2025 (3) TMI 1561 - HC - Income Tax

Additions u/ss 68 and 69C quashed for penny stock trades backed by SEBI findings and documents

HC held that additions under ss. 68 and 69C on account of alleged bogus penny stock transactions were unsustainable. Relying on SEBI's detailed inquiry, ... Undisclosed income u/s 68 - Bogus purchases of sale proceeds of shares - penny stock - as alleged price movement of the company were not supported by financial fundamentals of the company - unexplained expenditure u/s 69C - HELD THAT:- It is pertinent to note at this stage that in furtherance to the report, SEBI has undertaken a detailed inquiry against M/s.Mishka Finance & Trading Ltd. and in the said inquiry, vide order dated 5.10.2017, the SEBI has not found any adversarial material of any violation of statute. Over and above, admittedly, the assessee has also furnished complete evidence including contract note of shares, demat details, details of bonus shares and those evidences have not been doubted by the authorities. Entire transaction was done by the assessee through the platform of BSE by paying necessary security transaction tax and the transaction was undertaken by the share brokers, no such allegation was made against the said broker for indulging in any price manipulation. Decided in favour of assessee. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether deletion by the appellate authority of addition under section 68 of the Income Tax Act, 1961, in respect of sale proceeds of shares of a penny stock company, treating the long-term capital gains as genuine, raises any substantial question of law under section 260A. 1.2 Whether deletion by the appellate authority of addition under section 69C of the Income Tax Act, 1961, towards alleged commission expenditure for arranging bogus transactions, raises any substantial question of law under section 260A. 1.3 Whether the findings of the appellate authority regarding genuineness of the share transactions and consequent tax treatment are perverse in light of alleged price manipulation and investigation reports. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Addition under section 68 on account of alleged bogus long-term capital gains from penny stock shares - existence of substantial question of law Legal framework (as discussed) 2.1.1 The appeal was preferred under section 260A of the Income Tax Act, 1961, requiring the presence of a 'substantial question of law' for interference with the order of the appellate authority. The addition in dispute was made under section 68 as 'undisclosed income' arising from sale of shares of a company treated as a penny stock. Interpretation and reasoning 2.1.2 The Tribunal had deleted the addition under section 68 after recording factual findings that: (i) the Assessing Officer doubted the transactions mainly on the basis of a report of the Investigation Wing, Kolkata; (ii) the securities market regulator had initiated and completed investigation in respect of the company whose shares were traded; (iii) in its order dated 05.10.2017, the regulator did not find any adverse material or prima facie violation in respect of such company. 2.1.3 The Tribunal further recorded that the assessee had furnished complete evidentiary support for the impugned share transactions, including contract notes of purchase and sale, demat account details, details of bonus shares, and banking records, and that no adverse evidence was brought on record by the Assessing Officer to rebut these documents, nor any adverse comment was made on such evidences. 2.1.4 The Tribunal also took note that the transactions were routed through the stock exchange platform, security transaction tax was paid, and there was no allegation against the broker involved that it indulged in price manipulation. It was observed that the assessee had no control over brokers' activities or over any possible price movement in the scrip. 2.1.5 The Tribunal applied binding precedent of the jurisdictional High Court holding that where an assessee proves genuineness of share transactions by producing contract notes, demat statements, and banking records reflecting transfer in and out of shares, addition of capital gains as unexplained cash credits is not justified. The Tribunal additionally relied on a decision where similar documentary evidence and continued holding of dematerialised shares led to deletion of additions. 2.1.6 The Court noted that in an earlier tax appeal in respect of the same scrip and substantially identical facts and reasoning by the Tribunal, it had already held that no substantial question of law arose, particularly in view of: (i) the clean investigative outcome by the regulator in respect of the company's shares, and (ii) the assessee's complete and undoubted evidentiary support for the transactions. 2.1.7 Adopting the reasoning from the earlier decision and the factual appreciation of the Tribunal, the Court held that the dispute turns on appreciation of evidence and findings of fact by the Tribunal, and does not give rise to any substantial question of law within the meaning of section 260A. Conclusions 2.1.8 The Court concluded that the deletion of the addition under section 68 by the Tribunal, based on uncontroverted documentary evidence, absence of adverse findings from the regulator, and lack of any allegation against the broker, does not involve any substantial question of law warranting interference under section 260A. The revenue's challenge to the genuineness of the long-term capital gains on the penny stock shares was rejected. 2.2 Addition under section 69C on account of alleged commission for arranging bogus share transactions - existence of substantial question of law Interpretation and reasoning 2.2.1 The addition under section 69C was premised on the allegation that the assessee incurred commission expenditure for arranging accommodation entries to convert unaccounted income into exempt long-term capital gains. 2.2.2 The Tribunal recorded that once the long-term capital gain from the impugned share transactions was accepted as genuine and the addition under section 68 was deleted, the alleged commission payment, being consequential to the assumption of a bogus scheme, could not survive. On that basis, the Tribunal deleted the addition under section 69C. 2.2.3 The Court, having upheld the Tribunal's factual findings and legal conclusion regarding genuineness of the share transactions and deletion of the section 68 addition, held that the deletion of the commission expenditure addition was a logical and consequential finding of fact. Conclusions 2.2.4 The Court held that no substantial question of law arises from the Tribunal's deletion of the section 69C addition, since it directly follows from the affirmed finding that the long-term capital gains were genuine and not a device to launder unaccounted income. 2.3 Alleged perversity of the Tribunal's findings in light of investigation reports and price movement in the shares Interpretation and reasoning 2.3.1 The revenue contended that the Tribunal's order was perverse as it allegedly ignored material demonstrating manipulation of share prices and unjustified price movement not supported by financial fundamentals. 2.3.2 The Court noted that the Tribunal had specifically considered the investigation reports and the fact that the regulator had undertaken a thorough inquiry into the relevant scrip and found no adverse material or prima facie statutory violation. The Tribunal also took into account that there was no material evidencing the assessee's participation in any manipulation, and that the assessee had produced complete transactional records. 2.3.3 The Court observed that mere allegations of price manipulation or general suspicion based on investigation reports, in the absence of concrete adverse material against the assessee and in the face of uncontroverted primary evidence, cannot render the Tribunal's findings perverse. 2.3.4 Relying on its reasoning in the earlier tax appeal concerning identical factual matrix, the Court reiterated that the Tribunal's appreciation of evidence and its conclusion upholding genuineness of the transactions were plausible and within the domain of fact-finding, and did not disclose perversity. Conclusions 2.3.5 The Court held that the Tribunal's order did not suffer from perversity, as it had duly considered the investigation-related material, the regulator's inquiry, the absence of adverse findings, and the documentary evidence produced by the assessee. The challenge on the ground of perversity was rejected, and the tax appeal was dismissed for want of any substantial question of law.