2024 (6) TMI 536 - AT - Income Tax

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 ... Addition u/s 68 - bogus LTCG - ingenuine transaction of sale of shares - as submitted transaction through stock exchange cannot give strength to the fabricated devises - as argued shares were undertaken on the stock exchange platform through the SEBI registered broker on which STT was levied and the consideration was routed through normal banking channel. HELD THAT:- It is worth noting that impugned share sale transactions undertaken by the assessee are on the online digital trading platform of stock exchange of BSE which is a regulated market under the aggies of a regulator viz. SEBI. There is nothing on record from the market regulator SEBI for the relevant period which establishes the ‘tainted’ status of the scrips involved in the present case, so as to hold the share sale transactions as bogus/accommodation entry as alleged by the ld. AO. Also, the operations and modus operandi of this regulated market does not in any way provide for any mechanism by which assessee can bring forth the identity of the buyers of his shares and their creditworthiness. Sale proceeds are received through the stock market process into the pre-identified bank account of the seller i.e., the assessee which cannot be tainted as ‘unexplained or unaccounted or undisclosed’ money for the addition made u/s. 68 by the ld. Assessing Officer. From the perusal of the statement of assessee recorded by the AO during the course of assessment for Assessment Year 2013-14 as reproduced in the impugned order demonstrates that he is a long-term investor, investing since year 2006 and is aware of his DMAT account, brokers through whom transactions were undertaken, shares in which he had invested and stock market operations. AO has not brought on record any material to show that assessee was part of any group which was involved in the manipulation of share prices. Suspicion by the AO on the purchase and sale of shares is baseless. AO while drawing the adverse conclusion noted about the cash trail in the accounts of entry providers. He based his conclusion on the finding of investigations done by the Investigation Wing rather than bringing on record any direct and cogent material to establish existence of such a cash trail where the assessee has transacted in cash. In this respect, CIT(A) has supported the AO by stating that AO cannot be expected to produce such evidences and has merely harped on general proposition of having circumstantial evidence leading to inference or presumption. In this respect in the absence of any corroborative material brought on record by the authorities below, we hold against drawing such inference or presumption. Non Compliance with procedural requirements u/s 142(3) of the Act - As in the first appellate order, Ld. CIT(A)while dismissing the appeal observed that ld. AO by not allowing the assessee to cross examination the brokers, operators and exit providers whose statements were relied upon by the ld. Assessing Officer, does not vitiate the assessment. Negating the request made by the assessee, Ld. CIT(A) confirmed the addition. The approach adopted by ld. CIT(A) while dismissing the appeal and stating that assessment order passed by the AO does not get vitiated merely because AO did not allow cross examination, is not in compliance with the provisions of section 142(3) of the Act which is a statutory mandatory procedural requirement for making a valid assessment. We note that the required compliance with section 142(3) has not been met. CIT(A) dealt with extensive literature on the concept of preponderance of probability and other doctrines to dismiss the appeal of the assessee. According to us, the theory of preponderance of probability is applied to weigh the evidence of either side and draw a conclusion in favour of a party which has more favourable factor in his side. The conclusions have to be drawn on the basis of certain admitted facts and materials and not on the basis of presumption of fact that might go against the assessee. Once nothing has been proved against the assessee with the aid of any direct material, nothing can be implicated against the assessee on the presumption or suspicion, howsoever, strong it might appear to be true. We delete the addition made u/s 68 towards proceeds of sale of listed shares which gave rise to Long Term Capital Gain on the said sale claimed exempt by the assessee u/s 10(38), in both the assessment years. Accordingly, grounds taken by the assessee in this respect are allowed. 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 stockThe 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.