Assessee wins appeal against Section 68 addition for legitimate share sale proceeds through proper banking channels

The ITAT Mumbai allowed the assessee's appeal against addition u/s 68 for alleged bogus share sale proceeds. The assessee inherited shares from his deceased mother through will and sold them via regular broker on BSE through proper banking channels. The AO treated the transaction as penny stock accommodation entry based on statements from operators, without establishing any direct relationship between the assessee and the entry providers. The Tribunal held that merely dealing in suspected scripts without material evidence linking the assessee to accommodation providers cannot justify adverse inference, particularly when the assessee was a regular investor with no connection to suspicious transactions.

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Issues Involved:
1. Reopening of the case under section 148 of the Income-tax Act, 1961.
2. Treatment of Long Term Capital Gain (LTCG) as income under section 68 of the Act.
3. Validity of addition based on third-party statements.

Summary:

Reopening of the Case:
The case was reopened by issuing a notice under section 148 of the Income-tax Act, 1961, based on information from the Director of General of Income Tax (Inv) Pune regarding bogus long-term capital gain manipulation in market prices of shares. The assessee was identified as a beneficiary of this manipulation to the extent of Rs. 1,10,80,500/-. The assessee requested the reasons for reopening, which were provided, and statutory notice under section 143(2) was issued.

Treatment of LTCG as Income under Section 68:
The Assessing Officer (AO) observed that the assessee earned LTCG by selling shares of M/s. Rander Corporation Ltd. and claimed it as exempt under section 10(38) of the Act. The AO considered the transaction suspicious due to the large capital gains and relied on findings from the Kolkata Investigation Wing and statements from various operators and brokers, concluding that the assessee was a beneficiary of manipulated share prices. Consequently, the AO added the sale proceeds of Rs. 1,10,52,724/- as income under section 68 of the Act.

Validity of Addition Based on Third-Party Statements:
The assessee argued that all transactions were conducted through a Demat account and banking channels, complying with section 10(38) conditions. The assessee denied any connection with the alleged manipulators and challenged the addition based on third-party statements. The AO, however, maintained the addition, relying heavily on these statements without establishing a direct link between the assessee and the manipulators.

Tribunal's Findings:
The Tribunal observed that the assessee's mother initially purchased the shares through preferential allotment, and the assessee acquired them through a will. The shares were sold through a regular broker on the Bombay Stock Exchange (BSE). The AO failed to establish any relationship between the assessee and the operators or provide tangible evidence linking the assessee to the alleged manipulation.

The Tribunal referenced a similar case (Shri Abhishek Doshi) where the addition was deleted due to the lack of evidence connecting the assessee to the manipulation. The Tribunal concluded that merely dealing with a suspected script does not warrant an adverse view without concrete evidence.

Conclusion:
The Tribunal allowed the appeal, directing the AO to delete the addition made under section 68 and accept the assessee's claim of LTCG and short-term capital gains. The appeal filed by the assessee was allowed.

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