Assessee's appeal dismissed for bogus LTCG exemption under section 10(38) through penny stock manipulation scheme

The ITAT Mumbai dismissed the assessee's appeal regarding additions under section 68 for accommodation entries through penny stock transactions. The tribunal upheld the CIT(A)'s decision, finding that claimed long-term capital gains (LTCG) exemption under section 10(38) was a colourable device to convert unaccounted income into fictitious gains. Key evidence included admission by exit provider that his account was operated by another person, and artificial price manipulation of shares from Rs. 1.82 to Rs. 1,425 before dropping to Rs. 0.88. The AO was justified in treating bogus LTCG as unexplained cash under section 68.

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Issues Involved:

1. Reopening of assessment under Section 148 of the Income Tax Act.
2. Validity of the addition under Section 68 of the Income Tax Act for unexplained cash credit.
3. Adherence to principles of natural justice and opportunity for cross-examination.
4. Use of information from the Investigation Wing and its impact on the assessment.
5. Jurisdiction of Assessing Officer under Sections 153A/153C.
6. Principles of incriminating material and its necessity for reassessment.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 148:

The assessee challenged the reopening of the assessment by the notice dated 07.03.2019 under Section 148, arguing it was bad in law due to the absence of tangible material suggesting income had escaped assessment. The Tribunal noted that the reopening was based on information from the Director of Income Tax (Investigation), which the assessee claimed amounted to borrowed satisfaction. The Tribunal upheld the validity of the reopening, emphasizing that the information received was sufficient to form a reason to believe that income had escaped assessment.

2. Validity of Addition under Section 68 for Unexplained Cash Credit:

The assessee contested the addition of Rs. 5,03,98,853/- under Section 68, arguing that the long-term capital gains (LTCG) from the sale of shares were genuine and conducted through a recognized stock exchange. The Tribunal observed that the transaction involved shares of M/s. Risa International Ltd., which was found to be a bogus paper company during a search operation. The Tribunal upheld the addition under Section 68, citing that the assessee failed to prove the genuineness of the transaction and the creditworthiness of the parties involved.

3. Adherence to Principles of Natural Justice and Opportunity for Cross-examination:

The assessee argued that the disallowance was made without providing an opportunity to cross-examine the parties whose statements were relied upon. The Tribunal held that the assessee did not demonstrate how they were prejudiced by the non-furnishing of the investigation report or the non-production of the persons for cross-examination. It was noted that the assessee was not named in the investigation report, and the burden of proof was on the assessee to establish the genuineness of the transactions.

4. Use of Information from the Investigation Wing:

The Tribunal noted that the assessment was based on information received from the Investigation Wing, which indicated that the assessee was a beneficiary of bogus LTCG from shares of M/s. Risa International Ltd. The Tribunal emphasized that the report and subsequent investigation provided a reasonable basis for the Assessing Officer to question the genuineness of the transactions and make the addition under Section 68.

5. Jurisdiction of Assessing Officer under Sections 153A/153C:

The Tribunal discussed the principles laid down in various judicial decisions regarding the jurisdiction of the Assessing Officer under Sections 153A/153C. It was noted that the Assessing Officer does not have the jurisdiction to re-adjudicate settled issues unless fresh incriminating material is found during the search proceedings. In this case, the Tribunal found that the addition was based on information from the Investigation Wing and not on any fresh incriminating material found during the search.

6. Principles of Incriminating Material and Its Necessity for Reassessment:

The Tribunal reiterated that for reassessment under Sections 153A/153C, there must be incriminating material found during the search proceedings. It was observed that in the absence of such material, the assessment should be made based on the originally assessed/returned income. The Tribunal concluded that the addition in this case could not survive without incriminating evidence and directed the Assessing Officer to delete the impugned addition.

Conclusion:

The Tribunal upheld the reopening of the assessment under Section 148 and the addition under Section 68 for unexplained cash credit. It emphasized the necessity for the assessee to prove the genuineness of the transactions and the creditworthiness of the parties involved. The Tribunal dismissed the appeals of the assessee, affirming that the assessments were justified based on the information received from the Investigation Wing and the principles laid down in judicial decisions.

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