2023 (2) TMI 497 - AT - Income Tax

Assessee's LTCG claim rejected, Tribunal upholds decision on unexplained cash credit.

The appeal filed by the assessee against the order of the Commissioner of Income Tax (Appeals) confirming the addition of Long-Term Capital Gain (LTCG) as ... Addition u/s 68 - bogus LTCG - Unexplained cash credit - HELD THAT:- There are large number of assessees, who have transacted with equity shares of M/s. Cressanda Solutions Limited and claimed exemption u/s 10(38) of the Act. Apart from this scrip, there are other scrips also in Kolkata, who were found to be penny stock and transactions on papers only. The Hon’ble Calcutta High Court has recently considered this aspect in its judgment in the case of Swati Bajaj & Others [2022 (6) TMI 670 - CALCUTTA HIGH COURT] In a number of appeals, we have also rejected the claim of the assessees, where the assessee transacted in the shares of M/s. Cressanda Solutions Limited. All these transactions have been held as bogus by the Hon’ble Jurisdictional High Court. Therefore, we affirm the view taken by the Revenue Authorities who have rejected the claim of the assessee and made the additions. We do not find any merit in this appeal. Decided against assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether long-term capital gains claimed as exempt under section 10(38) arising from sale of listed shares are genuine where transactions relate to a scrip identified as penny-stock and indicative of paper trading. 2. Whether the sums representing alleged long-term capital gains can be treated as unexplained cash credit and added to income under section 68 where the assessee's explanation (purchase, amalgamation, share-split and subsequent sale) is disbelieved. 3. Whether reliance on findings/precedent holding a particular scrip's transactions to be bogus can justify confirming additions for other assessees transacting in the same scrip. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Authenticity of LTCG exemption under section 10(38) for transactions in the scrip Legal framework: Exemption under section 10(38) applies to long-term capital gains arising from transfer of qualifying securities; however, transactions that are sham/paper or where gains are fictitious cannot attract such exemption. The Assessing Officer may examine documentary evidence and transaction pattern to determine genuineness. Precedent Treatment: The Tribunal, in multiple matters concerning the same scrip, and the Jurisdictional High Court have held similar transactions in the scrip to be bogus. The Tribunal expressly follows that High Court conclusion. Interpretation and reasoning: The Assessing Officer examined contract notes showing multiple sales through a single broker across disparate dates and prices, and compared declared purchases with total shares sold. The assessee's explanation (acquisition of 15,000 shares of a predecessor company, allotment post-amalgamation, sale of 5,500 and subsequent split converting remaining into 95,000 shares) was found inconsistent with transactional records showing sale of 100,500 shares. Given the scrip's characterization as a penny stock prone to paper trading and a pattern of transactions by many assessees, the Tribunal considered the claimed LTCG to be not genuine. Ratio vs. Obiter: Ratio - Where material inconsistency and an established pattern of paper transactions in a scrip exist, LTCG exemption under section 10(38) may be denied as gains are bogus. Obiter - General observations about prevalence of penny-stock malpractice in the market (contextual, non-decisive). Conclusions: The Tribunal affirms that the LTCG claimed on the scrip is bogus and not entitled to exemption under section 10(38). Issue 2 - Treatment of the claimed gains as unexplained cash credit under section 68 Legal framework: Section 68 permits the assessing authority to treat sums as unexplained cash credits where the assessee fails to satisfactorily explain the nature and source of such credits; where an explanation is disbelieved, addition is permissible. Precedent Treatment: The AO's approach of invoking section 68 where the assessee's explanation is inconsistent with records is consistent with established practice and supported by the Tribunal's and High Court's findings in related matters involving the same scrip. Interpretation and reasoning: The assessee's narrative - purchase in 2011, allotment on amalgamation, partial sale and post-split increase in share count - was found not reconciled with contract notes showing much larger disposals and varied sale prices. The Tribunal accepted the revenue's conclusion that the claimed receipts were unexplained and constituted bogus gains; consequently, the addition under section 68 was upheld. Ratio vs. Obiter: Ratio - Where an assessee's explanation for share-origin and numbers is inconsistent with transaction records and a finding of paper trading exists for the scrip, amounts can be added as unexplained cash credit under section 68. Obiter - Specific accounting of how share-split mechanics might operate in isolation (not relied upon). Conclusions: The addition under section 68 was correctly made; the assessee failed to establish genuineness and source of the gains. Issue 3 - Reliance on findings/precedent concerning the scrip to decide other appeals Legal framework: Decisions of the Jurisdictional High Court on factual patterns and characterisation of particular scrips are binding on subordinate fora; contemporaneous similar factual findings across multiple assessments may be followed when similar indicia of sham transactions are present. Precedent Treatment: The Tribunal followed the recent decision of the Jurisdictional High Court that had held transactions in the same scrip to be bogus. The Tribunal also referenced its consistent view in a number of appeals involving the scrip. Interpretation and reasoning: Given multiple assessees transacted in the same scrip and the High Court's finding that such transactions were paper-based and bogus, the Tribunal found it appropriate to respectfully follow that decision in affirming the revenue's additions. The reliance was not mechanical but based on similar factual matrix (single broker, penny-stock characteristics, incongruent share counts/prices). Ratio vs. Obiter: Ratio - A binding higher-court finding that a scrip's transactions are bogus can justify affirming additions in other appeals with a similar factual matrix. Obiter - Broader policy observations about market abuse (contextual). Conclusions: Reliance on the High Court's finding was appropriate; the Tribunal affirmed the revenue's action in light of that precedent and the case-specific inconsistencies. Overall Conclusion The Tribunal dismissed the appeal, holding that (1) the claimed long-term capital gains under section 10(38) in respect of transactions in the particular scrip were bogus and not entitled to exemption, (2) the amounts were rightly added as unexplained cash credit under section 68, and (3) the Tribunal was justified in following the Jurisdictional High Court's finding that transactions in the scrip were paper-based, thereby supporting the revenue's disallowance and additions. These conclusions are treated as the operative ratio of the decision.