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2022 (10) TMI 728 - AT - Income TaxBogus long-term capital gains (LTCG) arising from sale of shares - Disallowance of claim of exemption u/s. 10(38) - assessee case as selected for scrutiny u/s. 143(3) through CASS and the issue in all of them for selection relates to suspicious long term capital gain on shares - HELD THAT - AO held that the said LTCG/loss are fabricated/engineered transactions by the respective assessees, sale of which falls under the category of penny stocks and the same were treated as bogus which were added in the total income by treating it as unexplained cash credit u/s. 68 of the Act. As decided in Swati Bajaj case 2022 (6) TMI 670 - CALCUTTA HIGH COURT Assessing Officers as well as the Commissioner (Appeals) have adopted an inferential process which is found to be a process which would be followed by a reasonable and prudent person. AO and the Commissioner (Appeals) have culled out proximate facts in each of the cases, took into consideration the surrounding circumstances which came to light after the investigation, assessed the conduct of the assessee, took note of the proximity of the time between the buy and sale operations and also the sudden and steep rise of the price of the shares of the companies when the general market trend was admittedly recessive and thereafter arrived at a conclusion which is a proper conclusion. The issue involved in these appeals is squarely covered against the assessee by the said decision as the fact involved are identical to that which were before the Hon ble High Court. - Decided against the assessee.
Issues Involved:
1. Disallowance of claim of exemption under section 10(38) of the Income Tax Act, 1961. 2. Treatment of Long-Term Capital Gains (LTCG) as income from undisclosed sources. 3. Addition towards commission charged by operators as unexplained expenditure. 4. Treatment of trading losses on shares as sham transactions. Detailed Analysis: Disallowance of Claim of Exemption under Section 10(38): The primary issue in all appeals was the disallowance of the exemption claim under section 10(38) of the Income Tax Act, 1961, concerning LTCG from the sale of shares. The Assessing Officer (AO) denied these claims, treating the LTCG as income from undisclosed sources. This decision was based on the significant and rapid increase in share prices, which the AO deemed suspicious and indicative of non-genuine transactions. Treatment of LTCG as Income from Undisclosed Sources: The AO treated the LTCG reported by the assessees as bogus, alleging that the transactions were engineered to introduce unaccounted money into the books. This conclusion was drawn from an investigation report by the Directorate of Income Tax, which detailed the modus operandi of price rigging in penny stocks. The AO's decision was supported by the CIT(A), who confirmed the addition of these gains as undisclosed income. Addition Towards Commission Charged by Operators: In several cases, the AO also made additions towards commission charged by operators, treating these as unexplained expenditures. These commissions were linked to the alleged accommodation entries taken by the assessees in the form of LTCG. Treatment of Trading Losses on Shares as Sham Transactions: In one case, the AO disallowed the trading losses claimed by the assessee, arguing that the transactions were not bona fide commercial transactions but rather sham and artificial arrangements intended to gain tax benefits. The AO added the trading loss amount to the total income of the assessee. Judgment Analysis: The Tribunal referred to a recent judgment by the Hon'ble jurisdictional High Court of Calcutta in the case of Swati Bajaj and others, which dealt with similar issues. The High Court upheld the AO's approach, emphasizing the following points: 1. Preponderance of Probabilities: The test of preponderance of probabilities was applied to ascertain violations of the Income-tax Act. The Court noted that the steep rise in share prices of little-known companies within a short period was suspicious and indicative of non-genuine transactions. 2. Onus of Proof: The burden of proving the genuineness of the transactions rested with the assessees. The Court held that the assessees failed to establish the legitimacy of the share price rise and the creditworthiness of the companies involved. 3. Surrounding Circumstances: The Court criticized the Tribunal for not considering the totality of circumstances, including the complex nature of the transactions and the surrounding circumstances that suggested manipulation. 4. Inferential Process: The AO and CIT(A) adopted an inferential process based on proximate facts, surrounding circumstances, and the conduct of the assessees. The Court found this approach reasonable and prudent. 5. Restoration of AO's Orders: The High Court restored the orders passed by the respective AOs, which were affirmed by the CIT(A), concluding that the Tribunal had erred in setting aside these orders. Conclusion: The Tribunal, following the binding decision of the Hon'ble jurisdictional High Court of Calcutta in Swati Bajaj and others, dismissed the appeals of the assessees. The Tribunal upheld the AO's treatment of the LTCG as income from undisclosed sources and the addition of commissions as unexplained expenditures. The Tribunal also supported the AO's disallowance of trading losses claimed by the assessees. The appeals were dismissed, and the orders of the respective AOs, as affirmed by the CIT(A), were restored.
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