Tribunal rules in favor of assessee on genuine capital gain, criticizes revenue for lack of procedural fairness

The Tribunal found in favor of the assessee, concluding that the capital gain declared from the sale of shares was genuine. The revenue's additions under Section 68 of the Income-tax Act were deleted as the documentary evidence, transaction methodology, long holding period of shares, and the assessee's regular investment activities supported the genuineness of the transactions. The Tribunal criticized the revenue for not providing procedural fairness by withholding crucial details from the assessee. Consequently, the appeals of the assessee were allowed, and the additions made by the revenue were rejected.

---

---

Issues Involved:
1. Whether the revenue is justified in treating the capital gain declared by the assessee as non-genuine and thereby making an addition under Section 68 of the Income-tax Act, 1961Rs.

Summary:

Issue 1: Justification of Revenue in Treating Capital Gain as Non-Genuine

The controversy revolves around whether the revenue is justified in treating the capital gain declared by the assessee from the sale of shares of M/s KCL Infra Projects Ltd. (KCLIPL) as non-genuine and thereby making an addition under Section 68.

Assessee's Arguments:
1. Documentary Evidence: The transactions were fully supported by valid documents, including year-wise summaries, de-mat accounts, bank passbooks, contract notes, and statements of purchases and sales.
2. Purchase Details: Shares were purchased in tranches on various dates and payments were made through banking channels, not in cash.
3. Dematerialization: Shares were credited in the de-mat account after purchase, albeit with a slight delay due to the system's popularity at the time.
4. Holding Period: Shares were held for approximately 10 years, which rules out allegations of non-genuineness.
5. Regular Investor: The assessee held other securities, indicating regular investment activities.

Revenue's Contentions:
1. Penny Stock Allegation: The AO found that KCLIPL was a penny stock providing accommodation entries to beneficiaries.
2. Buyer Data: Majority of buyers were shell entities, and some notices to buyers returned unserved or were unresponsive.
3. Director's Statement: The director of KCLIPL admitted to market manipulation.
4. Financial Analysis: The company's financials did not support the abnormal rise in share price.
5. Preponderance of Probabilities: The AO concluded that the transactions were executed to legitimize unaccounted income.

Tribunal's Findings:
1. Documentary Evidence: The assessee produced all necessary documents, none of which were disputed by the revenue.
2. Transaction Methodology: Both purchase and sale were conducted through recognized stock exchanges, and payments were made through account payee cheques.
3. Holding Period: The long holding period of shares (approximately 10 years) strongly indicated the genuineness of the transactions.
4. Regular Investor: The assessee's investment in other securities further supported the genuineness of the transactions.
5. Procedural Fairness: The AO did not provide the assessee with details of enquiries or statements from buyers and the director of KCLIPL, violating the principle of "audi alteram partem."

Conclusion:
The Tribunal concluded that the facts did not reveal any problem or negativity, and the revenue cannot rely on mere suspicion or conjecture. The capital gain declared by the assessee was accepted as genuine, and the additions made by the revenue authorities were deleted. The appeals of the assessee were allowed.

Order Pronouncement:
The order was pronounced in the open court on 04/08/2023.

---