Tribunal deletes bogus LTCG addition under section 68 citing lack of evidence for penny stock manipulation allegations

ITAT Kolkata allowed the assessee's appeal against addition under section 68 for bogus LTCG from penny stock transactions. The tribunal found no adverse material to support allegations of price rigging or manipulation. The assessee provided genuine evidence including bills, contract notes, demat statements, and bank records proving transaction authenticity. Neither AO nor CIT(A) found evidence false or issued broker confirmation notices. The tribunal held authorities below erred in rejecting section 10(38) exemption based on suspicion without legal evidence. Addition of sale proceeds as undisclosed income was deleted, along with 5% commission disallowance under section 69C.

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Issues Involved:
1. Legality of additions made under Section 153A without incriminating material.
2. Denial of cross-examination of witnesses.
3. Validity of Long Term Capital Gains (LTCG) claims and related transactions.
4. Treatment of commission expenses related to LTCG transactions.

Issue-wise Detailed Analysis:

1. Legality of Additions Made Under Section 153A Without Incriminating Material:
The Tribunal noted that the assessments for the years under appeal were not pending on the date of the search. According to the legal position established in CIT Vs. Kabul Chawla (2016) 380 ITR 573 (Del.), and upheld by the Hon’ble Supreme Court in Kurele Paper Mills, no addition can be made without incriminating material found during the search. The Tribunal observed that there was no incriminating material against the assessee for the relevant assessment years, and thus, the additions made by the AO were not legally tenable.

2. Denial of Cross-Examination of Witnesses:
The AO denied the assessee's request for cross-examination of Shri Devesh Upadhyay and the brokers involved in the transactions. The Tribunal held that denying cross-examination violated the principles of natural justice, as established by the Hon’ble Supreme Court in Andaman Timber Industries. The Tribunal emphasized that the AO cannot rely on third-party statements to draw adverse inferences without allowing cross-examination.

3. Validity of Long Term Capital Gains (LTCG) Claims and Related Transactions:
The Tribunal examined the evidence provided by the assessees, including contract notes, demat statements, and bank statements, which substantiated the genuineness of the LTCG claims. The Tribunal found that the transactions were conducted through recognized stock exchanges and brokers, and the payments were made through banking channels. The AO's reliance on general reports and statements without specific incriminating evidence against the assessees was deemed insufficient to disallow the LTCG claims. The Tribunal cited several judicial precedents supporting the genuineness of such transactions and concluded that the LTCG claims were valid.

4. Treatment of Commission Expenses Related to LTCG Transactions:
Since the Tribunal upheld the genuineness of the LTCG claims, it also directed the deletion of the additions made on account of commission expenses. The Tribunal reasoned that if the LTCG transactions were genuine, the related commission expenses could not be disallowed.

Conclusion:
The Tribunal allowed the appeals of the assessees, holding that the additions made by the AO were not justified in the absence of incriminating material and without allowing cross-examination of witnesses. The Tribunal upheld the genuineness of the LTCG claims and directed the deletion of related commission expenses.

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