Tribunal allows LTCG exemption under section 10(38), rejects Revenue's bogus transaction claims without specific evidence

ITAT Bangalore allowed the appeal regarding bogus LTCG and unexplained cash credit under section 68. The tribunal held that capital gains cannot be deemed bogus based solely on modus operandi, generalisation, or suspicious circumstances without specific evidence against the assessee. Revenue failed to prove the assessee's involvement in collusion with entry operators or stockbrokers. The tribunal distinguished cases where SEBI enquiry found wrongdoing, noting no such finding existed here. Mere linkage to third-party investigations without independent evidence against the assessee was insufficient. The exemption under section 10(38) was allowed, deciding in favour of the assessee.

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Issues Involved:
1. Delay in filing the appeal.
2. Disallowance of exempted capital gain under section 10(38) and treatment as unexplained cash credit under section 68.

Issue-wise Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal was delayed by 43 days. The assessee explained the delay was due to the assessment order being untraceable, which was mandatory for filing the appeal. The delay was beyond the control of the assessee, and the Revenue did not object to the condonation. Considering the circumstances, the delay was condoned, and the matter was decided on merit.

2. Disallowance of Exempted Capital Gain and Treatment as Unexplained Cash Credit:
The assessee, a HUF, claimed an exemption of long-term capital gain (LTCG) of Rs. 10,86,720/- under section 10(38) from the sale of shares of M/s Comfort Intech Ltd. The AO disallowed this exemption, treating the transaction as a sham and adding the amount under section 68 as unexplained cash credit. The AO's decision was based on the following observations:
- The shares were purchased offline, and their price increased significantly in a short period.
- The volume of transactions was negligible during the price increase, and the price rise was not supported by the company's financial performance.
- Investigations revealed that the company was involved in providing bogus LTCG.

The assessee argued that the transactions were genuine, supported by documentary evidence such as share purchase evidence, contract notes, and demat account statements. The assessee contended that:
- The AO did not provide evidence of involvement in penny stock activities.
- The materials and statements relied on by the AO were not provided for rebuttal or cross-examination.
- The transactions were conducted through the stock exchange, and payments were received through banking channels.

The CIT(A) upheld the AO's addition, stating that mere furnishing of documents did not prove the genuineness of the transactions. The CIT(A) referred to the case of Swati Bajaj, where it was held that the onus is on the assessee to prove the creditworthiness and genuineness of the transactions.

On appeal, the Tribunal analyzed the facts and observed:
- Offline purchase of shares is not prohibited, and the price rise alone cannot conclude rigging.
- No enquiry was conducted by SEBI or the stock exchange regarding the rigging of the share price.
- The AO allowed the cost of acquisition, indicating the purchase was genuine, contradicting the claim of a sham transaction.
- The AO's reliance on the modus operandi without specific evidence against the assessee was insufficient.
- The assessee discharged the onus under section 68 by providing necessary documentary evidence.

The Tribunal cited various judgments, including those from the Mumbai Tribunal and the Hon'ble Delhi High Court, emphasizing that suspicion alone cannot justify treating income as bogus. The Tribunal concluded that the Revenue failed to provide specific evidence linking the assessee to the alleged bogus transactions and that the principles of natural justice were violated by not providing an opportunity for cross-examination.

Conclusion:
The Tribunal held that the capital gain earned by the assessee could not be deemed bogus based on general findings without specific evidence. The addition made by the AO was set aside, and the assessee's appeal was allowed. The order was pronounced on 3rd September 2024.

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