2025 (3) TMI 353 - AT - Income Tax

Addition u/s 68 - denial of long term capital gain claimed as exempt income u/s. 10(38) - bogus accommodation entry - HELD THAT - As correctly decided entire addition were made without any basis. AO has made certain assumptions on the basis of Investigation Wing report received by him without adducing any direct evidences that supports his assumptions. The AO has also ignored the evidences furnished by the assessee which is unfortunate and which makes the assessment untenable. Addition made by the A.O. is not correct factually and legally and disallowance of exemption u/s.10(38) is directed to be deleted. Hence these grounds are allowed. AO assessed the sale consideration of shares as unexplained cash credit u/s 68 - It is pertinent to note that the purchase of shares made in an earlier year has been accepted by the revenue. The sale of shares has taken place in the online platform of Stock Exchange and the sale consideration has been received through the stock broker in banking channels. Hence in the facts of the case the sale consideration cannot be considered to be unexplained cash credit in terms of section 68. We also hold that the addition made by the Assessing Officer is incorrect factually and legally and disallowance of exemption under section 10(38) and addition made under section 68 has rightly deleted by the CIT(A). Disallowance u/s 14A - Under the specific circumstances when the Assessing Officer has failed to establish the nexus that investment was made out on interest bearing funds disallowance towards administrative expenditure is not permissible. We also find that the fact of the present case is similarly situated and in the absence of any changed facts of the case We are unable to support the estimated disallowance as made by the Assessing Officer. Hence disallowance made u/s 14A in the instant case is hereby directed to be deleted. Revenue fails on this issue also.

1. ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment are:

Whether the addition of 2,84,35,115 made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961, on account of long-term capital gains (LTCG) claimed as exempt under Section 10(38), was justified.
Whether the disallowance of 15,75,789 under Section 14A of the Income Tax Act, related to the expenditure incurred in relation to income not includible in total income, was appropriate.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition under Section 68 for LTCG

Relevant legal framework and precedents: Section 68 of the Income Tax Act deals with unexplained cash credits, while Section 10(38) provides exemption for LTCG arising from the transfer of equity shares subject to certain conditions. The AO relied on a report from the Investigation Wing, Kolkata, which alleged misuse of Section 10(38) for bogus LTCG entries.
Court's interpretation and reasoning: The Tribunal found that the AO's addition was based on general information and statements from third parties not directly linked to the assessee. The Tribunal emphasized the need for direct evidence linking the assessee to any alleged bogus transactions.
Key evidence and findings: The assessee provided substantial documentation, including purchase and sale records, dematerialization details, and banking transactions, all of which were conducted through recognized channels and duly recorded. The Tribunal noted that the AO did not falsify these documents or provide contrary evidence.
Application of law to facts: The Tribunal applied the principles of natural justice, highlighting the lack of opportunity for the assessee to cross-examine witnesses whose statements were used against him. The Tribunal also noted that the transactions were conducted through stock exchanges and banking channels, fulfilling the conditions for exemption under Section 10(38).
Treatment of competing arguments: The Tribunal dismissed the AO's reliance on third-party statements and general modus operandi reports, as they did not specifically implicate the assessee. The Tribunal also noted the absence of any direct link between the assessee and the alleged accommodation entry providers.
Conclusions: The Tribunal concluded that the addition under Section 68 was not justified and directed the deletion of the disallowance of exemption under Section 10(38).

Issue 2: Disallowance under Section 14A

Relevant legal framework and precedents: Section 14A of the Income Tax Act pertains to disallowance of expenditure incurred in relation to income not includible in total income. The AO made a disallowance of 15,75,789 under this section.
Court's interpretation and reasoning: The Tribunal examined the assessee's balance sheet, which showed that the assessee had sufficient own funds to make the investments in tax-free securities. The Tribunal relied on precedents that establish the principle that if an assessee has sufficient interest-free funds, no disallowance under Section 14A is warranted.
Key evidence and findings: The assessee demonstrated that the investments were made from interest-free funds, and the interest expenses claimed were related to other liabilities, not the investments in question.
Application of law to facts: The Tribunal applied the principle that when an assessee has sufficient interest-free funds to cover investments, it should be presumed that the investments were made from those funds, thus negating the need for disallowance under Section 14A.
Treatment of competing arguments: The Tribunal rejected the AO's disallowance under Section 14A, finding no nexus between the interest expenditure and the tax-free investments, in line with the judicial precedents cited.
Conclusions: The Tribunal directed the deletion of the disallowance under Section 14A, as the assessee had adequately demonstrated the availability of interest-free funds for the investments.

3. SIGNIFICANT HOLDINGS

The Tribunal upheld the principles of natural justice, emphasizing the need for direct evidence and the opportunity for cross-examination when relying on third-party statements.
The Tribunal reinforced the principle that investments made from sufficient interest-free funds do not warrant disallowance under Section 14A.
Final determinations: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order to delete the additions under Sections 68 and 14A.

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