2024 (2) TMI 1573 - AT - Income Tax

Taxpayer's long-term capital gains from stock exchange share sales accepted; s.68 addition deleted for supported transactions

ITAT MUMBAI - AT allowed the taxpayer's appeal, holding the AO and CIT(A) erred in treating long-term capital gains from share sales as bogus and making ... Bogus LTCG - denial of Long Term Capital Gain (LTCG) claimed by the assessee in respect of sale of shares - addition made as assessee has discharged the burden of proving the genuineness of his claim HELD THAT:- In the decided case Ziauddin A Siddique [2022 (3) TMI 1437 - BOMBAY HIGH COURT] the issue before the Hon’ble High Court was whether this Tribunal was right in law in deleting the addition made u/s 68 of the ACT in relation to LTCG derived on sale of shares, ignoring the fact that the shares were purchased from offmarket sources and that the sharp rise in prices were not supported by financials. Answering the question raised by the Revenue in the negative, the Hon’ble High Court held that there was a finding of fact that the purchase & sale of shares occured on the platform of stock exchang, upon payment of STT and were supported by documentary ecidences and therefore there was no perversity in the order of this Tribunal. The Court further noted that there was no allegation against the assessee that he had participated in price rigging in the market and therefore dismissed the appeal of the Revenue. More particularly of the binding jurisdictional High Court in the cases of Shyam Pawar [2014 (12) TMI 977 - BOMBAY HIGH COURT], Ziauddin A Siddique [2022 (3) TMI 1437 - BOMBAY HIGH COURT], Mukesh R Marolia [2005 (12) TMI 457 - ITAT MUMBAI] & Jamna Devi Agarwal [2010 (9) TMI 81 - BOMBAY HIGH COURT] we hold that, the Ld. CIT(A) had erred both on facts and in law in upholding the AO’s action of making addition u/s 68 of the Act, in relation to the proceeds derived on sale of shares of M/s Sunrise Asian Ltd alleging it to be bogus. We therefore direct the AO to delete the addition made u/s 68 of the Act and therefore the addition made as commission also does not survive. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether long-term capital gain (LTCG) claimed on sale of shares can be disallowed as unexplained income u/s 68 where the assessee produced primary documentary evidence of allotment, dematerialisation, court-approved amalgamation, broker contract notes, STT payment and receipt of sale proceeds through banking channels, but the Department relies on general investigation reports alleging market manipulation by third-party entry operators. 2. Whether reliance on investigation/SEBI reports and third-party statements (not recorded in assessee's presence and not subject to cross-examination) suffices to brand bona fide share transactions as bogus and to shift onus on the assessee to disprove alleged conspiracy. 3. Whether an addition by estimating commission/expenditure for arranging alleged bogus LTCG u/s 69C is sustainable where the primary LTCG addition u/s 68 is not sustained. 4. Whether unusual or sharp rise in share price, or the fact that some purchases were off-market, can alone justify treating documented share transactions as sham without specific evidence linking the assessee to the alleged price-rigging modus operandi. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Disallowance of LTCG u/s 68 despite documentary proof of share acquisition and sale Legal framework: Section 68 permits treating unexplained credits as income where the assessee fails to satisfactorily account for them. For share transactions, documentary proof (allotment, demat statements, contract notes, bank receipts, STT payment) is prima facie evidence of genuineness and places onus on revenue to prove otherwise. Precedent treatment: Tribunal and High Court authorities (cited and followed by the Court) have held that documented demat entries, broker contract notes and banking trail, and absence of specific adverse findings against the assessee in SEBI/listing orders, weigh in favour of the assessee; mere classification of a scrip as a 'penny stock' or reliance on general investigation reports do not automatically render all transactions in that scrip bogus. Interpretation and reasoning: The Court examined the primary documents submitted by the assessee - share application, allotment advice, share certificate with distinctive numbers, demat statements showing credit post-amalgamation (court-sanctioned), broker contract notes of sales on recognised exchange, STT payment and bank credits. These documents were undisputed and not impeached by AO/CIT(A). Where holding in demat account and sale through exchange via recognised broker with banking trail and STT are established, the transactions cannot be discarded merely on suspicion. The AO's reliance on general investigative findings (identifying certain entry operators and syndicates) without any material specifically implicating the assessee or his broker was insufficient to displace the documentary record. The Court required revenue to produce cogent material linking the assessee to the alleged modus operandi; absent such link, the statutory presumption under s.68 does not operate. Ratio vs. Obiter: Ratio - Where an assessee produces unchallenged primary documentary evidence of share allotment, demat holding, court-approved amalgamation and sale through recognised exchange with banking trail and STT, the AO must produce specific material connecting the assessee to alleged entry-operator schemes before invoking s.68 to treat sale proceeds as unexplained income. Obiter - Observations on the general functioning of entry operators and market manipulation as described in investigation reports. Conclusion: Addition u/s 68 disallowing LTCG was not sustainable on the material on record and was to be deleted. Issue 2 - Admissibility and weight of investigation/SEBI reports and third-party statements not recorded in assessee's presence Legal framework: Administrative/investigation reports and third-party statements can be relevant, but principles of natural justice and rules of evidence require that adverse reliance on statements affecting an assessee should be supported by linking material and, where necessary, opportunity to rebut/cross-examine. Judicial precedent requires independent verification by AO when relying on general investigation findings to impugn transactions of specific taxpayers. Precedent treatment: Courts and the Tribunal have held that suspicion, however strong, cannot substitute for evidence; revenue must contradict the assessee's documentary proof with specific and cogent material. Reliance on investigation reports which do not name or implicate the assessee is inadequate. Statements recorded without the assessee's presence and without cross-examination cannot be conclusive against the assessee. Interpretation and reasoning: The AO heavily relied on investigation wing reports and statements of alleged entry operators/brokers. The Court found these materials to be general and not linking the assessee or his broker to the alleged conspiracy. No enquiry was made of the broker through whom the assessee sold the shares; the AO did not identify which buyers (exit providers) purchased the assessee's lots; the statements were not recorded in assessee's presence nor subjected to cross-examination. The Court held that such reliance by AO/CIT(A) amounted to conjecture and was legally insufficient to overturn the documentary prima facie case made by the assessee. Ratio vs. Obiter: Ratio - Investigation/SEBI reports and third-party statements that do not specifically implicate the assessee and are not confronted with him cannot be the sole basis for adverse findings; AO must conduct independent verification and bring specific evidence against the taxpayer. Obiter - Detailed critique of the AO's failure to interrogate the broker or identify buyer-entities. Conclusion: Investigation/SEBI reports and third-party statements, absent specific incriminating material against the assessee and without opportunity to rebut, could not sustain the addition. Issue 3 - Addition of estimated commission/expenditure u/s 69C where underlying LTCG addition is unsustainable Legal framework: Section 69C permits treating unexplained expenditure as income where the assessee fails to account for it; such addition is normally consequential and linked to the existence of the principal unexplained receipt or transaction. Precedent treatment: Where primary addition disallowing receipts is deleted for lack of evidence, consequential estimated commissions or related unexplained expenditure additions fall away unless independently established. Interpretation and reasoning: The AO estimated a 5% commission for arranging alleged bogus LTCG and added it u/s 69C. The Court held that this addition was contingent on the foundational finding that the LTCG was bogus. Once the s.68 addition was deleted for lack of specific evidence implicating the assessee, the consequential commission addition had no independent basis. Ratio vs. Obiter: Ratio - Consequential addition u/s 69C cannot survive if the foundational addition (here u/s 68) is deleted for lack of evidence. Obiter - None. Conclusion: Commission addition u/s 69C to be deleted along with the s.68 addition. Issue 4 - Effect of abnormal price rise and off-market purchases on genuineness of transactions Legal framework: Volatility or substantial price appreciation of a scrip and off-market acquisitions may attract scrutiny, but do not ipso facto render transactions sham where contemporaneous documentary evidence establishes acquisition, holding and sale through recognised channels and where there is no proof of the assessee's participation in manipulation. Precedent treatment: Jurisprudence acknowledges that off-market transactions are not illegal per se and that mere classification of a scrip as a penny stock or showing abnormal price movement does not automatically convert documented transactions into sham ones. Revenue must establish nexus between taxpayer and manipulative conduct. Interpretation and reasoning: The Court found no evidence that rises in price were attributable to the assessee or that the assessee participated in price-rigging. The AO's amazement at price multiplication was insufficient; market movements, SEBI's limited/specific findings, and the absence of the assessee's name in SEBI's lists weighed against inferring sham transactions. Further, off-market origin of purchase did not invalidate the demat credit and subsequent sale on exchange backed by STT and banking receipts. Ratio vs. Obiter: Ratio - Abnormal price rise or off-market purchase alone cannot justify treating otherwise documented and verifiable share transactions as sham; specific evidence connecting the assessee to manipulation is required. Obiter - Observations criticizing AO's reliance on general market-manipulation narratives without case-specific proof. Conclusion: Price rise and off-market purchase, in the absence of specific incriminating evidence against the assessee, do not justify disallowance of LTCG. Final disposition (cross-reference to Issues 1-4) Having considered documentary evidence, legal precedents and the insufficiency of general investigation/SEBI material to implicate the assessee, the Court concluded that the addition u/s 68 in respect of LTCG and the consequential u/s 69C addition were unsustainable and ordered deletion of both additions.