2025 (2) TMI 819 - AT - Income Tax

Addition u/s 68 - bogus LTCG - AO concluded that penny stock frauds concluded by assessee - HELD THAT - The assessee has provided all necessary documentary evidence to substantiate the purchase and sale of shares including purchase agreements Demat account statements broker confirmations bank transaction records and STT payment proof. The broker Shaswat Stockbrokers Pvt. Ltd. confirmed the transactions in response to a notice under Section 133(6) of the Act. The shares were purchased off-market but subsequently dematerialized and sold through BSE demonstrating the transparency of the transaction. AO s addition under Section 68 is not based on any direct evidence showing that the transactions were accommodation entries. The AO has relied only on general observations regarding penny stock manipulation without establishing any link between the assessee and such activities. Mere stock price fluctuations without direct evidence of price rigging or collusion cannot justify an addition under Section 68 of the Act. Hon ble Gujarat High Court in the case(s) of Pr. CIT v. Himani M. Vakil 2012 (9) TMI 1099 - GUJARAT HIGH COURT and Maheshchandra G. Vakil 2012 (9) TMI 1098 - GUJARAT HIGH COURT has held that mere reliance on the Investigation Wing s report and abnormal price fluctuations cannot justify an addition under Section 68 unless there is specific material to prove that the transaction is a sham. We find that the assessee has fully discharged the burden of proof by providing all necessary evidence whereas the Revenue has failed to rebut it with substantive material. AO has neither examined the counterparty nor produced any evidence of collusion or price manipulation. Decided in favour of assessee.

Summary

The present appeal before the Appellate Tribunal concerns the deletion of an addition made under Section 68 of the Income Tax Act, 1961 by the Deputy Commissioner of Income Tax, Central Circle-1(1), Ahmedabad (AO), in relation to the Assessment Year 2015-16. The issue revolves around the Long-Term Capital Gain (LTCG) declared by the assessee, arising from the sale of shares of Kappac Pharma Ltd. (KPL). The Revenue challenged the order of the Commissioner of Income Tax (Appeals)-11, Ahmedabad (CIT(A)), which had deleted the aforementioned addition.**Issues Presented and Considered:**1. Whether the LTCG declared by the assessee is genuine or should be treated as bogus under Section 68 of the Act.2. Whether the CIT(A) erred in deleting the addition made by the AO without sufficient proof of the genuineness of the transaction.**Issue-Wise Detailed Analysis:****Issue 1: Genuineness of LTCG**- The AO relied on reports of the Income Tax Department regarding penny stock scams and identified common features in KPL indicative of such scams.- The AO issued a show cause notice questioning the genuineness of the LTCG, which the assessee defended by providing documentary evidence of purchase, sale, and compliance with tax regulations.- The AO treated the LTCG as bogus based on general observations of penny stock frauds and the ecosystem in which they operate.**Issue 2: CIT(A)'s Decision**- The CIT(A) considered the assessee's submissions and supporting documents, finding flaws in the AO's approach and lack of specific evidence linking the assessee to price manipulation.- The CIT(A) deleted the addition, emphasizing the substantial documentary evidence provided by the assessee to establish the genuineness of the LTCG claim.**Significant Holdings:**- The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision based on the assessee's discharge of the burden of proof and the lack of substantive evidence presented by the Revenue to rebut the genuineness of the transactions.- The Tribunal highlighted the failure of the AO to establish a direct link between the assessee and any fraudulent activities, relying solely on general observations without concrete evidence.In conclusion, the Tribunal upheld the CIT(A)'s decision, emphasizing the importance of specific evidence to prove a transaction as sham under Section 68 of the Act. The Tribunal found that the assessee had provided comprehensive documentation to support the genuineness of the LTCG, while the Revenue failed to present contrary evidence. The decision underscores the significance of concrete proof in tax assessments and the burden of establishing the non-genuineness of transactions resting on the tax authorities.