Share sale proceeds through banking channels cannot be treated as unexplained cash credit under section 68

ITAT Mumbai held that sale consideration from shares traded on stock exchange through banking channels cannot be treated as unexplained cash credit under section 68. The tribunal found share purchase/sale transactions genuine with proper documentation including demat account entries. Following Delhi HC precedent in PCIT vs. Smt Krishna Devi, the tribunal rejected AO's reasoning based on price increases and company fundamentals as mere conjecture. Addition of estimated commission expenses was also deleted. CIT(A) order set aside, assessee's appeal allowed.

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Issues Involved:

1. Legitimacy of the long-term capital gains declared by the assessee on the sale of shares.
2. Justification for the addition of estimated commission expenses related to the sale of shares.

Detailed Analysis:

1. Legitimacy of the Long-Term Capital Gains:

The primary issue in this case was whether the long-term capital gains declared by the assessee on the sale of shares of M/s Sunrise Asian Ltd. were genuine or bogus. The assessee had declared long-term capital gains of Rs. 2.36 crores, claiming exemption under Section 10(38) of the Income Tax Act, 1961. The Assessing Officer (AO) relied on a report by the Investigation Wing, which alleged price manipulation and generation of bogus long-term capital gains in penny stocks, including the shares sold by the assessee. The AO concluded that the gains were pre-arranged to generate bogus capital gains, leading to the addition of Rs. 2.47 crores as unexplained income under Section 68 of the Act.

The Tribunal observed that the AO primarily relied on a generalized report without concrete evidence linking the assessee to the alleged manipulation. The Tribunal noted that the assessee had conducted transactions through proper banking channels, dematerialized shares, and sold them through the stock exchange, receiving the sale consideration through banking channels. The Tribunal emphasized that the AO did not find any defects in the documentation provided by the assessee, nor was the assessee subjected to any inquiry by SEBI. Furthermore, the AO did not provide the assessee with an opportunity to cross-examine a key witness, Shri Anuj Agarwal, whose statement was heavily relied upon. The Tribunal cited several decisions from the Hon'ble Bombay High Court, which held that transactions supported by credible documentary evidence could not be considered bogus without substantial proof. Consequently, the Tribunal set aside the addition made by the AO, holding that the sale consideration could not be treated as unexplained cash credit under Section 68.

2. Justification for the Addition of Estimated Commission Expenses:

The second issue was the AO's addition of estimated commission expenses at 3% of the sale value of shares, amounting to Rs. 7,41,921/-, under Section 69 of the Act. The AO assumed that the assessee would have incurred commission expenses to generate bogus long-term capital gains. However, the Tribunal found no basis for this estimation, as the transactions were deemed genuine. The Tribunal noted that the AO did not provide any evidence to substantiate the incurrence of such expenses by the assessee. As a result, the Tribunal directed the AO to delete the addition of estimated commission expenses.

Conclusion:

In conclusion, the Tribunal allowed the appeal filed by the assessee, setting aside the order of the CIT(A) and directing the AO to delete both the addition of the sale consideration as unexplained cash credit and the estimated commission expenses. The Tribunal's decision was based on the lack of concrete evidence linking the assessee to any manipulation and the genuineness of the transactions as supported by documentary evidence. The order was pronounced in the open court on 09-10-2024.

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