2024 (10) TMI 995 - AT - Income Tax

Assessee wins partial appeal as share sale proceeds through stock exchange cannot be treated as unexplained cash credit under section 68

Mrs. Bhavna Lalit Jain Versus The Income Tax Officer Ward–15 (1) (1), Mumbai

ITAT Mumbai allowed the assessee's appeal partly, reversing the AO's addition under section 68 regarding bogus share transactions. The tribunal held that ... Addition u/s 68 - denial of claim of exemption u/s 10(38) - Bogus share transactions - HELD THAT:- We do not find any merits in the reason of the AO as well as the CIT (A) where the above addition is confirmed by them as the AO has not established that the assessee was involved in price rigging and further the AO did not find fault with any of the documents furnished by the assessee. We noticed earlier that the AO has assessed the Sale consideration of shares as unexplained cash credit u/s 68 of the Act. As pertinent to note that the purchase of shares made in an earlier year has been accepted by the revenue. The sale of shares has taken place in the online platform of the Stock exchange and the sale consideration has been received through the stock broker in banking channels. Hence, in the facts of the case, the sale consideration cannot be considered to be unexplained cash credit in terms of sec. 68 of the Act. Since we have held that the sale transactions of shares cannot be doubted with, the addition made by the AO with regard to estimated commission expenses is also liable to be deleted. Thus, orders of lower authorities are reversed. AO is directed to delete the addition u/s 68 of the act and allow assessee exemption u/s 10(38). Violation of principles of natural justice - As we completely agree with the finding of the ld. CIT (A) to the extent of the opportunity of cross examination not given to the assessee does not violate principles of natural justice because those statements were not sued for making the addition and issue is squarely covered against the assessee by the decision of Swati Bajaj [2022 (6) TMI 670 - CALCUTTA HIGH COURT], this issue is not dealt with in Chirag Tej Prakash Dangi [2024 (2) TMI 1413 - ITAT MUMBAI] so separate finding is given by us. Accordingly appeal of assessee is partly allowed. Issues Involved:1. Reopening of assessment under section 147 of the Income Tax Act.2. Addition under section 68 of the Income Tax Act regarding long-term capital gains.3. Denial of exemption under section 10(38) of the Income Tax Act.4. Allegations of penny stock manipulation and bogus transactions.Issue-wise Detailed Analysis:1. Reopening of Assessment:The appeal initially challenged the reopening of the assessment under section 147 of the Income Tax Act. However, the assessee's representative did not press this ground during the hearing, and hence, it was dismissed. The reopening was based on information from the Principal Director of Income Tax (Investigation), Kolkata, regarding alleged manipulation in penny stocks, including Surabhi Chemicals and Investments Ltd., which led to the belief that income had escaped assessment.2. Addition under Section 68:The primary issue was the addition of the sale consideration of shares under section 68, treating it as unexplained cash credit. The assessing officer, relying on an investigation report, considered the transactions suspicious due to alleged manipulation of share prices. The assessee provided extensive documentation, including purchase bills, bank statements, and Demat statements, to substantiate the genuineness of the transactions. Despite this, the assessing officer concluded that the transactions were not genuine, citing the company's poor financials and alleged involvement in providing bogus long-term capital gains.3. Denial of Exemption under Section 10(38):The exemption claimed under section 10(38) for long-term capital gains was denied by the assessing officer, who argued that the transactions were part of a scheme to generate bogus gains. The assessee contended that the shares were purchased and sold through legitimate channels, with all requisite taxes paid, and that the transactions were supported by documentary evidence. The CIT (A) upheld the assessing officer's decision, but the appellate tribunal found that the assessee had provided sufficient evidence to support the claim of genuine transactions.4. Allegations of Penny Stock Manipulation:The case involved allegations that the shares of Surabhi Chemicals and Investments Ltd. were part of a manipulated penny stock scheme. The assessing officer relied on findings from the investigation wing, which suggested that the share prices were artificially inflated to provide accommodation entries for bogus capital gains. The tribunal, however, noted that the assessee had provided comprehensive evidence of genuine transactions, including purchase and sale through recognized stock exchanges, and that there was no direct evidence linking the assessee to the alleged manipulation.Tribunal's Findings:The tribunal, after considering the evidence and precedents, concluded that the assessee had adequately demonstrated the genuineness of the transactions. It noted that the shares were purchased and sold through recognized stock exchanges, with all transactions documented and taxes paid. The tribunal also referenced several judicial precedents where similar additions were deleted, emphasizing that the burden of proof had been met by the assessee. Consequently, the tribunal directed the deletion of the addition under section 68 and allowed the exemption under section 10(38).Conclusion:The tribunal's decision highlighted the importance of documentary evidence in substantiating the genuineness of transactions and emphasized that mere suspicion or reliance on generalized reports without specific evidence against the assessee is insufficient to deny tax exemptions or make additions under section 68. The appeal was partly allowed, with the tribunal directing the deletion of the addition and granting the exemption claimed by the assessee.