Tribunal rejects LTCG exemption claim, deems transaction dubious

The Tribunal overturned the CIT (A)'s decision and upheld the AO's assessment, ruling that the claimed LTCG exemption was a colorable device to convert unaccounted money. The Tribunal found the transaction dubious, emphasizing the lack of credible financials of the company involved. The appeal filed by the Revenue was allowed, setting aside the CIT (A)'s order.

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Issues Involved:
1. Deletion of addition made by AO under Section 68 for bogus Long Term Capital Gains (LTCG) claimed as exempt under Section 10(38) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 68 for Bogus LTCG:

Facts and Background:
The assessee, an individual taxpayer, declared income from various sources, including capital gains. During scrutiny, the Assessing Officer (AO) found that the assessee claimed LTCG of Rs. 2,72,85,500 as exempt under Section 10(38) from the sale of shares of M/s. Kappac Pharma Limited. The AO, referencing a nationwide investigation by the Directorate of Investigation, Income-tax, Kolkata, suspected the LTCG to be bogus, part of an organized racket to generate fictitious LTCG entries.

AO's Findings:
The AO noted that the assessee purchased 40,000 shares of M/s. Kappac Pharma Limited for Rs. 4,52,000 in cash from undisclosed sources, later declared under the Income-tax Disclosure Scheme (IDS), 2016. The shares were dematerialized and sold for Rs. 2,77,74,600, and the AO concluded that the funds received were from the sale of penny stocks, treating the credit as unexplained income under Section 68, adding Rs. 2,77,46,000 to the income of the assessee.

CIT (A)'s Decision:
The Commissioner of Income-tax (Appeals) [CIT (A)] deleted the addition made by the AO, accepting the assessee's appeal and finding the assessee eligible for exemption under Section 10(38).

Tribunal's Analysis:
The Tribunal examined the financial health of M/s. Kappac Pharma Limited, noting its consistent losses and lack of credible financials, making it improbable for any prudent investor to invest in its shares. The Tribunal referred to previous cases involving M/s. Kappac Pharma Limited, where similar transactions were found to be dubious, aimed at converting unaccounted money into white money.

Key Points from Tribunal's Findings:
- The Tribunal found the entire transaction dubious, starting from the purchase of shares with unaccounted cash, subsequently legalized under IDS, 2016, to the sale of shares at an inflated price.
- The assessee's evasive responses during the investigation further cast doubt on the genuineness of the transactions.
- The Tribunal relied on the principle that the burden of proof lies on the party asserting the genuineness of the transaction. The assessee failed to dispel the suspicion raised by the AO.
- The Tribunal noted that the financials of M/s. Kappac Pharma Limited did not justify the astronomical increase in share prices, supporting the AO's conclusion that the transactions were a colorable device to evade taxes.

Conclusion:
The Tribunal concluded that the CIT (A) erred in deleting the disallowance made by the AO. The entire transaction was found to be a colorable device to convert unaccounted money into fictitious exempt LTCG. The Tribunal set aside the order of the CIT (A) and upheld the assessment order passed by the AO, allowing the appeal filed by the Revenue.

Order Pronouncement:
The Tribunal pronounced the order in open court, setting aside the CIT (A)'s order and upholding the AO's assessment, thereby allowing the Revenue's appeal.

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