2025 (1) TMI 371 - AT - Income Tax

Addition u/s 68 - bogus LTCG - Investigation Wing had carried out investigation with regard to the price manipulations and generation of bogus long term capital gains in number of stocks, classified as penny stocks - HELD THAT - We notice that the investigation report prepared by Investigation Wing is a generalized report with regard to the modus operandi adopted in manipulation of prices of certain shares and generation of bogus capital gains. AO has placed reliance on the said report without bringing any material on record to show that the transactions entered by the assessee were found to be a part of manipulated transactions, i.e., it was not proved that the assessee has carried out the transactions of purchase and sale of shares in connivance with the people who were involved in the alleged rigging of prices. It is stated by the Ld.AR that the transactions carried on by the assessee were not subjected to scrutiny by SEBI at all. AO has recorded statement from the assessee u/s 131 of the Act, but he could not find any fault with the assessee. AO has only observed that the assessee could not explain as to why he invested in the shares of company, whose fundamentals are weak. However, the assessee had stated that she has made investment on the basis of market information that the future of this company is bright. In our view, the rationale of making investment may not be relevant to arrive at the conclusion that the transactions of purchase and sale of shares are bogus. AO has also referred to a statement given by a person named Shri Rakesh Somani before the Investigation Wing, but did not furnish the same to the assessee to rebut it. He also did not provide opportunity of cross-examination to the assessee. It was not known as to whether Shri Rakesh Somani has stated that the transactions entered by the assessee were bogus. Another important aspect is that the assessee has sold only a part of shares of above said company, i.e., 5,20,000 shares. The remaining 14,80,000 shares are still held by the assessee. Further, the assessee is also a regular investor holding shares of other companies also. Hence, it is not a case of isolated transaction of purchase and sale of shares. In view of the above, we are of the view that there is no reason to suspect the purchase and sale of shares undertaken by the assessee. As noticed that the evidences furnished by the assessee to prove the purchase and sale of shares, payment made/received, entry/exit of shares in the demat account of the assessee etc., were not doubted with. In the case of PCIT vs. Smt Krishna Devi 2021 (1) TMI 1008 - DELHI HIGH COURT has noticed that the reasoning given by the AO to disbelieve the capital gains declared by the assessee, viz., astronomical increase in the price of shares, weak fundamentals of the relevant companies are based on mere conjectures - Decided in favour of assessee.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment from the Appellate Tribunal ITAT Mumbai presents the following core legal questions:

Whether the long-term capital gains declared by the assessee on the sale of shares were genuine or constituted a pre-arranged scheme to generate bogus gains.
Whether the addition of Rs. 3.28 crores under Section 68 of the Income Tax Act, 1961, was justified.
Whether the estimated commission expenses of Rs. 9,83,123/- added under Section 69C of the Act were valid.
Whether the assessee was denied a fair opportunity to contest the evidence against them, particularly the statement of a third party, Shri Rakesh Somani.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legitimacy of Long-Term Capital Gains

Relevant Legal Framework and Precedents: The case revolves around Sections 68 and 69C of the Income Tax Act, 1961, concerning unexplained credits and unexplained expenditure. Precedents from the Bombay High Court and Delhi High Court were considered, emphasizing the need for concrete evidence to declare transactions as bogus.
Court's Interpretation and Reasoning: The Tribunal found that the Assessing Officer (AO) relied heavily on a generalized report from the Investigation Wing without specific evidence linking the assessee to the alleged price manipulation scheme.
Key Evidence and Findings: The assessee provided documentation for the purchase and sale of shares, including dematerialization records and banking transactions. No independent evidence was presented by the AO to prove the transactions were part of a fraudulent scheme.
Application of Law to Facts: The Tribunal applied the principle that the burden of proof lies with the Revenue to establish that transactions are not genuine. The lack of concrete evidence against the assessee led to the conclusion that the gains were legitimate.
Treatment of Competing Arguments: The Tribunal considered the AO's reliance on the statement of Shri Rakesh Somani but noted that the assessee was not given a chance to cross-examine, undermining the fairness of the evidence.
Conclusions: The Tribunal concluded that the long-term capital gains declared by the assessee could not be deemed bogus without specific evidence of manipulation.

Issue 2: Addition under Section 68

Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act deals with unexplained cash credits. The Tribunal referenced several judgments, including those from the Bombay High Court, which emphasized the need for the Revenue to provide substantial evidence of bogus transactions.
Court's Interpretation and Reasoning: The Tribunal found that the AO's addition under Section 68 was based on assumptions and lacked concrete evidence linking the assessee to any fraudulent activity.
Key Evidence and Findings: The AO's reliance on a generalized report and the lack of independent verification of the assessee's transactions were critical in the Tribunal's decision.
Application of Law to Facts: The Tribunal applied the principle that mere suspicion or conjecture cannot justify additions under Section 68 without corroborative evidence.
Treatment of Competing Arguments: The Tribunal dismissed the AO's arguments due to the absence of direct evidence against the assessee and the failure to provide an opportunity for cross-examination.
Conclusions: The Tribunal directed the deletion of the addition under Section 68, as the Revenue failed to substantiate its claims.

Issue 3: Addition under Section 69C

Relevant Legal Framework and Precedents: Section 69C pertains to unexplained expenditure. The Tribunal considered the lack of evidence for estimating commission expenses.
Court's Interpretation and Reasoning: The Tribunal found no basis for the AO's estimation of commission expenses, as no material evidence was presented.
Key Evidence and Findings: The AO's estimation was found to be arbitrary and unsupported by any concrete evidence.
Application of Law to Facts: The Tribunal emphasized that estimations must be based on factual evidence, not assumptions.
Treatment of Competing Arguments: The Tribunal rejected the AO's estimation due to the absence of supporting evidence.
Conclusions: The Tribunal directed the deletion of the addition under Section 69C.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The Tribunal concluded that there was something more which was required, which would connect the present Assessee to the transactions and which are attributed to the Promoters/Directors of the two companies."
Core principles established: The burden of proof lies with the Revenue to establish that transactions are not genuine. Mere suspicion or reliance on generalized reports is insufficient.
Final determinations on each issue: The Tribunal allowed the appeal, reversing the CIT(A)'s order and directing the AO to delete the additions under Sections 68 and 69C.

The judgment underscores the need for concrete evidence in tax assessments and the importance of procedural fairness, such as allowing cross-examination of witnesses. It reaffirms the principle that the Revenue must substantiate claims of bogus transactions with specific evidence rather than relying on generalized reports or assumptions.

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