2024 (3) TMI 1502 - AT - Income Tax

Delay condoned; penny stock LTCG exemption under s.10(38) allowed, s.68 addition deleted, interest ss.234B/234C consequential

ITAT Mumbai condoned a 174-day delay in filing the appeal, holding that the assessee had shown reasonable cause, relying on SC precedent. On merits, ITAT ... Condonation of delay - reasonable cause - delay of 174 days - Entitlement to claim exemption u/s 10(38) - Long Term Capital Gain transaction - income of share transactions - discrepancies in the documentary evidences - characteristics of the penny stock - non-genuine scrips - taxable as unexplained cash credit u/s 68 - application of the presumptions and concept of human probabilities - levy of interest under section 234B and 234C. Condonation of delay - HELD THAT:- The assessee could properly explain the delay in filing the appeal, therefore following the ratio in the decision of the Hon’ble Supreme Court in the case of Collector, Land Acquisition v. MST. Katiju and others, [1987 (2) TMI 61 - SUPREME COURT] we condone the delay of 174 days and admit the appeal for disposing off the same on merits. Exemption u/s 10(38) - The assessee has purchased the shares directly from the company on preferential allotment, subsequently, D-mated the scrips and sold the same in the stock exchange. It clearly raises several doubt on the purchase and sales transactions recorded in this case. However, there is no discrepancies in the documents filed by the assessee claiming the deductions u/s 10(38) of the Act. At the same time, even though all the characteristics of the penny stock exists in the present case, still the revenue has not brought on record any materials linking the assessee in any of the dubious transactions relating to entry, price rigging or exit providers. Even in the SEBI report, there is no mention or reference to the involvement of the assessee. We can only presume that the assessee is one of the beneficiary in this transactions merely as an investor who has entered in investment fray to make quick profit. Even the assessing officer has applied the presumptions and concept of human probabilities to make the additions without their being any material against the assessee. Assessing Officer and Ld. CIT (A) has applied the concept of Human probabilities and held the above said scrip to be a penny stock without bring on record how the assessee is involved in any of the scrupulous activities or directly linked to one of the person who has involved in manipulation/rigging of share prices, entry operator or exit provider as observed by the Hon’ble Bombay High Court in the case of Ziauddin A Siddique [2022 (3) TMI 1437 - BOMBAY HIGH COURT] Therefore, there is no material with the tax authorities to substantiate their findings that the impugned transaction is non-genuine. Therefore, we are inclined to allow the ground raised by the assessee. Accordingly the Ground No. 1 raised by the assessee is allowed. With regard to Ground No. 2 which is in respect of levy of interest under section 234B and 234C of the act, as we have adjudicated ground No. 1 in favour of assessee, this ground being consequential in nature this ground is not adjudicated at this stage. Accordingly, Ground No. 2 raised by the assessee is allowed for statistical purpose. ISSUES PRESENTED AND CONSIDERED 1. Whether the delay of 174 days in presenting the appeal to the Tribunal is excusable and should be condoned. 2. Whether long term capital gains (LTCG) claimed as exempt under section 10(38) on sale of certain low-priced/high-return scrips are non-genuine and hence taxable as unexplained cash credit under section 68. 3. Whether reliance by tax authorities on investigation wing reports and application of 'human probabilities' or circumstantial inferences (including characterisation of a scrip as a 'penny stock') suffices to displace documentary evidence of genuine transactions. 4. Consequences of allowing or disallowing the LTCG claim on (a) levy of interest under sections 234B and 234C and (b) initiation of penalty proceedings under section 271(1)(c). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of delay (174 days) Legal framework: The Tribunal exercises discretion to admit delayed appeals if sufficient cause is shown, following settled principles laid down by the Supreme Court in Collector, Land Acquisition v. Katiju (reasonableness/sufficient cause test). Precedent treatment: The Tribunal expressly follows the ratio in Collector, Land Acquisition v. Katiju in assessing sufficiency of cause. Interpretation and reasoning: The assessee filed an affidavit explaining non-receipt of appellate order by electronic or physical service and discovery of the order only upon subsequent login to the portal; no adverse material was placed by Revenue to controvert these facts. The Tribunal found that the delay was adequately explained as being on account of reasonable cause. Ratio vs. Obiter: Ratio - condonation of delay is warranted where plausible explanation of non-service/non-knowledge of order is made and not rebutted. Conclusion: Delay of 174 days is condoned and the appeal is admitted for adjudication on merits. Issue 2 - Genuineness of LTCG and addition under section 68 Legal framework: Claim of LTCG exempt under section 10(38); addition as unexplained cash credit under section 68 where transaction is not genuine or source of receipts is unexplained; onus and standards of proof governing such additions. Precedent treatment (followed/distinguished): The Tribunal relied on and followed decisions which favor an assessee where documentary evidence demonstrates bona fide transactions (e.g., coordinate and High Court decisions cited - Ziauddin A Siddique, Krishna Devi, and coordinate Bench decision in Yogesh Thakkar). The Tribunal distinguished cases where facts differed and where cogent corroborative material established collusion or rigging. Interpretation and reasoning: The AO and first appellate authority concluded that the LTCG was a prearranged scheme based on factors such as disproportionate price rise, investigative reports about market manipulation, and modus operandi of entry providers. The Tribunal examined the material and found: (a) the assessee produced contract notes, bank statements, demat records and evidence of payments through banking channels and delivery through demat; (b) Revenue did not produce material directly linking the assessee to price rigging, entry operators, or exit providers; (c) SEBI reports and investigation material on the scrip did not name the assessee; and (d) the AO/CIT(A) relied on circumstantial inferences and 'human probabilities' without cogent corroboration specific to the assessee. The Tribunal referred to High Court reasoning that suspicion or theory of human behaviour cannot substitute for evidence and that reliance on investigation reports without independent corroboration is insufficient to conclude transactions are fictitious. Ratio vs. Obiter: Ratio - where an assessee discharges the initial onus under section 68 by documentary evidence of trading (demat entries, banking channels, STT, contract notes) and Revenue fails to produce cogent material linking the assessee to rigging/entry providers, additions under section 68 cannot be sustained merely on suspicion or generalized investigation reports. Obiter - observations on characteristics of penny stocks and market behaviour where specific incriminating evidence exists. Conclusion: The Tribunal allowed the ground challenging the addition under section 68 and held the LTCG claim under section 10(38) to be genuine on the facts of this case; the addition sustained by AO and CIT(A) is disallowed. Issue 3 - Reliance on investigation reports and application of human probabilities Legal framework: Revenue may use investigation reports and circumstantial material, but legal standards demand specific corroboration linking the assessees to fraudulent schemes before treating transactions as sham; findings of fact require material evidence, not conjecture. Precedent treatment: The Tribunal relied on High Court authorities (including the Delhi High Court's reasoning in Krishna Devi) and coordinate Bench decisions which hold that reliance on generalized investigation reports without corroborative material specific to the assessee is inadequate; the Tribunal followed these precedents in preferring documentary evidence of transactions. Interpretation and reasoning: The Tribunal held that application of 'human probabilities' or presumptions about how no prudent investor would invest in penny stocks cannot supplant evidentiary proof. Where documents show trades through registered brokers, delivery via demat and receipt of sale proceeds by banking channels and where Revenue fails to adduce material connecting the assessee to manipulators, the Tribunal will not sustain additions based solely on suspicion or SEBI/investigation findings that do not implicate the assessee. Ratio vs. Obiter: Ratio - suspicion arising from market dynamics or investigation reports must be supported by cogent evidence against the specific assessee to displace declared transactions. Obiter - generalized discussion on market returns and comparative indices as indicators of suspicion. Conclusion: Revenue's reliance on the investigation wing's reports and human probabilities, without direct evidence against the assessee, was insufficient to sustain the addition; therefore such reliance cannot justify treating the LTCG as non-genuine in this matter. Issue 4 - Consequential interest (ss. 234B/234C) and penalty (s. 271(1)(c)) Legal framework: Interest under sections 234B and 234C is consequential on tax liability; penalty under section 271(1)(c) requires separate adjudication and is premature until assessment result is final. Interpretation and reasoning: As the Tribunal allowed the primary ground disallowing the addition under section 68, consequential interest claims become academic at this stage; penalty proceedings were held to be premature and not adjudicated. Ratio vs. Obiter: Ratio - consequential relief (interest) flows from primary relief on taxability; penalty initiation is a distinct process and cannot be adjudicated as a mature issue when primary addition is reversed. Conclusion: Ground on interest is allowed as consequential to the decision on LTCG (noted for statistical purposes); penalty ground is not adjudicated being premature. Overall Conclusion The Tribunal condoned the delay in filing the appeal and on merits allowed the appeal in respect of the contested addition under section 68 by holding the LTCG claim under section 10(38) to be genuine on the facts. Consequential grounds on interest were allowed for statistical purposes and penalty proceedings were left unadjudicated as premature. The Tribunal followed precedents emphasizing that suspicion and investigation reports alone, absent cogent material linking the assessee to manipulative operators, cannot justify treating documented share transactions as bogus.