2025 (6) TMI 822 - AT - Income Tax

Assessee wins appeal against section 68 addition for alleged bogus capital gains transactions

ITAT Mumbai ruled in favor of the assessee regarding addition under section 68 for alleged bogus capital gains and denial of exemption under section ... Addition u/s 68 - bogus capital gains - denial of exemption u/s 10(38) - HELD THAT:- Transactions of purchase and sale of shares cannot be considered to be bogus, when the documentary evidences furnished by the assessee establish genuineness of the claim. AO is therefore, directed to delete the addition made u/s 68 of the Act. Appeal of the assessee is allowed. The core legal questions considered in this appeal pertain primarily to the validity of the reassessment proceedings under section 148 read with section 143(3) of the Income-tax Act, 1961, and the correctness of the addition made under section 68 of the Act amounting to Rs. 3,72,18,541/-. The issues also encompass the denial of exemption under section 10(38) for long-term capital gains, the levy of interest under section 234B, initiation of penalty proceedings under section 271(1)(c), and the procedural propriety of the assessment and appellate orders.Firstly, the question arose whether the notice issued under section 148 and the subsequent reassessment order were valid, given the contention that the reassessment was initiated without independent satisfaction by the Assessing Officer (AO) and was based solely on inputs from other authorities. Secondly, the legitimacy of the addition under section 68, which treats the entire sale proceeds of shares of Banas Finance Limited (BFL) as unexplained income, was challenged on grounds that the transactions were genuine, supported by documentary evidence including contract notes, demat account statements, banking channels, and brokerage records. Thirdly, the appellant contended that exemption under section 10(38) for long-term capital gains was wrongly denied despite compliance with all conditions. Fourthly, the imposition of interest under section 234B and penalty under section 271(1)(c) were disputed. Finally, the appellant raised procedural objections regarding non-furnishing of statements or information relied upon during reassessment and the failure of the Commissioner of Income-tax (Appeals) (CIT(A)) to adjudicate certain grounds or consider relevant judicial precedents.Regarding the validity of reassessment under section 148, the appellant argued that the AO did not independently evaluate the material before issuing the notice and that the reassessment was initiated at the instance of other authorities without independent satisfaction, rendering the proceedings void ab initio. However, since the Tribunal ultimately deleted the addition under section 68 on merits, it left the challenge to the reopening open and did not decide on the validity of the reassessment notice.The principal issue concerning the addition under section 68 was whether the sum of Rs. 3,72,18,541/- received on sale of shares of BFL constituted unexplained cash credits or bogus capital gains. The AO, relying heavily on an investigation wing report, concluded that the scrip was manipulated to generate bogus capital gains and treated the entire amount as unexplained income. The CIT(A) upheld this addition without detailed reasoning, merely echoing the AO's findings.The appellant countered by producing extensive documentary evidence demonstrating the genuineness of transactions: contract notes, demat account statements showing shares were acquired through preferential allotment and private placement, bank statements evidencing payments and receipts through banking channels, and brokerage records confirming trades executed on the stock exchange. It was also highlighted that BFL was exonerated by SEBI from charges of irregularities related to preferential allotment, and that the appellant's broker and name were not mentioned in any investigation report alleging manipulation. The appellant further relied on coordinate bench decisions where similar additions involving the same scrip and identical facts were deleted on merits, emphasizing that the AO failed to conduct any enquiry or examine brokers or third parties, and disregarded the evidentiary burden on the revenue to disprove the genuineness of the transactions.The Tribunal examined the AO's reliance on the investigation report and noted the absence of any direct link between the appellant and alleged price rigging or manipulation. The Tribunal referred to binding judicial precedents, including decisions of the Bombay High Court and coordinate benches of the Tribunal, which consistently held that transactions in shares cannot be treated as bogus merely on suspicion when the assessee furnishes credible documentary evidence establishing the genuineness of the transactions. Specifically, the Tribunal cited a High Court ruling where the Tribunal's finding that shares were transacted through stock exchange and banking channels, with payment of securities transaction tax, was upheld and the addition under section 68 was deleted. The Tribunal distinguished the present facts from cases relied upon by the revenue where purchases were made off-market or through private placements without proper documentation or where brokers admitted to price manipulation.On the issue of exemption under section 10(38), the appellant contended that the long-term capital gains from sale of BFL shares were wrongly denied exemption despite fulfillment of all statutory conditions. The CIT(A) dismissed this ground without discussion or reasoning. The Tribunal observed this omission and implicitly supported the claim for exemption by deleting the addition under section 68, thereby recognizing the genuineness of the capital gains.Regarding the levy of interest under section 234B and penalty under section 271(1)(c), these were consequential to the addition under section 68. Since the addition was deleted, these grounds became infructuous and were not separately adjudicated.Procedural objections raised by the appellant included failure to provide copies of statements or information on which the reassessment notice was based, and denial of opportunity for cross-examination or verification of third-party records. The Tribunal noted these contentions but did not explicitly decide on them, focusing instead on the merits of the addition and the evidentiary record.The Tribunal criticized the CIT(A) for a cryptic appellate order that merely reproduced the AO's findings without independent application of mind or consideration of the appellant's detailed submissions and annexures. The appellate order was described as preconceived and merely echoing the assessment order. The Tribunal emphasized the necessity of adjudicating grounds with adequate reasoning and respecting judicial precedents, which the CIT(A) failed to do.In conclusion, the Tribunal held that the addition under section 68 was not sustainable on the facts and law. The appellant had discharged the onus by furnishing credible documentary evidence proving the nature and source of the amount received from sale of shares of BFL. The AO failed to rebut this evidence or conduct any meaningful enquiry. The Tribunal stated: 'We hold that the impugned appellate order has been passed in a preconceived manner, dittoing the assessment order rather than by way of independent application of mind.' The addition was therefore deleted. The challenge to the reopening notice under section 148 was left open. The appeal was allowed accordingly.Significant holdings include the principle that when an assessee furnishes credible documentary evidence of purchase, sale, payment through banking channels, and demat transactions executed on the stock exchange, such transactions cannot be treated as bogus or unexplained income under section 68 merely on suspicion or on the basis of investigation reports implicating other parties. The burden lies on the AO to disprove the genuineness by independent enquiry or evidence, which was absent in this case. The Tribunal reaffirmed binding precedents from the Bombay High Court and coordinate benches of the Tribunal holding that mere suspicion, surmises, or reliance on third-party investigation reports without direct evidence against the assessee do not justify additions under section 68.The Tribunal also underscored the requirement for appellate authorities to independently consider and adjudicate grounds raised by the assessee with proper reasoning, rather than mechanically upholding assessment orders. Failure to do so amounts to a breach of judicial discipline and undermines the principles of fair adjudication.Ultimately, the Tribunal's order sets a precedent reinforcing that genuine transactions supported by documentary evidence and conducted through proper channels cannot be treated as accommodation entries or bogus income without cogent proof. It also highlights the importance of procedural fairness and adherence to judicial precedents in income tax appellate proceedings.