ITAT deletes bogus LTCG additions under sections 68 and 69C, allows section 10(38) exemption for penny stock sales (38)

ITAT Mumbai allowed the assessee's appeal against additions made under sections 68 and 69C regarding alleged bogus LTCG from penny stock sales. The CIT(A) had dismissed the appeal relying on Calcutta HC's decision in Swati Bajaj case. However, ITAT noted conflicting HC decisions and applied the principle from Vegetable Products case that favorable construction should be adopted for the assessee. The tribunal found the assessee had established the genuineness of share sale proceeds, deleted the section 68 addition, and allowed the section 10(38) exemption claim. The consequential 5% commission addition under section 69C was also deleted.

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Issues Involved:
1. Addition under section 68 for denying exemption claimed under section 10(38) of the Income-tax Act, 1961 for the sale proceeds of listed equity shares alleged as penny stock.
2. Addition under section 69C for unexplained commission estimated at 5% on the sale proceeds of the alleged shares.

Detailed Analysis:

Issue 1: Addition under section 68 for denying exemption claimed under section 10(38) of the Income-tax Act, 1961 for the sale proceeds of listed equity shares alleged as penny stock

The case revolves around the assessee, engaged in trading ferrous and non-ferrous metals, who reported a total income of Rs. 12,08,750 for AY 2015-16. The scrutiny assessment was initiated based on information from the Investigation Wing about transactions in shares characterized as penny scrip. The assessee claimed a capital gain of Rs. 99,80,463 on the sale of shares of PS IT Infrastructure and Services Limited (PS IT), which was claimed as exempt under section 10(38) of the Act. The assessee provided necessary details and documentary evidence, including bank statements, DMAT account, broker contracts, share certificates, and High Court order for amalgamation.

The Assessing Officer (AO) questioned the genuineness of the share transactions, citing an unusual rise in share prices and reliance on statements from individuals allegedly involved in providing accommodation entries. Despite the assessee's submission of comprehensive documentation, the AO made an addition under section 68 of the Act for the entire sale consideration of Rs. 1,01,38,461, alleging the transactions were bogus.

The Tribunal observed that the transactions were conducted through a SEBI-registered broker, with payments made through normal banking channels. No discrepancies were found in the documents provided by the assessee. The Tribunal emphasized that the AO failed to provide substantive evidence to justify the addition and relied on assumptions and conjectures. The Tribunal referenced decisions from the Hon'ble High Court of Bombay and Delhi, which held that transactions of purchase and sale of shares cannot be considered bogus if supported by documentary evidence.

The Tribunal concluded that the AO's reliance on the investigation wing's report without further corroboration did not justify the conclusion that the transactions were bogus. The Tribunal noted that the assessee had discharged his burden by submitting relevant documents and that the AO did not establish the assessee's involvement in price rigging. The Tribunal also highlighted that the assessee's transactions were conducted on a regulated stock exchange, and the AO did not identify the purchasers of the shares.

Issue 2: Addition under section 69C for unexplained commission estimated at 5% on the sale proceeds of the alleged shares

The AO made an addition of Rs. 5,06,923 under section 69C, estimating a 5% commission for arranging artificial capital gains. The Tribunal noted that this addition was consequential to the addition made under section 68 for the sale proceeds of the alleged penny stock. Since the Tribunal deleted the addition under section 68, the consequential addition under section 69C had no foundation to stand and was also deleted.

Conclusion:

The Tribunal allowed the appeal of the assessee, deleting the additions made under sections 68 and 69C. The Tribunal emphasized that the AO failed to provide substantive evidence to justify the additions and relied on assumptions and conjectures. The Tribunal referenced decisions from higher courts supporting the assessee's position and concluded that the transactions were genuine and supported by documentary evidence.

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