2021 (11) TMI 221 - AT - Income Tax

Tribunal overturns decision on capital gain, citing lack of evidence and denial of cross-examination

The Tribunal allowed the appeal, holding that the long-term capital gain reported by the assessee could not be deemed as bogus solely based on a report ... Long-term capital gains exemption under section 10(38) - unexplained cash credit under section 68 - requirement of cogent evidence linking the assessee to a rigging/entry operator - modus operandi of penny stocks - preponderance of human probabilities - onus on the assessee to prove genuineness of transactions - reliability of investigation wing reports and the need for independent inquiry - opportunity of cross examination of third party statementsLong-term capital gains exemption under section 10(38) - unexplained cash credit under section 68 - requirement of cogent evidence linking the assessee to a rigging/entry operator - Capital gains claimed as exempt under section 10(38) cannot be treated as unexplained cash credit under section 68 merely on the basis of general reports or suspicious price movement unless cogent material links the particular assessee to the alleged scam. - HELD THAT: - The Tribunal examined whether the long term capital gains claimed by the assessee on sale of shares could be treated as bogus and added as unexplained cash credit. While noting the extraordinary rise in share prices and the investigation wing's report about a wider modus operandi, the Tribunal held that such circumstances and the theory of human probabilities may generate suspicion but cannot substitute for evidence specific to the assessee. The Revenue must establish, by cogent material, that the assessee participated in the scheme (for example, proof that cash changed hands or a live link connecting the assessee to the entry operator). Where documents of sale/purchase, contract notes, demat transfers, STT payment and receipt of sale proceeds through banking channels are on record and no specific incriminating mention of the assessee exists in the investigation report, the addition cannot be sustained merely on generalized findings about penny stock manipulation. Applying authoritative precedents, the Tribunal concluded that in absence of specific evidence against the assessee the addition under section 68 was not justified and must be deleted. [Paras 8]Capital gains held not to be bogus for purposes of section 68; addition deleted.Reliability of investigation wing reports and the need for independent inquiry - opportunity of cross examination of third party statements - onus on the assessee to prove genuineness of transactions - Reliance solely on statements or reports of the investigation wing concerning third parties, without independent inquiry or provision of opportunity for cross examination and without evidence directly implicating the assessee, is insufficient to sustain an addition. - HELD THAT: - The Tribunal observed that the AO primarily relied on the investigation wing's findings and trade pattern analysis but did not conduct independent enquiries (for example, from SEBI/BSE) nor produced material showing the assessee's name in the investigation. The assessee had produced contract notes, demat records, proof of STT payment and bank receipts for sale proceeds; there was no material showing payment of cash by the assessee to effect accommodation entries. The Tribunal reiterated that while cross examination of distant third parties may be impracticable, the lack of an independent corroborative enquiry by the AO and absence of specific adverse material against the assessee mean that third party statements alone cannot override the documentary evidence produced by the assessee. Precedents were followed to the effect that documents relied upon by the AO must be confronted with the assessee and independent corroboration is necessary where the allegation is one of a concerted accommodation racket. [Paras 3, 4, 8]AO's reliance on investigation reports and third party statements without independent corroboration and without implicating the assessee was held inadequate; the addition was set aside.Final Conclusion: The Tribunal allowed the appeal, holding that the assessee's claimed long term capital gains for Assessment Year 2015 16 could not be treated as unexplained cash credit under section 68 in absence of cogent material linking the assessee to the alleged penny stock rigging; reliance solely on investigation wing reports and generalized probabilities was insufficient and the addition was deleted. Issues Involved:1. Whether the long-term capital gain of Rs. 2,56,90,510/- reported by the assessee should be treated as bogus and taxed as unexplained cash credit under section 68 of the Income Tax Act, 1961.Issue-Wise Detailed Analysis:1. Treatment of Long-Term Capital Gain as Bogus:The primary issue raised by the assessee was that the CIT(A) erred in confirming the AO's order treating the long-term capital gain of Rs. 2,56,90,510/- as bogus and taxing it as unexplained cash credit under section 68 of the Act.Facts and Arguments:- The assessee, an individual, claimed long-term capital gains from the sale of shares of two companies, Life Line Drugs Pharma Ltd. and Mahavir Advance Remedies Ltd., purchased offline in cash.- The AO, based on an investigation report from Kolkata, found that these shares were used for providing bogus long-term capital gains. The AO noted irregularities such as offline purchases, delayed dematerialization, and a significant rise in share prices without corresponding financial performance.- The assessee argued that price fluctuations in shares are normal and that there was no evidence implicating him or his broker in any price manipulation. The assessee also contended that the statements of third parties were used against him without providing an opportunity for cross-examination.Findings:- The AO's conclusion was based on circumstantial evidence, such as the rapid price increase of the shares and the suspension of trading by SEBI. However, no direct evidence was provided linking the assessee to any fraudulent activities.- The CIT(A) upheld the AO's decision, emphasizing the modus operandi and circumstantial evidence, suggesting that the transactions were not genuine.Tribunal's Analysis:- The Tribunal noted that the AO did not conduct an independent inquiry to establish the assessee's involvement in rigging share prices or exchanging cash for accommodation entries.- The Tribunal highlighted that the assessee provided all necessary documentation, including contract notes and evidence of transactions through banking channels.- The Tribunal emphasized the importance of providing an opportunity for cross-examination, which was denied in this case.- The Tribunal referred to the judgment of the Hon’ble Delhi High Court in the case of Pr. CIT vs. Smt. Krishna Devi, which held that suspicion alone cannot justify rejecting an assessee's claim without concrete evidence.Conclusion:- The Tribunal concluded that the capital gain earned by the assessee could not be held bogus merely based on some report without cogent material against the particular assessee.- The Tribunal set aside the CIT(A)'s finding and directed the AO to delete the addition made under section 68 of the Act.Judgment:- The appeal of the assessee was allowed, and the order was pronounced on 29/10/2021 at Ahmedabad.