2023 (8) TMI 418 - AT - Income Tax

Addition u/s 69 - bogus LTCG - Penny Stock purchases - long term capital gain exemption u/s. 10(38) on the scrip denied - HELD THAT - We observe that this scrip and the manner it has behaved in the market clearly indicate that this is peculiar case of penny stock and there is no doubt that in the present case assessee has bought the shares and sold the shares through the operators who are under the scanners of the department as entry and exit operators. Even though there is no direct link was established by the tax authorities, however, the action of the assessee is clearly indicate that he has purchased those shares off-market and offloaded the same in the BSE. This transaction has contained all the ingredients of penny stock and based on the nature of the transactions, AO has treated the same as penny stock and made the addition u/s. 69 - The only issue raised by the assessee before appellate authority is that no cross examination opportunity was granted to the assessee. Since the Assessing Officer has relied heavily on the statement recorded from the exit operators. Decided in favour of assessee. Thus overall facts on record and the nature of transaction clearly indicate that this transaction basically falls under the category of penny stock and assessee has not proved basic information why he has invested in the company which does not have any net-worth and no financial activities. Without actually satisfying the onus for such investment, merely relying on non-availing of the opportunity for cross examination which is subsequent development, the assessee cannot claim benefit. Decided against assessee. Deemed Dividend addition u/s 2(22)(e) - Inter-corporate deposit - HELD THAT - It is clear the MMPL has given Inter-corporate deposit to MIDL in which assessee is a common share holder along with his wife and from the record it is very clear that the ICD was given to another sister concern and the tax authorities has not brought on record how this transaction will benefit the assessee. As decided in Jateen Madanlal Gupta 2021 (2) TMI 177 - ITAT AHMEDABAD loans and advances were made as inter corporate deposits in ordinary course of its business which are not subject to the provisions of deemed dividend as provided u/s 2 (22) of the Act. Decided in favour of assessee.

Summary

Issues Involved:
1. Addition under Section 69 of the Income Tax Act for sale proceeds of shares.
2. Addition under Section 2(22)(e) of the Income Tax Act for deemed dividend.

Summary:

Issue 1: Addition under Section 69 of the Income Tax Act for sale proceeds of shares
The assessee declared long-term capital gains (LTCG) on the sale of shares of Trinity Tradelink Ltd. (TTL) and claimed exemption under Section 10(38) of the Income Tax Act. The Assessing Officer (AO) found the LTCG suspicious due to the involvement of penny stocks and detailed investigations by the Kolkata Investigation Wing. The AO added the sale proceeds of Rs. 27,99,270/- as unexplained income under Section 69. The assessee argued that the transactions were genuine, supported by documentation, and requested cross-examination of the parties involved. The CIT(A) upheld the AO's addition, citing the inability of the assessee to counter the AO's findings and the steep rise in share prices. The ITAT dismissed the assessee's appeal, noting that the transactions had characteristics of penny stock dealings and the assessee failed to prove the genuineness of the investment.

Issue 2: Addition under Section 2(22)(e) of the Income Tax Act for deemed dividend
The AO added Rs. 1.5 crores as deemed dividend under Section 2(22)(e), observing that the assessee held substantial interest in both the lending (MMPL) and borrowing (MIDL) companies. The assessee contended that the Inter-Corporate Deposit (ICD) was not a loan or advance and was used for business purposes, not benefiting the shareholders directly or indirectly. The CIT(A) upheld the AO's addition, stating that the assessee failed to prove the ICD's nature and the amount was already taxed in the hands of MIDL. The ITAT allowed the assessee's appeal, citing the Ahmedabad ITAT decision in DCIT v. Jateen Madanlal Gupta, which held that ICDs given in the ordinary course of business are not subject to deemed dividend provisions if they do not benefit the shareholder.

Conclusion:
The ITAT dismissed the appeal regarding the addition under Section 69, affirming the AO's findings of penny stock transactions. However, it allowed the appeal concerning the addition under Section 2(22)(e), recognizing the ICD as a business transaction not benefiting the shareholders, thus not attracting deemed dividend provisions.