2025 (5) TMI 957 - AT - Income Tax

ITAT deletes additions under sections 68 and 69C as shares were not penny stocks in assessment year

ITAT Mumbai held that additions under sections 68 and 69C for unexplained cash credit and expenditure could not be sustained. The tribunal found that the ... Addition u/s 68 and 69C - unexplained cash credit and unexplained expenditure - HELD THAT:- The share is neither a penny stock in the impugned assessment year, nor the additions made by the AO can be sustained due to the above mentioned reasons. The additions made by the AO under section 68 as well as under section 69C is deleted for the reasons mentioned and the appeal of the appellant allowed on merit. Appeal of the assessee is allowed. The core legal questions considered in this appeal include: (1) Whether the reopening of the assessment under section 148 of the Income Tax Act was valid and lawful; (2) Whether the additions made under sections 68 and 69C of the Act, relating to unexplained cash credit and unexplained expenditure respectively, were justified on the facts and evidence; (3) Whether the assessing officer and the first appellate authority properly appreciated the evidence and submissions of the assessee, including documentary evidence supporting the genuineness of share transactions; and (4) Whether the reliance on third-party statements and investigation reports without providing the assessee an opportunity for cross-examination or independent inquiry was appropriate.Regarding the validity of reopening under section 148, the Court examined the procedural aspects and the basis for reopening. The reopening was initiated based on information from the Directorate of Investigation (DIT), Mumbai, following a search operation against a group led by Naresh Jain, which allegedly engaged in accommodation entries through manipulation of penny stock shares. The assessing officer issued the reopening notice citing this information and the alleged involvement of the assessee as a beneficiary of sale proceeds from Divine Multimedia (India) Ltd shares. The Court noted that the reopening notice was duly issued and served, and sufficient opportunity was afforded to the assessee to respond. However, since the appeal was allowed on merits, the Court deemed adjudication on the validity of reopening as academic and did not dwell further on this issue.On the substantive issue of additions under section 68, the legal framework requires that when an assessee credits an amount in their books, the identity, creditworthiness, and genuineness of the source must be satisfactorily established. If the assessee fails to do so, the amount can be treated as unexplained cash credit and added to income. The assessing officer relied heavily on the investigation report and statements recorded during search operations, which alleged that the shares of Divine Multimedia (India) Ltd were used for providing accommodation entries through price manipulation. The AO treated the entire sale consideration of Rs. 11,97,290/- as unexplained and added it under section 68. Additionally, a further addition of Rs. 23,945/- was made under section 69C on account of presumed commission paid to the entry provider.The assessee contested these additions by furnishing extensive documentary evidence, including contract notes, ledger accounts, bank statements showing payments through banking channels, D-mat account details, and income tax returns for earlier years. The assessee also submitted that being a retired Central Government officer, he had informed his higher authorities about his investments as per service rules, and there was no knowledge or involvement in any price manipulation. The assessee argued that the AO did not conduct any independent inquiry or cross-examination of third-party statements and relied solely on the investigation report, which was not shared with the assessee. Furthermore, the assessee highlighted that the shares were transacted through recognized stock exchanges and that Securities Transaction Tax (STT) was paid, which under the Act exempts capital gains under section 10(38).The first appellate authority (CIT(A)) upheld the additions, relying on the investigation report and statements of Naresh Jain and associates, and held that the assessee failed to establish the genuineness of the transactions. The CIT(A) also rejected the argument that the AO did not conduct an independent inquiry, stating that reliance on credible external reports is legally valid. The CIT(A) confirmed the addition under section 68 and the commission addition under section 69C.On appeal to the Tribunal, the Court undertook a detailed analysis of the evidence and submissions. It was observed that the assessee had made bona fide investments, transacted through legitimate channels, and had disclosed the income correctly. The Court noted that the search and investigation occurred many years after the transactions, and there was no evidence that the assessee had knowledge of any price manipulation. The Court emphasized that the AO's addition of the entire sale consideration without deducting the cost of purchase demonstrated non-application of mind. The AO also presumed commission payments without identifying the recipient or mode of payment, further evidencing lack of proper scrutiny.Importantly, the Court examined the financials of Divine Multimedia (India) Ltd during the relevant years, noting a turnover exceeding Rs. 40 crore, net profits of approximately Rs. 55 lakhs, substantial share capital, and reserves. This financial strength contradicted the AO's characterization of the company as a penny stock. The Court held that a company with such financials cannot be labeled as a non-descript or penny stock company, and therefore, the assumption of price manipulation was factually incorrect.The Court also considered the principle that once the genuineness of the purchase is accepted by the department, the corresponding sale cannot be doubted. The assessee's transactions were executed through recognized stock exchanges, with payment through banking channels, and with STT paid, satisfying the conditions for exemption of capital gains under section 10(38). The Court further noted that no regulatory authority such as SEBI had initiated any action against the assessee or his brokers, which would have indicated involvement in price rigging or manipulation.The Court found that the AO and CIT(A) failed to appreciate the documentary evidence and the factual matrix properly, relying instead on third-party statements and investigation reports without adequate independent verification or cross-examination. The Court held that reliance on such reports without providing the assessee an opportunity to challenge the allegations violates principles of natural justice and fair procedure.Consequently, the Court deleted the additions made under sections 68 and 69C. It stated, 'The share is neither a penny stock in the impugned assessment year, nor the additions made by the AO can be sustained due to the above mentioned reasons.' The Court allowed the appeal on merits and did not find it necessary to examine the validity of the reopening notice further.The significant holdings established include:Reopening of assessment under section 148 must be based on credible information and proper procedure, but where the appeal is allowed on merits, the question of reopening validity becomes academic.For additions under section 68, the department must establish that the identity, creditworthiness, and genuineness of the credited amount are not satisfactorily explained by the assessee; mere reliance on third-party statements or investigation reports without independent inquiry or opportunity to cross-examine is insufficient.Acceptance of genuineness of purchase transactions precludes treating the corresponding sale proceeds as unexplained income.Characterization of a company as a penny stock must be based on financial fundamentals and facts; a company with substantial turnover, profits, and reserves cannot be presumed to be a penny stock merely based on investigation reports.Additions based on assumption of commission payments require specific evidence identifying the recipient and mode of payment; presumptions without evidence amount to non-application of mind.Transactions carried through recognized stock exchanges with payment through banking channels and payment of STT qualify for exemption under section 10(38) and must be treated as genuine unless disproved by cogent evidence.Reliance on credible external reports is permissible, but not at the cost of denying the assessee a fair opportunity to contest allegations.In conclusion, the Tribunal reversed the orders of the lower authorities, deleted the additions under sections 68 and 69C, and allowed the appeal on merits, emphasizing the need for proper appreciation of evidence and adherence to principles of natural justice in tax proceedings.