2024 (12) TMI 1652 - AT - Income Tax

Appeal dismissed: Reopening valid; no nexus found between share trades and alleged market manipulation; additions under s.10(38), s.68, s.69C deleted

ITAT upholds CIT(A)'s decision: reopening was valid but CIT(A) properly considered evidence and found no nexus between the assessee's share transactions ... Reopening of assessment - Addition being bogus long term capital gain u/s 10(38) - addition u/s 68 - addition u/s 69C (unexplained expenditure) in respect of commission - HELD THAT:- It is pertinent to note that the CIT (A) has rightly held that the reasons of reopening was recorded properly and, therefore, rightly rejected the legal point of the assessee. CIT (A) has taken cognisance of the evidences produced by the assessee before the Assessing Officer as well as before the CIT(A) which clearly mentions that the assessee at no point of time was involved in the manipulation of the pricing of the scrip of Kushal Group. In fact, the Assessment Order in para no.6 to 8 simply makes the observation that the conclusion of the Investigation Wing is self-explanatory. Therefore, trading of Kushal Group is non-genuine and manipulate scrips to generate long term capital gain/loss and short term capital gain/loss. The connection on this alongwith the assessee’s transaction was not established the nexus. AO has not given any finding that the purchase and sale of shares was in doubt. AO has simply relied upon the SEBI investigation report and has not given any independent finding to that extent regarding the purchase and sale of shares and has not established any doubt to that extent in the finding of Assessment Order. Thus, the CIT (A) has rightly deleted the additions including that of commission income under Section 69C of the Act. There is no need to interfere with the finding of the CIT(A). Decided against revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer was justified in treating the claimed long-term capital gains (claimed exempt under Section 10(38)) as unexplained cash credits under Section 68 and taxing the same under Section 115BBE where the transactions related to sale/purchase of listed shares purportedly part of an SEBI-identified manipulated scrip? 2. Whether the Assessing Officer was justified in making an addition under Section 69C (unexplained expenditure) in respect of commission amounting to 3% of the impugned amount where the assessee furnished contract notes, STT payments, demat transactions and source/source-of-source details? 3. Whether the reopening (issuance of notice under Section 148) was invalid for want of proper reasons recorded or without application of mind as alleged by the assessee? ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of claimed long-term capital gains (Section 10(38) v. Sections 68 & 115BBE) Legal framework: Section 10(38) provides exemption for long-term capital gains on transfer of certain listed securities where STT is paid. Section 68 permits treating unexplained credits as income where the assessee fails to satisfactorily explain the nature and source of such credits. Section 115BBE prescribes taxation of income from certain specified incomes including deemed income at special rates. Precedent treatment: The Tribunal's order does not rely upon or distinguish any appellate precedents; determination is made on facts and evidence produced before the authorities. Interpretation and reasoning: The Assessing Officer relied primarily on a SEBI investigation describing the scrip as being traded in a synchronised/manipulated manner and concluded that trading in the scrip was non-genuine; on that basis AO treated the receipts as unexplained cash credits. The Tribunal examined whether the AO made independent findings linking the assessee's transactions to the SEBI findings or whether the AO confronted the assessee with specific deficiencies and gave an opportunity to explain. The Tribunal found: (a) the AO's order only records reliance on the SEBI investigation report without making independent findings that the assessee's purchases or sales were not genuine; (b) the assessee produced supporting documentary evidence before the AO and the CIT(A) - contract notes, demat account transactions, STT payment evidence, and source/source-of-source details - showing transactions were executed through recognized stock exchange and proper channels; (c) there was no material showing cash delivery or off-market non-transparent settlement by the assessee; and (d) the assessee did not, at any stage, have its specific transactions independently impugned by the AO with reasons why the documentary explanations were insufficient. Ratio vs. Obiter: The Tribunal's holding that reliance solely on an investigative agency's report, without independent factual findings tying the assessee's specific transactions to the tainted scrip dealings, is insufficient to treat receipts as unexplained under Section 68, constitutes the ratio of the decision. Conclusions: The Tribunal upheld the CIT(A)'s deletion of the addition. On the facts, the AO failed to establish the nexus between SEBI's findings and the assessee's transactions or to record independent findings challenging the genuineness of the assessee's purchases/sales. Therefore the long-term capital gains claimed under Section 10(38) could not be treated as unexplained cash credits under Section 68 nor taxed under Section 115BBE. Issue 2 - Addition under Section 69C in respect of commission payments Legal framework: Section 69C deals with unexplained investments and expenditures; where assessee fails to explain expenditure or payments, such amounts may be added as income. The AO treated commission @3% of the impugned amount as unexplained expenditure under Section 69C. Precedent treatment: No case law was invoked or applied by the Tribunal; assessment turned on documentary evidence and the AO's causal findings. Interpretation and reasoning: The Tribunal noted that the assessee provided explanations and documentary support for commission payments (contract notes/invoices etc.) and that the AO did not independently demonstrate that the commission payments were sham or unsubstantiated. As with the primary addition, the AO's reliance on the SEBI report without linking that report to the assessee's specific commission payments was held insufficient. The CIT(A) examined the evidence and found the explanations acceptable; the Tribunal found no error in that appreciation. Ratio vs. Obiter: The conclusion that unexplained expenditure under Section 69C cannot be sustained where the assessee furnishes contemporaneous documentary proof for payments and the assessing authority fails to show any specific defect in those proofs is a part of the operative ratio. Conclusions: The Tribunal affirmed the CIT(A)'s deletion of the Section 69C addition relating to commission, concluding that the AO had not discharged the burden of showing the payments to be unexplained or bogus in the face of the assessee's documentary explanations. Issue 3 - Validity of reopening under Section 148 / sufficiency of reasons recorded Legal framework: Reopening of assessment under Section 147/148 requires that the Assessing Officer records reasons to believe that income chargeable to tax has escaped assessment; those reasons must reflect application of mind. Precedent treatment: The Tribunal's decision does not rely on any specific precedent; it reviews the record for sufficiency of reasons. Interpretation and reasoning: The Tribunal observed that the CIT(A) had considered the challenge to reopening and concluded that reasons were properly recorded. The Tribunal concurred with the CIT(A) that the reasons for reopening were not vitiated by want of application of mind. The Revenue had contended the reasons were defective (not quantifying amounts etc.), but the Tribunal accepted the CIT(A)'s view that the legal point on reopening was rightly rejected. The Tribunal therefore proceeded to examine the merits of the additions. Ratio vs. Obiter: The finding that the recorded reasons for reopening were adequate in the present factual matrix is a decision on the point of law as applied here; it is limited to the record before the Tribunal (ratio limited to these facts). Conclusions: The Tribunal upheld the CIT(A)'s conclusion that the reopening was validly founded; however, on the substantive merits the AO's additions were not sustained for the reasons noted above. Final Disposition The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s deletions of the additions relating to the claimed long-term capital gains and the commission (Section 69C), and agreeing that the reopening was not invalid on the recorded reasons. The Tribunal declined to interfere with the merit findings of the CIT(A) that the assessee's documentary evidence established the genuineness of the transactions and payments in the absence of independent adverse findings by the Assessing Officer.