2025 (4) TMI 1299 - AT - Income Tax

Revenue fails to prove assessee's involvement in alleged bogus capital gains manipulation scheme under sections 68 and 69C

ITAT Mumbai upheld CIT(A)'s order deleting additions made under sections 68 and 69C regarding alleged bogus long-term capital gains in scrip price ... Reopening of assessment - Bogus long term capital gains - information received from the Insight Portal regarding price manipulation in scrip of Tilak Venture Ltd. to provide accommodation entry of bogus long-term capital gains to its beneficiaries, proceedings u/s 147 of the Act were initiated in the case of the assessee - HELD THAT:- As in the present case, the proceedings u/s 147 of the Act were initiated based on the information received from the Insight Portal. Since the impugned additions were made pursuant to proceedings initiated u/s 147 of the Act, therefore, they can be either based on the information received by the AO or the information as obtained by the AO pursuant to an independent enquiry. Once the AO has failed to prove in the present case that the assessee was involved in the alleged bogus transaction of accommodation entry on the basis of either of the aforesaid information, nor is there any vague reference against the assessee, the Revenue cannot now plead that the CIT(A) while adjudicating the assessee’s appeal failed to conduct the inquiry. Further, apart from raising the aforesaid plea, the Revenue has not specifically pointed out which inquiry the CIT(A) failed to conduct. Therefore, we do not find any merits in the aforesaid submissions of the learned DR. Thus, no infirmity in the impugned order passed by the CIT(A). Accordingly, the deletion of the additions made u/s 68 and section 69C of the Act is upheld, and the grounds raised by the Revenue are dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the Assessing Officer (AO) was justified in disallowing the long-term capital gains claimed by the assessee on the sale of shares of Tilak Venture Ltd. on the ground that the gains were bogus and arose from price manipulation and accommodation entriesRs.(b) Whether the addition of the sale consideration as unexplained cash credit under section 68 of the Income Tax Act, 1961 ('the Act') and the addition under section 69C of the Act on account of alleged commission paid for accommodation entries was sustainableRs.(c) Whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the additions without exercising co-terminus powers under section 250(4) of the Act to conduct further inquiry or direct the AO to ascertain the correct factsRs.(d) Whether the documentary evidence furnished by the assessee, including contract notes, DEMAT account statements, and bank transactions, was sufficient to establish the genuineness of the transactionsRs.(e) Whether the Revenue's reliance on statements of exit providers implicating the directors of the company could be extended to implicate the assessee without specific evidence linking him to the alleged price manipulationRs.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Legitimacy of Long-Term Capital Gains and Additions under Sections 68 and 69CThe relevant legal framework includes the provisions of the Income Tax Act, particularly sections 10(38) (exemption of long-term capital gains on securities transaction tax paid transactions), 68 (unexplained cash credits), and 69C (expenditure on known sources not recorded in books). The AO relied on the modus operandi of penny stock price manipulation through circular trading and accommodation entries to disallow the gains and add the sale proceeds to income as unexplained cash credit.The AO's reasoning was based on the absence of intrinsic value or net worth in Tilak Venture Ltd., the unexplained astronomical rise in share price, and statements of exit providers alleging manipulation by the company's directors. The AO held that mere documentary evidence of purchase and sale was insufficient to prove genuineness, placing the onus on the assessee to explain the price rise and the source of gains.The assessee submitted that he acquired 100,000 shares through preferential allotment at face value plus premium, sold 49,300 shares through a recognized broker on the stock exchange, and held the balance shares which were sold later at a loss. The assessee produced contract notes, DEMAT account statements, and bank proofs to establish genuineness.The CIT(A) found that the AO failed to establish any incriminating material linking the assessee to the alleged manipulation or accommodation entry scheme. The CIT(A) noted the absence of any inquiry, cross-referenced documents, or statements connecting the assessee with the modus operandi. The CIT(A) held that the mere fact that the assessee earned long-term capital gains from the scrip was insufficient to treat the gains as bogus.The Tribunal concurred with the CIT(A), emphasizing that the AO did not discredit or comment on the evidence submitted by the assessee. The Tribunal observed that the assessee was a regular trader in shares of various entities and that the sale pattern of shares did not support the Revenue's case of manipulation, as the assessee sold only a portion of shares at the highest price instead of the entire holding.Further, the Tribunal noted that statements of exit providers implicating the company directors did not specify any link to the assessee, and no material was produced to connect the assessee with the alleged price rigging. The Tribunal held that the AO's conclusion was based on suspicion and not on concrete evidence.The Tribunal relied on the precedent set by the Hon'ble Jurisdictional High Court in a case where the Court held that if the DEMAT account and contract notes showed share transactions and the AO failed to prove the transactions as bogus, the long-term capital gains could not be treated as unaccounted income under section 68. The Court emphasized that the Revenue must discharge the initial onus of proving the bogus nature of transactions before making additions.Issue (c): Powers of CIT(A) under Section 250(4)The Revenue contended that the CIT(A), having co-terminus powers under section 250(4) of the Act, should have conducted further inquiry or directed the AO to ascertain correct facts instead of deleting the additions. The Tribunal examined this contention in light of the facts that the reassessment proceedings were initiated based on information from the Insight Portal and that the AO failed to produce any material linking the assessee to the alleged bogus transactions.The Tribunal observed that the Revenue did not specify any inquiry that the CIT(A) failed to conduct, nor did it point to any material that could have been gathered by further inquiry. Since the AO himself did not establish the involvement of the assessee, the CIT(A) was justified in deleting the additions without further inquiry. The Tribunal held that the Revenue's plea was vague and lacked merit.Issue (d): Sufficiency of Documentary EvidenceThe assessee submitted contract notes for purchase and sale, DEMAT account statements showing share allotment and dematerialization, and bank account records evidencing transactions. The AO did not dispute the authenticity of these documents but rejected them on the ground that they did not explain the price rise or the source of gains.The Tribunal held that the AO's rejection of documentary evidence without specifically pointing out any discrepancies or defects was unsustainable. The Tribunal emphasized that the burden on the assessee is to prove the genuineness of transactions, and the documentary evidence produced was sufficient to discharge this burden in the absence of contradictory material from the Revenue.Issue (e): Reliance on Statements of Exit ProvidersThe AO referred to statements of certain exit providers alleging manipulation by the directors of Tilak Venture Ltd. However, the Tribunal noted that there was no clarity on when these statements were recorded, whether they pertained to the assessee's exit providers, or whether they implicated the assessee in any manner. No adverse observation was made against the assessee in those statements.The Tribunal held that such vague and indirect references could not be the basis for disallowing the gains or making additions under sections 68 and 69C against the assessee. The Revenue failed to establish a nexus between the assessee and the alleged price manipulation.3. SIGNIFICANT HOLDINGSThe Tribunal upheld the deletion of additions made under sections 68 and 69C of the Act and dismissed the Revenue's appeal. The crucial legal reasoning preserved verbatim includes:'The AO has not established that there was any incriminating material pertaining to the assessee specifying his role in the manipulation of scrip of Tilak Venture Ltd. or even arranging accommodation entries. There is no material to hold that the assessee indulged in the manipulation of scrip and obtained an accommodation entry on a commission basis, which is liable to be considered as bogus capital gains.''Merely because the assessee is one of the persons who has earned long-term capital gains from the sale of the scrip of Tilak Venture Ltd. may not be sufficient to hold that the assessee was indulged in manipulation of scrip and has obtained accommodation entry on commission basis.''The AO, without finding any fault with the evidence submitted by the assessee, proceeded to treat the transaction as non-genuine and the long-term capital gains earned by the assessee as bogus. In the absence of any material proving any involvement of the assessee in the alleged bogus transaction of accommodation entry, we are of the considered view that the addition made pertaining to the receipt of sale consideration of the impugned transaction cannot be sustained.''Once the AO has failed to prove in the present case that the assessee was involved in the alleged bogus transaction of accommodation entry on the basis of either of the aforesaid information, nor is there any vague reference against the assessee, the Revenue cannot now plead that the learned CIT(A) while adjudicating the assessee's appeal failed to conduct the inquiry.'Core principles established include the requirement that the Revenue must discharge the initial onus to prove that transactions are bogus before making additions under sections 68 and 69C; mere suspicion or indirect references without direct evidence against the assessee are insufficient; and the CIT(A) is not obliged to conduct further inquiry or direct the AO to do so in the absence of any material or specific direction.Final determinations on each issue are:(a) The long-term capital gains claimed by the assessee on sale of shares of Tilak Venture Ltd. are genuine and not bogus.(b) Additions under sections 68 and 69C of the Act are not sustainable in the absence of evidence implicating the assessee.(c) The CIT(A) did not err in deleting the additions without conducting further inquiry under section 250(4).(d) The documentary evidence furnished by the assessee sufficiently established the genuineness of the transactions.(e) The statements of exit providers implicating the company directors could not be extended to implicate the assessee without specific evidence.