2025 (6) TMI 2054 - AT - Income Tax

Order upholds deletion of additions under s.68/69C where share conversion and stock exchange sales explain receipt of funds

ACIT, Circle, Mumbai Versus Abhishek Rajendrakumar Mundra

ACIT, Circle, Mumbai Versus Abhishek Rajendrakumar Mundra - TMI 1. ISSUES PRESENTED AND CONSIDERED 1. Whether additions made by the Assessing Officer under section 68 and section 69C of the Income-tax Act, 1961, in respect of sale proceeds of shares, are sustainable in absence of concrete material showing the transactions to be accommodation/entry transactions or traced to unaccounted sources. 2. Whether trading in a low-priced/'penny' scrip can be treated as colourable device/manipulation to generate fictitious long-term capital gains absent direct or convincing circumstantial evidence of collusion, circular trading or approach to identified entry operators. 3. Whether the assessee's holding of shares arising from a court-ordered merger (conversion of one company's shares into another) and subsequent sale through registered stock-exchange trades, with payments routed through banking channels and STT paid, negates the presumption of unexplained credits under section 68. 4. Whether reliance on coordinate bench decisions and fact-specific findings of genuineness in comparable matters is permissible and sufficient to uphold deletion of additions where the revenue places no new material before the Tribunal. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Additions under section 68 and section 69C: legal framework 1. Legal framework: Section 68 treats unexplained credits in the books of an assessee as income unless the assessee proves the nature and source; section 69C deals with unexplained investments. The revenue must bring material displacing the evidence of genuineness produced by the assessee and justify invoking deeming provisions. 2. Precedent Treatment: Revenue relied on authorities supporting additions where entries were accommodation or where manipulation was established; the Tribunal considered coordinate bench decisions which declined additions in materially identical factual matrices. 3. Interpretation and reasoning: The Court examined documentary evidence - purchase receipts, demat credits, bank payments by account-payee cheque, stock-exchange trade records, STT payment and credit of sale proceeds to bank account - and found these facts supported genuineness of purchase and sale. No tangible material was brought forward to show routing of unaccounted money or that proceeds were accommodation entries. Thus the AO failed to discharge the onus of establishing unexplained credit/investment. 4. Ratio vs. Obiter: Ratio - Where an assessee holds documentary evidence of bona fide acquisition and sale of shares (demat transfer, banking payments, STT, exchange trades) and the revenue adduces no direct or convincing circumstantial material showing approach to entry operators or routing of unaccounted funds, additions under sections 68/69C cannot be sustained. (This constitutes the dispositive holding.) 5. Conclusion: Deletion of additions under sections 68 and 69C was upheld for lack of proof by the revenue. Issue 2 - Characterisation of transactions in a penny/low-priced scrip as manipulation or circular trading 1. Legal framework: The characterization of trading as manipulation or circular trading requires evidence of design, mutual connivance, staging by entry operators, or other indicia that prices were artificially rigged for accommodation entries rather than market forces. 2. Precedent Treatment: The Tribunal distinguished instances where entry-operators' involvement was established from cases where mere association with a 'tainted' scrip, without proof of approach or collusion by the assessee, is insufficient. Coordinate bench decisions on the same scrip, where similar factual matrices led to deletion, were treated as persuasive. 3. Interpretation and reasoning: The Court observed that the assessee acquired shares of Company A and, by virtue of a court-ordered merger and subsequent regulatory approvals, became holder of Company B's shares - a fact inconsistent with a staged purchase from entry operators solely to obtain accommodation gains. The Tribunal noted absence of material showing the assessee had approached or conspired with alleged operators, and pointed to market volatility and decline in price (demonstrating the assessee suffered losses/gullibility, not complicity in rigging). The Court also relied on contemporaneous exchange trading records showing sales at prevailing market prices through recognized brokers. 4. Ratio vs. Obiter: Ratio - Mere trading in a low-priced scrip does not, without more, justify inferring manipulation or circular trading; positive evidence of collusion or staging is required. (This is a core holding.) 5. Conclusion: The Tribunal rejected the revenue's contention that the transactions constituted staged manipulation; findings of the appellate authority deleting such additions were affirmed. Issue 3 - Effect of shares received by merger and documentary/market evidence on onus of proof 1. Legal framework: Factual provenance of shares (e.g., acquisition by purchase versus acquisition by operation of law such as court-approved merger) bears on whether the assessee's holding is unexplained. Proof by the assessee of money trail (banking channel payments, demat credits) shifts the burden to the revenue to rebut genuineness. 2. Precedent Treatment: The Tribunal considered coordinate decisions involving identical scrips and similar merger facts, which treated documented possession and lawful procedural steps (court order, SEBI/government approval for merger and trading) as significant indicia of genuineness. 3. Interpretation and reasoning: The Tribunal emphasized that the assessee originally purchased shares of Company A, later converted to Company B shares by court order and regulatory approvals; shares were in demat, sale occurred on BSE through registered brokers, STT paid and sale proceeds credited to bank account. These circumstances undermined the AO's premise that the assessee 'purchased' the subject scrip from entry operators for accommodation. In absence of contrary evidence, the presumption of unexplained credit under section 68 was not attracted. 4. Ratio vs. Obiter: Ratio - Documentary and market evidence (demat records, banking payments, SEBI/ court/regulatory approvals, exchange trades and STT) materially advance the assessee's case and require the revenue to produce affirmative evidence to the contrary; absent such evidence, additions cannot be justified. (Dispositive ratio.) 5. Conclusion: The Tribunal validated the appellate authority's factual conclusion that the shares' origin and the sale transactions were genuine and therefore not liable to be taxed as unexplained credits/investments. Issue 4 - Reliance on coordinate bench decisions and absence of new material before Tribunal 1. Legal framework: Tribunal may rely on coordinate bench decisions as persuasive authority where facts are materially identical; moreover, the appellate fact-finding is not to be disturbed in absence of fresh, convincing material. 2. Precedent Treatment: The Tribunal identified multiple coordinate decisions with identical scrip and similar fact patterns that ruled in favour of taxpayers; these were followed. Revenue's reliance on higher-court precedents supporting additions was noted but not applied in light of distinguishing facts and absence of evidence of approach to entry operators. 3. Interpretation and reasoning: The Tribunal observed no new facts or circumstances were placed before it to disturb the CIT(A)'s findings. It also noted that in a related assessment concerning the assessee's brother the department had accepted genuineness in reopened proceedings, which undermined the department's case on consistency and supported the appellate view. Given the factual congruence with coordinate bench outcomes, the Tribunal found no reason to interfere. 4. Ratio vs. Obiter: Ratio - Where the revenue adduces no fresh material and coordinate bench decisions on identical facts support deletion, the Tribunal may affirm the appellate authority's deletion of additions. (Operational holding.) 5. Conclusion: Reliance on multiple coordinate bench decisions and absence of new material led to dismissal of the revenue's appeal; appellate deletions were upheld. Final Disposition 1. The Tribunal upheld the deletion of additions under sections 68 and 69C, dismissed the revenue appeal, and treated the assessee's cross-objection as infructuous in consequence of the dismissal.