Section 68 share sale addition reduced; only 5 percent profit on impugned sale proceeds to be taxed

ITAT Kolkata allowed the assessee's appeal partly, holding that the addition u/s 68 on alleged bogus sale consideration of shares/investments was unsustainable on the facts. It found that the assessee was regularly engaged in purchase and sale of investments over several years, that the share capital and premium raised in AY 2011-12 and the resultant investments had been duly recorded, audited, and accepted in scrutiny u/s 143(3), and that similar additions in a group concern had already been deleted by a coordinate bench. However, treating possible irregularities in purchasers' credentials as warranting a reasonable estimate, ITAT directed the AO to apply a profit rate of 5% on the impugned sales proceeds and to delete the balance addition.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1. Whether the undated assessment order without a Document Identification Number (DIN) could be treated as a valid assessment order, and whether two separate assessment orders for the same assessment year could stand in law.

2. Whether the entire sale consideration received on sale of shares/investments, already recorded in the books and arising from accepted opening investments and current-year purchases, could be brought to tax as unexplained cash credits under section 68.

3. Whether general allegations of use of shell companies, reliance on retracted statements recorded under section 132(4), and absence of direct incriminating material were sufficient to sustain the addition under section 68, or whether only a profit element embedded in the transactions could be brought to tax on an estimated basis.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Validity of the undated assessment order without DIN and passing of two assessment orders

Legal framework (as discussed):

* CBDT Circular No. 19 of 2019 mandating generation and quoting of a DIN on all income-tax communications, with the stipulation that communications without DIN are to be treated as non-est.

* Decision of the High Court in the matter of Brandix Mauritius Holdings Ltd., holding that any departmental communication not containing DIN in its body is non-est in law.

Interpretation and reasoning:

* The assessee pointed out that the Assessing Officer had passed (i) a short, cryptic assessment order dated 29.09.2021 bearing a DIN and (ii) another, undated, detailed assessment order running into 74 pages, without any DIN and evidently beyond the limitation period.

* It was contended that, in view of CBDT Circular No. 19 of 2019 and the ruling in Brandix Mauritius Holdings Ltd., the second undated order without DIN was non-est and could not be acted upon; and that the first, cryptic order was itself bad in law for being non-speaking.

* The Department argued that only one assessment order was effectively passed, and the so-called second order was only a corrected upload of the same assessment; the DIN mentioned was said to have been properly generated.

* The Tribunal referred to its coordinate bench decision in a group case (Swarna Kalash Commercial Pvt. Ltd.), arising from the same search, where on identical facts it had held that:

  - an undated assessment order without DIN was non-est in view of CBDT Circular No. 19 of 2019 and Brandix Mauritius Holdings Ltd.; and

  - the original short, cryptic order, making additions mechanically without any discussion on merits, was not sustainable in law.

Conclusions:

* Following the reasoning in the group concern's case, the Tribunal treated the subsequent undated assessment order without DIN as non-est and declined to place reliance on it.

* The Tribunal proceeded on the footing that the cryptic assessment order could not be sustained on the basis of the reasoning later supplied in the non-est order, and therefore examined the matter on merits in line with the approach adopted in the group case.

Issue 2 - Applicability of section 68 to the entire sale consideration of investments already recorded in the books

Legal framework (as discussed):

* Section 68 of the Income-tax Act dealing with unexplained cash credits and the onus on the assessee to prove identity, creditworthiness and genuineness.

* Judicial precedents relied upon by the lower authorities concerning colourable devices and bogus share-related transactions (including Durga Prasad More, Sumati Dayal, NRA Iron & Steel, Swati Bajaj and various "penny stock" decisions).

Interpretation and reasoning:

* The assessee's books disclosed:

  - Opening investments: Rs. 24,81,12,740

  - Purchases during the year: Rs. 106,69,21,561

  - Sales during the year: Rs. 99,72,36,896

  - Closing investments: Rs. 31,77,97,405

* It was undisputed that:

  - the investments represented by the opening balance had arisen from share capital and premium raised in an earlier year (AY 2011-12), which stood accepted in scrutiny assessment under section 143(3);

  - the purchases of investments during the year under consideration were also not doubted by the Assessing Officer; and

  - the sale consideration had been received through banking channels and the transactions were duly recorded in the regular books of account.

* The assessee argued that, once the source of investments (share capital and premium) and the purchases were accepted in earlier and current years, the sale proceeds of such investments could not be re-characterised as unexplained cash credits under section 68, since that would amount to double taxation of the same stream of funds. Reliance was placed on coordinate bench and other decisions where sale proceeds, already forming part of recorded investments, were held not amenable to section 68 treatment.

* The lower authorities, on the other hand, treated the entire sale consideration as unexplained, on the premise that the alleged purchasers were shell/paper entities lacking creditworthiness, and that the transactions were a colourable device to bring back unaccounted money.

* The Tribunal noted that the assessee was regularly engaged in purchase and sale of investments over several years; that the movement of investments supported the genuineness of such activity; and that the Department had not disturbed either the opening investments or the current-year purchases.

* Referring to the detailed reasoning in the group concern's case (Swarna Kalash Commercial Pvt. Ltd.), where on similar facts the entire sale consideration of shares was sought to be taxed under section 68 although the corresponding investments and their sources had been accepted, the Tribunal accepted that bringing the whole of the recorded sale proceeds to tax under section 68 was unwarranted.

Conclusions:

* The Tribunal held that, in the facts of the case-where both the opening investments and current-year purchases were accepted, and the sale was duly recorded in the books-the entire sale consideration could not be treated as unexplained cash credit under section 68.

* It rejected the approach of taxing the gross sale proceeds of recorded investments under section 68 and proceeded to consider only the profit element, if any, that could be embedded in such transactions.

Issue 3 - Effect of general allegations, retracted statements and absence of specific incriminating material; estimation of profit element

Legal framework (as discussed through the group case followed):

* Section 132(4) regarding statements recorded during search.

* CBDT Instructions/Letters discouraging additions based solely on confessional statements and directing reliance on corroborative evidence (Letter No. 286/2/2003-IT(Inv), etc.).

* Judicial precedents on:

  - limited evidentiary value of retracted statements without corroboration;

  - requirement of corroborative material for block or search-based additions; and

  - the need to examine human probabilities and surrounding circumstances (Durga Prasad More, Sumati Dayal, Golden Goenka Fincorp and others).

Interpretation and reasoning:

* The Department's case rested principally on:

  - general findings on modus operandi of shell/jamakharchi companies;

  - statements of alleged entry operators and key persons of the group recorded during search under section 132(4), some of which were subsequently retracted by affidavits; and

  - doubts about the capacity and genuineness of the purchasers.

* The assessee contended that:

  - no specific incriminating material had been brought on record to show that the particular sale transactions of shares/investments were bogus;

  - the statements of group persons were general, retracted promptly and uncorroborated by any cash trail or material linking the alleged accommodation entries with the impugned sale proceeds; and

  - reliance on such statements, contrary to CBDT instructions and settled case law, could not sustain additions under section 68.

* In the group concern's case (Swarna Kalash Commercial Pvt. Ltd.), in similar circumstances, the Tribunal had held that:

  - retracted statements made under section 132(4), in the absence of corroborative evidence, could not form the sole basis of addition;

  - CBDT's binding instructions required the Department to base additions on tangible evidence rather than mere confessions; and

  - where investments and their sources were on record and accepted, only a reasonable profit element in the questioned sale transactions could, at best, be brought to tax.

* The Departmental Representative in the present appeal argued that even if the assessee claimed to have sold shares at cost, business transactions are inherently profit-oriented and, given the long holding and magnitude of funds deployed, there should be a profit element embedded in the sales which ought to be taxed.

* Adopting a holistic view, and following the coordinate bench decision in the group concern, the Tribunal held that while the entire sale proceeds could not be treated as unexplained under section 68, an estimated profit embedded in the transactions could be taxed.

Conclusions:

* General allegations about shell companies and reliance on retracted, uncorroborated statements recorded under section 132(4), without specific incriminating evidence directly impugning the assessee's recorded sale transactions, were held insufficient to justify addition of the entire sale consideration under section 68.

* Consistent with the approach in the group concern's case, the Tribunal restricted the addition to 5% of the total sale consideration of Rs. 99,72,36,896/-, i.e., Rs. 4,98,61,845/-, as representing the profit element embedded in the transactions.

* The balance addition of Rs. 94,73,75,051/- made under section 68 was directed to be deleted.

---