Bogus capital gain addition under section 68 deleted due to lack of independent inquiry and retracted statement

The ITAT Mumbai held that addition under section 68 for alleged bogus long-term capital gain/short-term capital loss was not justified. The AO relied solely on a general statement from an individual who later retracted through affidavit, without conducting independent inquiry. The assessee demonstrated regular investment activity across 26 different scrips, indicating genuine trading. The particular scrip remained listed on stock exchange throughout the relevant period with no adverse findings by SEBI or other agencies. The AO failed to verify with the assessee's broker or exit provider, making the addition unsustainable based merely on investigation wing information regarding accommodation entries.

---

---

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the addition of Rs. 1,99,34,702/- as unexplained credit under Section 68 of the Income Tax Act, representing the sale proceeds of shares of Sunrise Asian Limited, was justified.
• Whether the addition of Rs. 5,74,041/- as unexplained expenditure under Section 68, purportedly paid as commission for procuring the Long Term Capital Gain (LTCG) entry, was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition of Rs. 1,99,34,702/- as Unexplained Credit

• Relevant legal framework and precedents: Section 68 of the Income Tax Act deals with unexplained credits. The burden of proof lies with the assessee to explain the nature and source of the credits. The court considered various precedents where similar issues were adjudicated, such as the cases of Mr. Arun S. Tripathi, Anjana Sandeep Rathi, and Dipesh Ramesh Vardhan.
• Court's interpretation and reasoning: The Tribunal found that the assessee had provided substantial documentary evidence to support the genuineness of the transactions, including demat account statements, share certificates, and bank statements. The court noted that the Assessing Officer (AO) relied heavily on the statement of Shri Vipul V. Bhatt, which was later retracted, and did not conduct independent inquiries to substantiate the claim of bogus transactions.
• Key evidence and findings: The assessee submitted evidence of share transactions through recognized stock exchanges, payment of Securities Transaction Tax (STT), and receipt of sale proceeds through banking channels. The Tribunal emphasized the lack of contrary evidence from the AO to disprove these documents.
• Application of law to facts: The Tribunal applied the principle that the burden of proof shifts to the revenue once the assessee provides prima facie evidence of the genuineness of the transactions. The AO failed to discharge this burden.
• Treatment of competing arguments: The Tribunal considered the Department's reliance on the investigation report and the statement of Shri Vipul V. Bhatt but found it insufficient to override the documentary evidence provided by the assessee.
• Conclusions: The Tribunal concluded that the addition of Rs. 1,99,34,702/- was not justified as the assessee had adequately demonstrated the genuineness of the transactions.

Issue 2: Addition of Rs. 5,74,041/- as Unexplained Expenditure

• Relevant legal framework and precedents: Similar to the first issue, Section 68 of the Income Tax Act applies. The Tribunal referred to the same set of precedents and principles regarding the burden of proof and the necessity of evidence.
• Court's interpretation and reasoning: The Tribunal noted that the AO did not provide concrete evidence to substantiate the claim that the assessee paid a commission for obtaining bogus LTCG entries. The reliance on the retracted statement of Shri Vipul V. Bhatt was deemed inadequate.
• Key evidence and findings: The Tribunal found that there was no evidence of any commission payment by the assessee, and the AO did not conduct further inquiries to establish this claim.
• Application of law to facts: The Tribunal applied the principle that mere suspicion or conjecture cannot replace substantive evidence. The AO's failure to provide such evidence meant that the addition could not be sustained.
• Treatment of competing arguments: The Tribunal dismissed the Department's argument due to the lack of corroborative evidence and the failure to provide the assessee with an opportunity to cross-examine the witness whose statement was used against them.
• Conclusions: The Tribunal concluded that the addition of Rs. 5,74,041/- was unjustified as the Department failed to prove the alleged commission payment.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The whole basis of making the addition is third party statement without there being any tangible material. It is trite law that additions merely on the basis of suspicious, conjectures or surmises could not be sustained in the eyes of law."
• Core principles established: The judgment reinforced the principle that the burden of proof lies initially with the assessee to substantiate the nature and source of credits. Once this is done, the burden shifts to the revenue to disprove the evidence provided by the assessee. Mere suspicion or reliance on retracted statements without further inquiry is insufficient to justify additions under Section 68.
• Final determinations on each issue: The Tribunal allowed the appeal of the assessee, setting aside the additions made by the AO for both the alleged unexplained credit and unexplained expenditure.

---