2022 (9) TMI 809 - AT - Income Tax

Unexplained credits u/s. 68 - Bogus LTCG - Penny stock purchases - disallowance of claim of exempted long term capital gain on sale of shares - HELD THAT - The orders of the authorities below cannot be accepted. There is no denying that consideration was paid when the shares were purchased. The shares were thereafter sent to the company for the transfer in the name. The company transferred the shares in the name of the assessee. There is nothing on record which could suggest that the shares were never transferred in the name of the assessee. Nothing on record to suggest that the shares were never with the assessee. On the contrary, the shares were thereafter transferred to demat account. The demat account was in the name of the assessee, from where the shares were sold. In our understanding of the facts, if the shares were of some fictitious company which was not listed in the Bombay Stock Exchange/National Stock Exchange, the shares could never have been transferred to demat account. Shri Akash Agarwal may have been providing accommodation entries to various persons but so far as the facts of the case in hand suggest that the transactions were genuine and therefore, no adverse inference should be drawn.Further, the alleged operators have not named the assessee as a beneficiary in their statements. In the light of the decisions of Andaman Timber Industries 2015 (10) TMI 442 - SUPREME COURT and considering the facts in totality, the claim of the assessee cannot be denied on the basis of presumption and surmises in respect of penny stock by disregarding the direct evidences on record relating to the sale/purchase transactions in shares supported by broker's contract notes, confirmation of receipt of sale proceeds through regular banking channels and the demat account. Appeal of assessee allowed.

Issues Involved:

1. Disallowance of claim of exempted long-term capital gain (LTCG) on sale of shares.
2. Treatment of LTCG as unexplained credits under Section 68 of the Income Tax Act.
3. Procedural fairness concerning the opportunity for cross-examination.
4. Validity of reliance on investigation reports and statements from third parties.

Issue-wise Detailed Analysis:

1. Disallowance of Claim of Exempted Long-Term Capital Gain (LTCG) on Sale of Shares:

The assessee declared a taxable income of Rs.10,32,510/- and claimed an exemption of LTCG amounting to Rs.62,13,945/- under Section 10(38) of the Income Tax Act. The shares of Shree Shaleen Textiles Ltd. were purchased offline and later dematerialized. The Assessing Officer (AO) disallowed this claim on the grounds that the transactions were not genuine and were part of a scheme to convert black money into white. The AO noted that the shares were identified as penny stocks manipulated through insider trading, and the transactions were not in conformity with SEBI guidelines. The AO also highlighted the abnormal returns from these shares, which were not consistent with normal market behavior.

2. Treatment of LTCG as Unexplained Credits Under Section 68 of the Income Tax Act:

The AO treated the LTCG as unexplained credits under Section 68, citing the modus operandi of acquiring shares at low prices and selling them at inflated prices through circular trading. The AO relied on statements from brokers and directors of paper companies who confessed to providing bogus LTCG entries. The AO also noted that similar entries were taken by other family members of the assessee, indicating a pattern of bogus LTCG claims.

3. Procedural Fairness Concerning the Opportunity for Cross-Examination:

The assessee argued that the AO's conclusions were based on the Investigation Wing's report and statements from third parties without providing an opportunity for cross-examination. The assessee cited various ITAT decisions where it was held that adverse decisions could not be taken without allowing cross-examination. The assessee contended that the AO did not find any fault in the documents relating to the purchase and sale of shares and that the transactions were done through recognized stock exchanges with payments made via account payee cheques.

4. Validity of Reliance on Investigation Reports and Statements from Third Parties:

The CIT(A) upheld the AO's disallowance, stating that the transactions were sham and intended to claim wrong exemptions. The CIT(A) noted that the share prices were artificially inflated, and the entire process was managed by operators for commission. The CIT(A) relied on statements from key persons involved in providing bogus LTCG entries. However, the assessee contended that these statements were not directly linked to their transactions and that no opportunity for cross-examination was provided.

Judgment:

The ITAT, after considering the rival contentions and various judicial precedents, ruled in favor of the assessee. The ITAT noted that the AO had not provided any cogent material to substantiate the addition and had relied solely on third-party statements without allowing cross-examination. The ITAT cited several cases where similar claims of LTCG were allowed, emphasizing that suspicion alone could not justify disallowance without concrete evidence. The ITAT also referred to the Delhi High Court's ruling in PCIT vs. Smt. Krishna Devi, which held that startling spikes in share prices could not alone justify the AO's conclusion without material evidence. The ITAT concluded that the transactions were genuine and supported by documentary evidence, and thus, the appeal filed by the assessee was allowed.

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