ITAT deletes section 68 addition on share transactions conducted through BSE with STT payment and banking channels

ITAT Mumbai ruled in favor of the assessee regarding additions under section 68 for alleged bogus long-term capital gains from share transactions. The tribunal held that transactions conducted through BSE's regulated platform with SEBI-registered brokers, where STT was paid and proceeds routed through banking channels, cannot be deemed bogus without direct evidence from market regulator SEBI. The AO failed to provide material evidence linking the assessee to price manipulation groups, relying instead on suspicion and investigation wing findings without establishing direct cash trail involvement. The tribunal criticized CIT(A) for dismissing procedural violations under section 142(3), noting the AO's failure to allow cross-examination of brokers and operators whose statements were relied upon. The addition under section 68 was deleted, allowing the assessee's claim for exemption under section 10(38) for long-term capital gains on listed shares.

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Issues Involved:
1. Addition made u/s 68 by denying exemption claimed u/s 10(38) for sale proceeds of listed equity shares alleged as penny stock.
2. Legality of re-assessment proceedings and assessment order passed u/s 147 r.w.s. 143(3).

Summary:

Issue 1: Addition made u/s 68 by denying exemption claimed u/s 10(38) for sale proceeds of listed equity shares alleged as penny stock

The assessee contested the addition made u/s 68 by denying the exemption claimed u/s 10(38) for the sale proceeds of listed equity shares alleged as penny stock for AY 2013-14 and 2014-15. The Assessing Officer (AO) based this addition on the unusual rise in the price of shares, which he believed indicated bogus transactions. The AO relied on the doctrine of preponderance of human probability and the lack of direct evidence provided by the assessee. The CIT(A) supported the AO's findings, emphasizing circumstantial evidence and the improbability of direct evidence in such cases. However, the Tribunal noted that the assessee had provided substantial documentary evidence, including contract notes, DMAT statements, and bank statements, which were not disputed by the AO. The Tribunal concluded that the AO's findings were based on assumptions and lacked cogent material. The Tribunal relied on judicial precedents, including CIT vs. Jamnadevi Agrawal and PCIT v. Krishna Devi, to assert that transactions cannot be considered bogus based on mere conjectures. The Tribunal held that the AO failed to prove the assessee's involvement in price rigging or dubious transactions and thus deleted the addition made u/s 68.

Issue 2: Legality of re-assessment proceedings and assessment order passed u/s 147 r.w.s. 143(3)

The assessee raised a legal issue regarding the re-assessment proceedings and the assessment order passed u/s 147 r.w.s. 143(3) for AY 2013-14 but did not press this issue during the hearing. Consequently, the Tribunal dismissed this ground as not pressed.

Conclusion:

The Tribunal allowed the appeals of the assessee, deleting the additions made u/s 68 towards the proceeds of the sale of listed shares, which gave rise to Long Term Capital Gain claimed exempt u/s 10(38). The Tribunal emphasized the necessity for the AO to provide direct and cogent material evidence to justify such additions and criticized the reliance on assumptions and circumstantial evidence without proper substantiation. The Tribunal also highlighted the mandatory procedural requirement u/s 142(3) for the AO to provide an opportunity for the assessee to be heard, which was not met in this case. The appeals were allowed, and the additions were deleted.

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