2024 (8) TMI 221 - AT - Income Tax

Bogus LTCG - addition made u/s 68 - denial of exemption claimed u/s 10(38) for the sale proceeds of listed equity shares alleged as penny stock - addition u/s 69C as unexplained commission estimated @ 5% on the sale proceeds - HELD THAT - CIT(A) has without dealing with the facts and detailed documentary evidences placed on record by the assessee, dismissed the appeal by stating that issue is a covered matter by the decision in the case of Swati Bajaj 2022 (6) TMI 670 - CALCUTTA HIGH COURT wherein as held that assessee had to establish the genuineness of rise in price of shares within a short period of time that too, when general market trend was recessive.However, we note that there are several decisions of Hon'ble Jurisdictional High Court which are in favour of the assessee. Accordingly, the same would prevail on the issue before this Tribunal. When there are conflicting decisions of various High Courts on the same issue, in the case of Vegetable Products 1973 (1) TMI 1 - SUPREME COURT had held that construction that is favourable to the assessee should be adopted. Hence by following this principle, reliance placed by ld.CIT(A) on the decision of Hon'ble Calcutta High Court in Swati Bajaj (supra) does not hold its fort. Further in the present case, we find that assessee has duly established the nature and source of credit representing sale proceeds of shares of PS IT. Thus, we delete the addition made u/s 68 towards proceeds of sale of listed shares of PS IT which gave rise to Long Term Capital Gain on the said sale, claimed exempt by the assessee u/s 10(38). Accordingly, grounds taken by the assessee in this respect are allowed. Addition on estimate basis towards commission for arranging alleged artificial capital gains @ 5% is consequential to the addition made towards receipt of sale proceeds of alleged penny stock. Since we have deleted the said addition towards sale proceeds of alleged penny stock in terms of above stated observations and findings, this consequential addition of commission has no foundation to stand. Accordingly, the same is deleted. Grounds taken by the assessee in this respect are allowed.

Summary

Issues Involved:
1. Addition under section 68 for denying exemption claimed under section 10(38) of the Income-tax Act, 1961 for the sale proceeds of listed equity shares alleged as penny stock.
2. Addition under section 69C for unexplained commission estimated at 5% on the sale proceeds of the alleged shares.

Detailed Analysis:

Issue 1: Addition under section 68 for denying exemption claimed under section 10(38) of the Income-tax Act, 1961 for the sale proceeds of listed equity shares alleged as penny stock

The case revolves around the assessee, engaged in trading ferrous and non-ferrous metals, who reported a total income of Rs. 12,08,750 for AY 2015-16. The scrutiny assessment was initiated based on information from the Investigation Wing about transactions in shares characterized as penny scrip. The assessee claimed a capital gain of Rs. 99,80,463 on the sale of shares of PS IT Infrastructure and Services Limited (PS IT), which was claimed as exempt under section 10(38) of the Act. The assessee provided necessary details and documentary evidence, including bank statements, DMAT account, broker contracts, share certificates, and High Court order for amalgamation.

The Assessing Officer (AO) questioned the genuineness of the share transactions, citing an unusual rise in share prices and reliance on statements from individuals allegedly involved in providing accommodation entries. Despite the assessee's submission of comprehensive documentation, the AO made an addition under section 68 of the Act for the entire sale consideration of Rs. 1,01,38,461, alleging the transactions were bogus.

The Tribunal observed that the transactions were conducted through a SEBI-registered broker, with payments made through normal banking channels. No discrepancies were found in the documents provided by the assessee. The Tribunal emphasized that the AO failed to provide substantive evidence to justify the addition and relied on assumptions and conjectures. The Tribunal referenced decisions from the Hon'ble High Court of Bombay and Delhi, which held that transactions of purchase and sale of shares cannot be considered bogus if supported by documentary evidence.

The Tribunal concluded that the AO's reliance on the investigation wing's report without further corroboration did not justify the conclusion that the transactions were bogus. The Tribunal noted that the assessee had discharged his burden by submitting relevant documents and that the AO did not establish the assessee's involvement in price rigging. The Tribunal also highlighted that the assessee's transactions were conducted on a regulated stock exchange, and the AO did not identify the purchasers of the shares.

Issue 2: Addition under section 69C for unexplained commission estimated at 5% on the sale proceeds of the alleged shares

The AO made an addition of Rs. 5,06,923 under section 69C, estimating a 5% commission for arranging artificial capital gains. The Tribunal noted that this addition was consequential to the addition made under section 68 for the sale proceeds of the alleged penny stock. Since the Tribunal deleted the addition under section 68, the consequential addition under section 69C had no foundation to stand and was also deleted.

Conclusion:

The Tribunal allowed the appeal of the assessee, deleting the additions made under sections 68 and 69C. The Tribunal emphasized that the AO failed to provide substantive evidence to justify the additions and relied on assumptions and conjectures. The Tribunal referenced decisions from higher courts supporting the assessee's position and concluded that the transactions were genuine and supported by documentary evidence.