2023 (12) TMI 396 - AT - Income Tax

Assessee wins on bogus LTCG allegations from penny stock sales due to lack of evidence and cross-examination denial

ITAT Ahmedabad ruled in favor of the assessee regarding alleged bogus LTCG from penny stock sales. The tribunal found no evidence of price rigging or ... Genuineness of long-term capital gains arising from sale of shares of penny stock companies - onus of proof discharged by documentary evidence including share allotment, banking payments, demat credits and contract notes - treatment of alleged bogus capital gains as unexplained income under section 68 and allowance of exemption under section 10(38) - reliability of third party statements and requirement of opportunity for cross examination / principles of natural justice - inference from steep price rise of a penny stock is not conclusive without case specific corroborative evidenceGenuineness of long-term capital gains arising from sale of shares of penny stock companies - onus of proof discharged by documentary evidence including share allotment, banking payments, demat credits and contract notes - reliability of third party statements and requirement of opportunity for cross examination / principles of natural justice - treatment of alleged bogus capital gains as unexplained income under section 68 and allowance of exemption under section 10(38) - Long term capital gains claimed on sale of shares of M/s Global Infratech Finance Ltd. are genuine and not liable to be treated as bogus/unexplained income. - HELD THAT: - The Tribunal examined whether sale proceeds attributable to a penny stock could be treated as tainted merely because the company lacked financial fundamentals and its price rose steeply. It applied the established approach that each case depends on its own facts and that documentary proof of genuine acquisition and sale negates an inference of bogus gains. The assessee produced share application, board resolution, cleared bank cheque for application money, share certificates, dematerialisation records, contract notes, broker account statements and receipts of sale consideration through banking channels. The Assessing Officer relied on third party statements alleging accommodation entries and on abnormal price movement, but did not provide specific evidence linking the assessee to price rigging or any return of unaccounted cash. Crucially, the assessee was not afforded opportunity to cross examine the persons whose statements were relied upon, which the Tribunal treated as a breach of principles of natural justice and a material infirmity in the AO's case. The Tribunal also noted consistent decisions by coordinate Benches on the same scrip and recent higher court authority emphasising that where the assessee discharges onus by documentary evidence and there is no material connecting the assessee to manipulation, exemption under section 10(38) cannot be denied and additions under section 68 are unjustified. Applying these principles to the portfolio holding facts and the evidence produced, the Tribunal upheld the CIT(A)'s conclusion that the claimed long term capital gains were genuine and dismissed the Revenue's grounds challenging that conclusion. [Paras 5, 7, 8, 13, 14]Grounds 1-3 dismissed; the addition treating the long term capital gains as bogus was deleted and exemption under section 10(38) allowed.Assessment of unexplained expenses and receipts based on seized loose papers - computation under section 69B and apportionment on pro rata basis - appellate adjustment of seized totals where AO included unsupported figures - Additions made by the Assessing Officer on account of unexplained expenses/receipts were improperly computed; the CIT(A)'s partial allowance and direction for recomputation on correct totals was upheld. - HELD THAT: - The AO based additions on loose papers seized during survey, taking total payments at an inflated figure which included an unexplained addition of Rs. 2.5 crore, and computed a pro rata amount attributable to the assessment year. The CIT(A) examined the seized material, reduced the aggregate to the actual total demonstrable from the papers, allowed credit for certain unaccounted receipts, and directed computation of addition on a pro rata basis for the year under consideration. The Department did not point to any specific factual or legal error in the CIT(A)'s analysis. In the absence of any demonstrated infirmity, the Tribunal found no reason to interfere with the CIT(A)'s factual adjustments and directions for recomputation, and dismissed the Revenue's challenge to these additions for the assessment years under appeal. [Paras 17, 19, 20, 27, 28]Ground Nos. 4 (and corresponding grounds in related years) dismissed; CIT(A)'s partial allowance and direction for recomputation upheld.Final Conclusion: All appeals filed by the Department for A.Ys. 2014 15, 2015 16 and 2016 17 are dismissed: the Tribunal upheld the CIT(A)'s deletion of additions treating the claimed long term capital gains from sale of M/s Global Infratech Finance Ltd. as genuine (rejecting Revenue's reliance on penny stock status and third party statements absent cross examination and specific linking evidence), and upheld the appellate adjustments and recomputation relating to unexplained expenses/receipts. Issues Involved:1. Deletion of addition on account of bogus/non-genuine Capital Gain by sale of shares of a penny stock company.2. Deletion of addition on account of unexplained expenses.Summary:Issue 1: Deletion of Addition on Account of Bogus/Non-Genuine Capital GainThe Department challenged the deletion of additions made by the Assessing Officer (AO) concerning the sale of shares of M/s Global Infratech Finance Ltd., a penny stock company, which the AO deemed as bogus long-term capital gains. The AO argued that the company had no financial standing to justify the steep rise in share prices and relied on statements from brokers admitting to providing accommodation entries. However, the Ld. CIT(A) found that the assessee had invested in shares based on his late father's advice and had conducted transactions through banking channels, with no evidence of involvement in share rigging or unaccounted cash flow. The CIT(A) noted the lack of cross-examination of witnesses whose statements were used against the assessee, thus violating principles of natural justice. The Tribunal upheld the CIT(A)'s decision, emphasizing that the Department failed to prove the assessee's involvement in price rigging or receipt of cash, and referenced various judicial precedents supporting the genuineness of such transactions when conducted through proper banking channels.Issue 2: Deletion of Addition on Account of Unexplained ExpensesThe AO added Rs. 13,26,641/- as unexplained expenses based on loose papers found during a survey, which the CIT(A) partially allowed by correcting the total expenses to Rs. 1,54,28,426/- and giving credit for unaccounted receipts. The Tribunal upheld the CIT(A)'s decision, noting no specific infirmity or factual inaccuracy pointed out by the Department, and found no reason to interfere with the CIT(A)'s order.Conclusion:The appeals for the Assessment Years 2014-15, 2015-16, and 2016-17 were dismissed, with the Tribunal finding no error in the CIT(A)'s decisions to delete the additions made by the AO on account of bogus capital gains and unexplained expenses. The Tribunal emphasized the necessity of cross-examination and the lack of concrete evidence against the assessee.