2024 (11) TMI 365 - AT - Income Tax

Bogus LTCG on accommodation entries - deductions u/s 10(38) denied - AO observed that assessee had made huge profit out of this investment because of this, it makes the script as suspicious and penny stock - HELD THAT - The assessee has purchased the shares directly from the company and through share transfer from other party, subsequently, sold the same in the stock exchange. However, there are no discrepancies in the documents filed by the assessee claiming the deductions u/s 10(38) of the Act. At the same time, even though all the characteristics of the penny stock exists in the present case, still the revenue has not brought on record any materials linking the assessee in any of the dubious transactions relating to entry, price rigging or exit providers. Even in the SEBI report, there is no mention or reference to the involvement of the assessee. We can only presume that the assessee is one of the beneficiaries in these transactions merely as an investor who has entered in investment fray to make quick profit. Even the Assessing Officer has applied the presumptions and concept of human probabilities to make the additions without their being any material against the assessee. AO and CIT(A) has applied the concept of human probabilities and held the above said scrips to be a penny stock without bringing on record how the assessee is involved in any of the scrupulous activities or directly linked to one of the person who has involved in manipulation/rigging of share prices, entry operator or exit provider as observed in the case of Ziauddin A Siddique 2022 (3) TMI 1437 - BOMBAY HIGH COURT Therefore, there is no material with the tax authorities to substantiate their findings that the impugned transaction is non-genuine - Decided in favour of assessee.

Issues Involved:

1. Legality and jurisdiction of the assessment order under Section 147.
2. Validity of approval under Section 151.
3. Violation of principles of natural justice for not providing cross-examination.
4. Sustaining the addition of income and long-term capital gains (LTCG).
5. Enhancing income by notional commission.
6. Applicability of Sections 234A, 234B, and 234C.
7. Legitimacy of transactions and documents provided by the assessee.
8. Allegations of penny stock transactions and involvement in price rigging.
9. Reliance on investigation reports without corroborative evidence.
10. Non-grant of cross-examination to the assessee.
11. Applicability of Section 68 for additions.
12. Reassessment proceedings and procedural compliance.

Detailed Analysis:

1. Legality and Jurisdiction of the Assessment Order under Section 147:
The assessee challenged the reopening of the assessment under Section 147, arguing it was illegal and without jurisdiction. The tribunal found that the reopening was based on an investigation report suggesting accommodation entries, but no direct evidence linked the assessee to any illegitimate activity. The tribunal emphasized that mere suspicion or reliance on an investigation report without corroborative evidence does not justify reopening.

2. Validity of Approval under Section 151:
The assessee contended that the approval under Section 151 was granted without application of mind. The tribunal noted that procedural lapses in obtaining approval could render the assessment order void. However, the tribunal focused more on the lack of substantive evidence against the assessee rather than procedural issues.

3. Violation of Principles of Natural Justice:
The assessee argued that the assessment order violated natural justice principles by denying cross-examination of persons whose statements were relied upon. The tribunal agreed, stating that the denial of cross-examination, especially when requested, undermines the fairness of the proceedings.

4. Sustaining the Addition of Income and LTCG:
The CIT(A) sustained additions on account of LTCG, which the assessee argued were based on genuine transactions. The tribunal found no discrepancies in the documentation provided by the assessee, such as bank statements and demat accounts, and noted that the revenue failed to establish any link between the assessee and alleged price rigging or accommodation entries.

5. Enhancing Income by Notional Commission:
The CIT(A) enhanced the income by a notional commission for arranging accommodation entries. The tribunal found no evidence supporting this addition, as the revenue did not demonstrate any actual commission paid by the assessee.

6. Applicability of Sections 234A, 234B, and 234C:
The assessee argued that these sections were not applicable. The tribunal did not specifically address this issue, focusing instead on the primary contention regarding the genuineness of the transactions.

7. Legitimacy of Transactions and Documents:
The assessee submitted all relevant documents to substantiate the transactions, and no defects were pointed out by the AO. The tribunal emphasized that unless defects are identified, the documents should be accepted as genuine.

8. Allegations of Penny Stock Transactions:
The revenue alleged that the transactions involved penny stocks. The tribunal, however, found no evidence linking the assessee to any manipulation or price rigging activities. The tribunal cited precedents where mere suspicion based on high profits or penny stock involvement was insufficient for adverse findings.

9. Reliance on Investigation Reports:
The tribunal criticized the revenue's reliance on investigation reports without further corroboration. It highlighted that the AO did not conduct independent inquiries or present evidence directly implicating the assessee.

10. Non-grant of Cross-examination:
The tribunal reiterated the importance of cross-examination as a fundamental right, especially when statements are used against an assessee. The denial of this right was a significant procedural lapse.

11. Applicability of Section 68:
The tribunal noted that Section 68 could not be invoked as the assessee did not maintain books of accounts, and the transactions were through recognized stock exchanges and banking channels. The tribunal referenced case law supporting the non-applicability of Section 68 in such scenarios.

12. Reassessment Proceedings and Procedural Compliance:
The tribunal found that the reassessment proceedings were initiated mechanically, relying solely on investigation reports without independent verification. The tribunal stressed the need for adherence to procedural guidelines, including those outlined in CBDT instructions.

Conclusion:
The tribunal allowed the appeals filed by the assessee for both assessment years, emphasizing the lack of substantive evidence against the assessee and procedural lapses in the reassessment process. The tribunal's decision underscored the importance of evidence-based assessments and adherence to principles of natural justice.

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