2024 (1) TMI 789 - AT - Income Tax

Addition u/s 68 - bogus sale proceeds of shares - shares procured from the mother post demise by 'Will' - HELD THAT - Assessee's mother who bought the initial shares through preferential allotment and at the demise of his mother, he got those shares by will . Assessee has sold those shares through his regular broker in the BSE. We observe that all the shares were purchased and sold through the proper banking channel. AO has observed that the shares sold by the assessee is one of the penny stock of Rander Corporation Ltd, he reopened the assessment and summoned the assessee to explain why the above shares should not be treated as penny stock and the sales proceeds should not be treated as undisclosed income u/s 68 of the Act. AO informed the assessee that the entry operators, brokers and exit operators of the above said shares have given statements wherein they agreed that this is penny stock and they were transacting in these shares to accommodate the beneficiaries to claim deduction u/s 10(38) of the Act. Since, the assessee has only dealt with the above transaction after receiving the shares thru will from his mother, he has nothing to offer any explanation. AO has proceeded to make the addition based on the various statements of the operators. At the same time, he has not brought on record how the assessee is involved in the above transaction except trading in the stock exchange. He has not established any relationship with any of the operators. As relying on Shri Abhishek Doshi 2023 (6) TMI 87 - ITAT MUMBAI only difference is the script is different, however, the assessee has no saying on the script traded by him and there is no relationship established with the accommodation entry providers anywhere on the record. Further the assessee himself a regular investor and not linked to any other suspected transactions. Merely because he has dealt with one of the suspected scripts, we cannot take adverse view without actually bring any material on record. Decided in favour of assessee.

Summary

Issues Involved:
1. Reopening of the case under section 148 of the Income-tax Act, 1961.
2. Treatment of Long Term Capital Gain (LTCG) as income under section 68 of the Act.
3. Validity of addition based on third-party statements.

Summary:

Reopening of the Case:
The case was reopened by issuing a notice under section 148 of the Income-tax Act, 1961, based on information from the Director of General of Income Tax (Inv) Pune regarding bogus long-term capital gain manipulation in market prices of shares. The assessee was identified as a beneficiary of this manipulation to the extent of Rs. 1,10,80,500/-. The assessee requested the reasons for reopening, which were provided, and statutory notice under section 143(2) was issued.

Treatment of LTCG as Income under Section 68:
The Assessing Officer (AO) observed that the assessee earned LTCG by selling shares of M/s. Rander Corporation Ltd. and claimed it as exempt under section 10(38) of the Act. The AO considered the transaction suspicious due to the large capital gains and relied on findings from the Kolkata Investigation Wing and statements from various operators and brokers, concluding that the assessee was a beneficiary of manipulated share prices. Consequently, the AO added the sale proceeds of Rs. 1,10,52,724/- as income under section 68 of the Act.

Validity of Addition Based on Third-Party Statements:
The assessee argued that all transactions were conducted through a Demat account and banking channels, complying with section 10(38) conditions. The assessee denied any connection with the alleged manipulators and challenged the addition based on third-party statements. The AO, however, maintained the addition, relying heavily on these statements without establishing a direct link between the assessee and the manipulators.

Tribunal's Findings:
The Tribunal observed that the assessee's mother initially purchased the shares through preferential allotment, and the assessee acquired them through a will. The shares were sold through a regular broker on the Bombay Stock Exchange (BSE). The AO failed to establish any relationship between the assessee and the operators or provide tangible evidence linking the assessee to the alleged manipulation.

The Tribunal referenced a similar case (Shri Abhishek Doshi) where the addition was deleted due to the lack of evidence connecting the assessee to the manipulation. The Tribunal concluded that merely dealing with a suspected script does not warrant an adverse view without concrete evidence.

Conclusion:
The Tribunal allowed the appeal, directing the AO to delete the addition made under section 68 and accept the assessee's claim of LTCG and short-term capital gains. The appeal filed by the assessee was allowed.