2025 (1) TMI 387 - AT - Income Tax

Addition u/s 68 - bogus share transaction - Allegation of price rigging or circulation of black money to generate LTCG - HELD THAT - Assessee earned LTCG related to the scrip MPL through transactions conducted on the BSE. No adverse findings or comments have been issued by SEBI regarding this scrip, and the Ld. DR was unable to submit any such directions or allegations by SEBI related to the scrip in question. AO did not reject any of these primary pieces of evidence during assessment proceeding. Hon ble Bombay High Court in Shyam R. Pawar 2014 (12) TMI 977 - BOMBAY HIGH COURT held that when details of share transactions are substantiated by DEMAT account statements and contract notes, and the AO fails to prove such transactions as bogus, the capital gains cannot be treated as unaccounted income under Section 68 of the Act. We find no basis to conclude that the assessee was involved in any price rigging or circulation of black money to generate LTCG. The evidence and documents submitted during the assessment proceedings were neither denied nor challenged in terms of their authenticity. - Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in this judgment include:

• Whether the transactions involving the purchase and sale of shares of Midland Polymers Ltd (MPL) by the assessee qualify as genuine transactions eligible for long-term capital gains (LTCG) exemption under Section 10(38) of the Income-tax Act, 1961.
• Whether the addition made under Section 68 of the Income-tax Act, treating the LTCG as bogus and unexplained cash credit, is justified.
• Whether the evidence provided by the assessee sufficiently substantiates the legitimacy of the transactions in question.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legitimacy of the Share Transactions and Eligibility for LTCG Exemption

• Relevant Legal Framework and Precedents: The case hinges on the interpretation of Section 10(38) of the Income-tax Act, 1961, which provides exemptions for LTCG arising from the transfer of equity shares. The precedents considered include the judgments of the ITAT and the Hon'ble Bombay High Court, particularly in the cases of Indravadan Jain (HUF) and Shyam R. Pawar.
• Court's Interpretation and Reasoning: The court examined whether the transactions were conducted through legitimate channels, such as stock exchanges, and whether they were supported by adequate documentation, including DEMAT account statements and broker's notes.
• Key Evidence and Findings: The assessee submitted substantial evidence, including broker's notes, DEMAT statements, bank statements, and a bonus declaration. These documents were not refuted by the Assessing Officer (AO) during the assessment proceedings.
• Application of Law to Facts: The court applied the principles from the cited precedents, emphasizing that the absence of any adverse findings by SEBI and the legitimate nature of the transactions as evidenced by the documentation supported the assessee's claim for exemption under Section 10(38).
• Treatment of Competing Arguments: The Revenue's argument, based on a generalized report by the Kolkata Investigation Directorate, was found insufficient as it lacked specific evidence against the assessee's transactions. The court noted that the AO failed to demonstrate that the transactions were part of any manipulated scheme.
• Conclusions: The court concluded that the transactions were genuine and eligible for exemption under Section 10(38), and the addition under Section 68 was unwarranted.

Issue 2: Justification of Addition under Section 68

• Relevant Legal Framework and Precedents: Section 68 deals with unexplained cash credits. The court referred to the principles established in previous judgments, such as the requirement for the AO to provide concrete evidence when alleging transactions as bogus.
• Court's Interpretation and Reasoning: The court emphasized that the AO's reliance on the investigation report without specific evidence against the assessee was inadequate to justify the addition under Section 68.
• Key Evidence and Findings: The court found that the assessee's documentation, including the DEMAT and bank statements, was consistent and unchallenged, supporting the legitimacy of the transactions.
• Application of Law to Facts: The court applied the legal standards for Section 68, noting that the AO failed to disprove the authenticity of the transactions or establish them as part of a fraudulent scheme.
• Treatment of Competing Arguments: The court found the Revenue's arguments unpersuasive due to the lack of contrary judgments or evidence to refute the assessee's claims.
• Conclusions: The addition under Section 68 was deemed unjustified, and the court ordered its deletion.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: The court noted, "We are of the view that there is no reason to suspect the transactions of purchase and sale of shares of above said company declared by the assessee in both the years under consideration."
• Core Principles Established: The judgment reinforces the principle that generalized reports or allegations without specific evidence cannot justify additions under Section 68. It also underscores the importance of documentary evidence in substantiating the legitimacy of share transactions.
• Final Determinations on Each Issue: The appeals were allowed, the addition under Section 68 was deleted, and the exemption under Section 10(38) was granted.

The judgment concludes with the court allowing the appeals of the assessee, thereby affirming the legitimacy of the transactions and the applicability of the LTCG exemption under Section 10(38) of the Income-tax Act, 1961.