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of <h1>Section 68 addition on alleged bogus LTCG from share sales deleted; precedents on unexplained cash credits not applicable</h1> <h3>Ajay Shankarlal Bankda Versus DCIT, Circle-16 (2), Mumbai</h3> Ajay Shankarlal Bankda Versus DCIT, Circle-16 (2), Mumbai - TMI ISSUES: Whether long term capital gains (LTCG) claimed on sale of shares of a penny stock company can be disallowed under Section 68 of the Income Tax Act, 1961 on the basis of generalized investigation reports alleging bogus accommodation entries.Whether the assessee discharged the onus of proving the genuineness of the purchase and sale transactions of shares to claim exemption under Section 10(38) of the Income Tax Act, 1961.Whether reliance on statements of third parties recorded under Section 131 of the Act without opportunity of cross-examination can be used to discredit the assessee's claim.Whether mere suspicion or preponderance of probabilities based on sharp rise in share price and investigation reports is sufficient to treat LTCG as bogus.Whether off-market or penny stock transactions conducted through recognized stock exchanges and brokers, supported by documentary evidence, can be treated as sham transactions.Whether additions under Section 68 of the Act can be sustained without specific evidence linking the assessee to any price manipulation or entry operator racket. RULINGS / HOLDINGS: The LTCG claim on sale of shares of the penny stock company cannot be disallowed merely on the basis of a generalized Investigation Report branding the shares as penny stocks and alleging a modus operandi of bogus LTCG; the assessee's transactions were found genuine as they were supported by primary documents including share certificates, bank statements, demat statements, and contract notes evidencing purchase and sale through recognized stock exchange and broker.The assessee discharged the initial onus under Section 68 of the Act by producing primary documents proving purchase consideration paid through banking channels, allotment of shares, dematerialization, sale through stock exchange, and receipt of sale consideration through banking channels with STT paid; absence of any material to rebut this evidence by the AO or CIT(A) renders the addition unsustainable.The AO erred in relying on statements of third parties recorded under Section 131 of the Act without affording the assessee opportunity for cross-examination; such statements cannot be used to draw adverse inference against the assessee.Mere suspicion or reliance on the preponderance of probabilities, including sharp rise in share price unsupported by independent inquiry or evidence of the assessee's involvement in price rigging, cannot justify treating LTCG as bogus income.Off-market or penny stock transactions executed through recognized stock exchanges and brokers with documentary proof cannot be treated as sham transactions solely on the basis of the nature of the scrip or generalized allegations of market manipulation.Additions under Section 68 of the Act require specific and cogent evidence linking the assessee to any fraudulent arrangement; generalized investigation findings against third parties without nexus to the assessee are insufficient to sustain additions. RATIONALE: The Court applied the evidentiary framework under Section 68 of the Income Tax Act, which places the initial burden on the assessee to prove the genuineness of unexplained credits or capital gains, shifting the onus to the Revenue to rebut by cogent evidence.Reliance was placed on judicial precedents emphasizing that generalized investigation reports or modus operandi descriptions cannot substitute for specific evidence against the assessee; the absence of independent inquiry or SEBI action implicating the assessee or his broker was critical.The Court followed binding decisions of the jurisdictional High Court and coordinate benches of the Tribunal which held that documentary evidence such as share certificates, demat account statements, contract notes, bank statements evidencing banking channel payments and receipt, and payment of Securities Transaction Tax (STT) sufficiently establish genuineness of transactions.The Court noted the principle that statements recorded behind the back of the assessee under Section 131 cannot be used adversely without opportunity of cross-examination, citing Supreme Court authority.The Court distinguished cases where SEBI or other regulatory findings established manipulation involving the assessee, holding that in absence of such findings or direct evidence, the LTCG claim cannot be denied.The Court rejected reliance on the 'preponderance of human probabilities' or suspicion arising from sharp share price fluctuations without corroborative evidence, emphasizing the need for proof rather than conjecture.The decision aligns with a doctrinal approach that protects assessee rights by requiring Revenue to establish fraudulent nexus with cogent material rather than relying on generalized reports or third-party statements.
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