2024 (7) TMI 1721 - AT - Income Tax

Addition under section 68 deleted as penny stock gains held genuine, exemption under section 10(38) allowed

ITAT Rajkot allowed the assessee's appeal and deleted the addition made u/s 68 on alleged unexplained receipts from long-term capital gains on penny stock ... Addition of unexplained receipt by invoking section 68 - long term gain on sale of shares - genuineness of the transaction - modus operandi - Entitlement for exemption u/s 10(38) - purchase and sale transactions - third- party evidences - supporting documents for purchases of shares - fulfillment of conditions to claim exemption u/s 10(38) - latin maxim 'minaturinnocentibus qui parcitnocentibus' - No opportunity of cross examination - CIT(A), confirmed the addition made u/s 68 by AO CIT(A) observed that transactions in penny stocks for appropriating unreasonable gains and/or losses, at the cost of the Revenue, for unjust enrichment of tax evaders are the biggest tax fraud scam in the history of independent India. The latin maxim 'minaturinnocentibus qui parcitnocentibus', meaning 'he who spares the guilty threatens the innocent' is squarely applicable to the issue at hand. The latin maxim 'nuuscommodumcaperepotest de injuria sua propria', which is applicable to the issue at hand, means 'no one can obtain an advantage by his own wrong'. HELD THAT:- From the purchase and sale transactions, it is vivid that assessee's purchase and sale, both are genuine and supported by genuine evidences, noted above. From all the above evidences placed on the record, such as purchase consideration by paying an account payee cheque, supported by bill of purchase, entry in the register of shareholder endorsed on the share certificate, the said shares were dematerialized by following the prescribed procedure and the same is with SEBI authorized broker, the share were duly reflected in the demat account and same are sold with the SEBI authorized broker after payment of security transaction tax, it clearly establish that the shares were held by the assessee for the period more than one year and there is no adverse remark by the assessing officer regarding the purchase or the sale transaction entered into by the assessee. Not only that the brokers involved were not examined and there is no adverse finding in the assessment order. We find that assessee has discharged his onus casted based on the provision of law and have proved the genuineness of the transaction and the requirements stated under the Act to claim the capital gain, as exempt Long Term Capital Gain u/s 10(38) of the Act. The assessing officer, nowhere, in the assessment order, stated that these documentary evidences, submitted by the assessee, are bogus. We note that there are three conditions to claim exemption u/s 10(38) of the Act viz: (i) Shares were purchased via Account Payee Cheque- For that the copy of bank statements reflecting the purchase amount along with the copy of cheque is placed on records, (ii) Shares were held in demat account for more than 12 months- The request form for dematerialization of shares has been submitted vide request form dated 21.01.2014, which is evident from the copy of Acknowledgement and the average period of holding of shares is 20 months (purchased on 24.07.2013 & initial sale on 21.02.2015) out of which the shares are held for almost 13 months in demat account and (iii) Shares were sold through recognized stock exchange after payment of Security Transaction Tax - The Security Transaction Tax has been paid by assessee which is evident from the copy of global report. Thus, the above-mentioned facts have been duly complied with by the assessee and thus, the assessee is entitled to claim exemption u/s 10(38) of the Act. Thus, lower authority failed to bring any proof/evidence/ connection regarding involvement of any cash trail activity which subsequently proves that assessee transformed his unaccounted money. Besides, assessing officer, failed to provide the opportunity of cross examination regarding details reported on AIMS module of ITBA portal, whether the information was reported based on any Investigation Wing Report/Statement of any person reported by Income Tax Department. However, no such information was shared with assessee. Hence in absence of providing opportunity of cross examination, the order passed is bad in law, for that reliance can be placed on the judgement of Hon'ble Supreme Court in the case of M/S Andaman Timber Industries vs. Commissioner of Central Excise [2015 (10) TMI 442 - SUPREME COURT] In the result, the appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether addition of alleged unexplained receipt by invoking section 68 can be sustained where the assessee produces documentary third-party evidence supporting purchase, dematerialisation, sale through a SEBI-registered broker and receipt of sale proceeds through banking channels, and the Assessing Officer relies primarily on information from the AIMS module without adducing direct evidence against the assessee. 2. Whether exemption of long-term capital gain under section 10(38) is impermissibly denied where the assessee satisfies the statutory conditions (payment by account-payee cheque, holding in demat for >12 months, sale on recognized exchange with STT payment) and the revenue does not rebut the documentary proof. 3. Whether information from the AIMS module/ITBA may be acted upon without providing the assessee opportunity to test or cross-examine the source of that information and without producing corroborative material linking the assessee to the alleged hawala/entry-operator network. 4. Whether decisions of High Courts outside the territorial jurisdiction are binding on a Tribunal and the proper approach to precedents of the jurisdictional High Court versus High Courts of other States when identical factual patterns arise (penny-stock/addition deletions). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sustainment of addition under section 68 when assessee places third-party documentary evidence and AO relies on AIMS information Legal framework: Section 68 permits treating unexplained cash credits as income where the assessee fails to satisfactorily account for sources of such credits; the initial burden to make out genuineness of the entry lies on the assessee by producing evidence, and the revenue must rebut or point to material to disbelieve that evidence. Precedent treatment: Tribunal relied on Supreme Court authority (Sreelekha Bannerjee) requiring department to show inherent weakness in the assessee's explanation or rebut it by adducing material in its possession before rejecting documentary proof. Tribunal also cited coordinate ITAT decisions and jurisdictional High Court rulings which deleted additions on similar facts. Interpretation and reasoning: The Court examined the documentary record - purchase bills, bank cheques/statements, transfer certificates, dematerialisation requests, BSE notices, broker transaction statements, global report showing STT payment and bank credit of sale proceeds - and found no adverse finding by the Assessing Officer challenging genuineness of these documents. The AO's reliance on generic modus operandi and AIMS information without producing direct evidence linking the assessee to any dubious network, or without confronting the assessee with material to rebut, was held inadequate. The Tribunal emphasised that mere suspicion or reference to a broad scam does not replace required evidentiary proof to displace the assessee's explanation. Ratio vs. Obiter: Ratio - where assessee produces credible third-party documentary proof satisfying statutory requirements for transaction genuineness, AO cannot treat receipts as unexplained under section 68 solely on AIMS intelligence or generalized findings absent specific contradictory material. Obiter - critical observations on the scale of penny-stock scams and policy dicta cited by lower authority. Conclusion: Addition under section 68 was not sustainable; assessee discharged initial onus and revenue failed to rebut; addition deleted. Issue 2 - Denial of exemption under section 10(38) where statutory conditions are satisfied Legal framework: Exemption under section 10(38) requires, inter alia, (i) purchase through banking channel (account-payee cheque), (ii) holding in demat for more than 12 months (for long-term), and (iii) sale on recognized stock exchange after payment of STT (as amplified by later provisos). Compliance with these conditions entitles assessee to exemption unless rebutted. Precedent treatment: Tribunal relied on its own and jurisdictional High Court decisions holding that factual compliance with statutory conditions, supported by documentary evidence, warrants acceptance of exemption and the deletion of additions where revenue produces no contrary material. Interpretation and reasoning: The Tribunal mapped each statutory requirement to the documentary record: banking evidence of purchase payments and cheques, demat requisition and acknowledgements indicating holding period beyond 12 months, broker/global reports showing STT payment and transfer through a SEBI-registered broker, and bank credits of sale proceeds. In absence of any specific finding that these documents were forged or fabricated, the statutory conditions were found satisfied. The AO's failure to identify any infirmity in the documentary proof meant that the exemption claim could not be denied merely on conjecture. Ratio vs. Obiter: Ratio - compliance with section 10(38) statutory conditions proven by admissible third-party documentation obliges acceptance of exemption unless evidence contrary is produced by revenue. Obiter - commentary on later legislative amendments and policy concerns about penny stocks. Conclusion: Exemption under section 10(38) was rightly claimable; denial overturned. Issue 3 - Admissibility and use of AIMS/ITBA information and requirement of opportunity to test such information Legal framework: Administrative/intelligence inputs may initiate enquiries or re-opening, but principles of natural justice and evidentiary rules require that material relied upon against an assessee be placed before the assessee to enable testing, cross-examination or rebuttal where appropriate. Precedent treatment: Tribunal relied on higher-court dicta mandating that department must either point out inherent weaknesses in the assessee's evidence or use material in its possession to rebut; also relied on authority requiring opportunity to confront and test adverse material. Interpretation and reasoning: The AO relied on AIMS reports indicating the scrip's use in money-laundering schemes but did not produce statements, investigation reports, or names linking the assessee to the alleged network; nor was the source of the AIMS information made available to the assessee for testing. The Tribunal held that acting on untested intelligence without supplying the material to the assessee and without affording opportunity for cross-examination rendered the order vulnerable. The absence of corroborative evidence against the assessee meant that the AIMS reference could not supplant the positive documentary proof presented by the assessee. Ratio vs. Obiter: Ratio - administrative intelligence cannot be the sole basis for adverse findings unless the assessee is provided the material and an opportunity to test and rebut it; acting otherwise is bad in law. Obiter - observations about the nature of AIMS as a trigger mechanism rather than conclusive evidence. Conclusion: Use of AIMS information without enabling testing/cross-examination and without producing corroborative material invalidated reliance on it to make the addition. Issue 4 - Precedential weight of High Court decisions and territorial application Legal framework: Decisions of the Supreme Court bind all courts; a High Court's decisions bind subordinate courts/tribunals within its territorial jurisdiction but are not binding outside that jurisdiction, where they are only persuasive. Precedent treatment: Tribunal distinguished reliance on a non-jurisdictional High Court decision relied upon by revenue and held that the Tribunal must follow binding jurisdictional High Court precedents and coordinate bench/tribunal decisions consistent with those authorities. Interpretation and reasoning: The Tribunal noted conflicting High Court decisions on penny-stock cases and reiterated judicial discipline requiring application of the jurisdictional High Court's rulings. Where the jurisdictional High Court has deleted additions on similar facts, those authorities are binding on the Tribunal; decisions from other States remain persuasive only and cannot override local binding precedents. Ratio vs. Obiter: Ratio - Tribunal must follow jurisdictional High Court decisions; non-jurisdictional High Court rulings are persuasive only. Obiter - elaboration of principles of stare decisis and bench hierarchy. Conclusion: The Tribunal applied and followed jurisdictional High Court authorities supportive of deletion on similar facts and thus did not follow an out-of-jurisdiction High Court decision relied upon by the revenue.