2018 (2) TMI 2087 - AT - Income Tax

Tribunal directs deletion of income addition under Section 68, grants exemption under Section 10(38)

The Tribunal allowed the appeal, directing the Assessing Officer to delete the addition made under Section 68 of the Income Tax Act and grant exemption ... Bogus LTCG - claim of exemption U/s.10(38) on the long term capital gains earned by the assessee from the sale of shares rejected - HELD THAT:- When the transactions are routed through banking channels and the identity of the seller and the purchasers are established and when the transactions are covered through contract notes, demat accounts which shows transfer in and out of shares then there is no necessity to doubt the genuineness of the transactions. From the above it is apparent that the decisions relied by the Ld. Revenue Authorities will not be strictly applicable to the case of the assessee and the decisions cited by the assessee are in support of the claim of the assessee. We do understand the genuine anxiety of the Revenue to tax the assessee due to the various unnatural happening of events, but as a Judicial body our hands are tied due to the lack of material evidence against the activities of the assessee and we cannot step into the shoes of the Revenue by making further investigations and enquiries to tie up the loose ends left out by the Revenue. From the materials produced before us there is nothing on record to establish that the transactions of purchase and sale of shares made by the assessee are dubious other than the fact that the share prices of M/s. PFL Infotech Ltd., rose substantially without sound backing and the statements of few persons such as Shri Aspi Bamanji Vairava, Shri Pankaj Kumar K Shah & Shri Dipti P Shah. At the same time it should be kept in mind that stock prices may raise due to certain hidden factors which may be not known to the public at large even with respect to blue chip companies. Hence conclusion cannot be bluntly made on the basis of surmises and conjectures in the case of any assessee when certain other material factors are in favour of the assessee. The Hon’ble Punjab & Haryana High Court in the case CIT vs. Anupam Kapoor [2007 (2) TMI 159 - PUNJAB AND HARYANA HIGH COURT] in a somewhat similar situation has categorically stated that no presumption could be drawn by the Assessing Officer merely on surmises and conjectures. We hereby direct the Ld.AO to delete the addition made by invoking Section 68 of the Act and also to grant deduction U/s.10(38) of the Act by treating the gain arising out of the sale of shares as Long Term Capital Gain. Appeal of assessee allowed. Issues Involved:1. Rejection of exemption claim under Section 10(38) of the Income Tax Act on long-term capital gains from the sale of shares.2. Classification of income from the sale of shares as 'profits and gains of business' instead of 'capital gains'.3. Allegations of artificial spiking of share prices and involvement in penny stock transactions.4. Burden of proof on the assessee to establish the genuineness of the transactions.Detailed Analysis:Issue 1: Rejection of Exemption Claim Under Section 10(38)The assessee claimed an exemption under Section 10(38) of the Income Tax Act for long-term capital gains from the sale of shares of M/s. PFL Infotech Ltd. The Assessing Officer (AO) rejected this claim, citing various reasons including the improbability of the share price increase, lack of company credentials, and the nature of transactions indicating artificial spiking of shares. The AO concluded that the transactions were not genuine and treated the income as unexplained credit under Section 68 of the Act.Issue 2: Classification of IncomeThe AO classified the income from the sale of shares as 'profits and gains of business' rather than 'capital gains.' The AO argued that the assessee's intention was to gain profit from the sale of shares rather than holding them for earning dividend income. The AO relied on CBDT Circular No. 17 dated 26.11.2008, which instructs treating income from the sale and purchase of shares by banking institutions as business income.Issue 3: Allegations of Artificial Spiking and Penny Stock TransactionsThe AO made several findings to support the claim that the transactions were artificially spiked:- The share price of M/s. PFL Infotech Ltd. increased from Rs. 22.38 per share to Rs. 760 per share without any substantial basis.- The company had minimal financial credentials and negative reserves.- The assessee had no previous expertise in trading shares and was involved in purchasing illiquid shares.- Statements from buyers of the shares indicated that their Demat accounts were operated by third parties for a commission.- The AO opined that the transactions were fabricated and involved collusion with entry operators to artificially spike the shares.Issue 4: Burden of ProofThe Commissioner of Income Tax (Appeals) [CIT(A)] concurred with the AO, emphasizing that the assessee failed to counter the findings satisfactorily. The CIT(A) noted that the assessee did not avail the opportunity to cross-examine adverse witnesses and failed to provide financials and bank accounts of the buyers to prove their creditworthiness. The CIT(A) also relied on various judicial precedents to support the AO's findings.Tribunal's Findings:The Tribunal examined the rival submissions and materials on record, noting several key points:- The transactions were conducted through recognized stock exchanges and financial transactions were through banking channels.- The AO's findings were based on suspicion and lacked concrete evidence to establish illegality.- The AO failed to investigate thoroughly or provide evidence of the modus operandi of the alleged artificial spiking.- The Tribunal found that the AO's reliance on certain judicial precedents was misplaced as the facts were not identical to the assessee's case.- The Tribunal also considered the decisions cited by the assessee, which supported the genuineness of transactions conducted through banking channels and recognized stock exchanges.Conclusion:The Tribunal concluded that the AO's findings were based on conjectures and surmises without substantial evidence. The Tribunal directed the AO to delete the addition made under Section 68 of the Act and grant the exemption under Section 10(38) by treating the gains as long-term capital gains. The Tribunal emphasized that this decision was based on the specific facts and materials presented in this case and does not have binding precedent value in similar cases. The appeal of the assessee was allowed.Order Pronouncement:The order was pronounced on 28th February 2018 at Chennai.