to any price manipulation or rigging.

3. Addition of Brokerage and Commission Charges:
The A.O added brokerage and commission charges at 3% of the transaction value, alleging that these were part of managing the LTCG transactions. The assessee argued that this addition was baseless and without evidence, relying purely on assumptions by the A.O. The Tribunal noted that no independent inquiry was conducted by the A.O to substantiate these claims, and the addition was made without any corroborative evidence.

Tribunal's Findings:
The Tribunal observed that the A.O's conclusions were based on general reports and statements from the Investigation Wing, without specific findings against the assessee. The assessee was not connected with the company or its promoters, and there was no evidence of involvement in any questionable activities. The Tribunal also noted that the SEBI's subsequent orders absolving the company of any wrongdoing diluted the Revenue's case. The Tribunal emphasized that the transactions were carried out through recognized stock exchanges, with payment of securities transaction tax, and the documentary evidence provided by the assessee was not disputed by the authorities. The Tribunal concluded that the A.O's decision was based on mere suspicion and conjecture, without any cogent evidence.

Conclusion:
The Tribunal allowed the appeals, quashing the disallowance of the LTCG exemption and the addition of brokerage and commission charges. The Tribunal held that the assessee had entered into genuine transactions, satisfying the conditions of Section 10(38) of the Income Tax Act, and the additions made by the A.O were without merit.

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