2023 (3) TMI 1457 - AT - Income Tax

LTCG exemption denied on penny stocks with unreasonable price rises treated as unexplained cash under section 68

Shri Hitendra C. Ghadia, Smt. Ilaben K. Ghadia, Smt. Ushaben H. Ghadia, Versus DCIT, CC-1 (1), Mumbai

The ITAT Mumbai denied exemption u/s 10(38) for claimed LTCG on penny stocks. The tribunal held that when shares show unreasonable price rises over short ... Addition u/s 68 - bogus LTCG - sale of penny stocks - Onus to prove - exemption claimed u/s 10(38) denied - HELD THAT:- If there is information and data available of unreasonable rise in the price of the shares of these penny stock companies over a short period of time of little more than one year, the genuineness of such steep rise in the prices of shares needs to be established and the onus is on the assessee to do so as mandated in section 68. Assessee cannot be permitted to contend that the assessments were based on surmises and conjectures or presumptions or assumptions. The assessee does not and cannot dispute the fact that the shares of the companies which they have dealt with were insignificant in value prior to their trading. If such is the situation, it is the assessee who has to establish that the price rise was genuine and consequently they are entitled to claim LTCG on their transaction. Until and unless the initial burden cast upon the assessee is discharged, the onus does not shift to the revenue to prove otherwise. It is incorrect to argue that the assessee have been called upon to prove the negative in fact, it is the assessee’s duty to establish that the rise of the price of shares within a short period of time was a genuine move that those penny stocks companies had credit worthiness and coupled with genuineness and identity. The assessee cannot be heard to say that their claim has to be examined only based upon the documents produced by them namely bank details, the purchase/sell documents, the details of the D-Mat Account etc. The assessee have lost sight of an important fact that when a claim is made for LTCG or STCL, the onus is on the assessee to prove that credit worthiness of the companies whose shares the assessee has dealt with, the genuineness of the price rise which is undoubtedly alarming that to within a short span of time. As transaction of LTCG claimed exempt u/s. 10(38) by the assessee is colourable device in guise of investment in listed shares. Entire transactions were stage managed with object to plough back his unaccounted income in form of fictitious long term capital gain (LTCG) and claim bogus exemption, Assessing Officer was justified in denying exemption under section 10(38) and treating such bogus LTCG in penny stock under purview of unexplained cash under section 68. Decided against assessee. Issues Involved:1. Disallowance of exemption claimed under section 10(38) for Long-Term Capital Gain.2. Addition of unexplained acquisition of bullion and diamond under section 68.3. Addition of unexplained investment in electronics under section 68.Summary:Issue 1: Disallowance of Exemption Claimed under Section 10(38) for Long-Term Capital GainThe assessee claimed exemption under section 10(38) of the Income Tax Act for Long-Term Capital Gain (LTCG) on the sale of shares. The Assessing Officer (AO) disallowed this exemption, treating the LTCG as bogus and added it under section 68, citing the suspicious nature of the transactions. The AO relied on investigations by the Directorate General of Income Tax (DGIT) and the Securities and Exchange Board of India (SEBI), which revealed that the transactions involved penny stocks and were manipulated to generate tax-exempt income. The Tribunal upheld the AO's decision, noting that the assessee failed to prove the genuineness of the transactions and that the entire scheme was a colorable device to plough back unaccounted income.Issue 2: Addition of Unexplained Acquisition of Bullion and Diamond under Section 68The AO added Rs. 14,72,630/- under section 68 for the unexplained acquisition of 400 grams of bullion and diamonds. The Tribunal found that the documents provided by the assessee were ante-dated and involved third-party tax invoices, which required re-examination. The matter was restored to the jurisdictional AO for further verification and re-examination to ensure sustainable and cogent reasons are on record.Issue 3: Addition of Unexplained Investment in Electronics under Section 68The AO added Rs. 1,90,900/- under section 68 for unexplained investments in electronics, including a refrigerator, washing machine, Sony battery, and laptop. Similar to the previous issue, the Tribunal found the documents provided by the assessee to be ante-dated and involving third-party tax invoices. The matter was restored to the jurisdictional AO for re-examination and verification.Conclusion:The Tribunal dismissed the appeals regarding the disallowance of exemption under section 10(38) for LTCG and upheld the AO's decision. However, the issues concerning the addition of unexplained acquisition of bullion and diamonds, and unexplained investment in electronics were restored to the jurisdictional AO for re-examination and verification. The appeals were partly allowed for statistical purposes.