Assessee's Capital Gains Deemed Genuine; AO's Additions Rejected under IT Act

The Tribunal found that the assessee successfully proved the genuineness of long-term capital gains from shares of a company, rejecting the AO's additions under Section 68 of the Income Tax Act. The Tribunal highlighted the lack of concrete evidence and reliance on presumptions by the AO, directing the acceptance of the capital gains as legitimate. Consequently, the addition of a 2% commission on the alleged bogus gains was also dismissed. The appeal was allowed in favor of the assessee, with the order issued on 04.12.2020.

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Issues Involved:
1. Addition made under Section 68 of the Income Tax Act, 1961 by treating long-term capital gains as not genuine.
2. Addition of 2% commission on alleged bogus long-term capital gains.

Issue-wise Detailed Analysis:

1. Addition under Section 68 of the Income Tax Act, 1961:

The assessee filed a return of income declaring Rs. 80,61,390/-, which was processed under Section 143(1). The return was selected for scrutiny due to suspicious sale transactions in shares of Lifeline Drugs and Pharma Ltd (LDPL), generating exempted long-term capital gains. The Assessing Officer (AO) disbelieved the transaction, suspecting a cartel of brokers manipulated the share prices to benefit various persons with long-term capital gains.

The AO heavily relied on the Investigation Wing's report from Kolkata, concluding that the assessee used entry providers to book unaccounted income as tax-free capital gains. The AO noted the steep rise in LDPL's share price was unreasonable, given the company's lack of profits and significant business activity.

Despite the assessee providing supporting documentary evidence during assessment proceedings, the AO made an addition of Rs. 6,12,44,000/- under Section 68, stating the assessee failed to discharge the onus of proving the genuineness of the transactions. The AO also observed that beneficiaries of such transactions typically pay a commission to entry providers and added Rs. 12,24,880/- as assumed commission.

The assessee contested this before the Commissioner of Income Tax (Appeals) [CIT(A)], but the appeal was dismissed.

Upon review, it was noted that the assessee was a habitual investor with substantial investments and gains over several financial years, including the year under consideration. The AO accepted other transactions but singled out the LDPL transaction as bogus without making adverse comments on the assessee's habitual investments.

The Tribunal emphasized that the initial burden to justify the return of income lies with the assessee, who provided necessary documentary evidence. The AO dismissed these evidences by relying on general observations and the Investigation Wing's report without confronting the assessee with specific evidence or seeking further explanation.

The Tribunal highlighted that LDPL, now Arihant Multi Commercial Ltd, was not a shell company and had substantial revenue and assets. The shares were sold months before SEBI suspended trading in LDPL shares, and no evidence suggested SEBI declared prior transactions null and void.

The Tribunal found the AO's additions were based on surmises and presumptions, unsupported by concrete evidence. It referred to Supreme Court decisions in Adamine Construction Pvt Ltd and Odeon Builders Pvt Ltd, emphasizing the necessity of independent enquiry and corroboration of third-party information.

The Tribunal concluded that the assessee successfully discharged the onus under Section 68, directing the AO to accept the long-term capital gain on LDPL shares as genuine.

2. Addition of 2% Commission on Alleged Bogus Long-Term Capital Gains:

Since the Tribunal accepted the genuineness of the long-term capital gain, it found no merit in the consequential addition of Rs. 12,24,880/- as commission and directed its deletion.

The Tribunal also noted a similar decision in the case of the assessee’s husband, where the appeal was decided in favor of the assessee on identical facts.

Conclusion:

The appeal filed by the assessee was allowed, and the order pronounced in the open court on 04.12.2020.

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