Assessee's appeal remanded for fresh adjudication on Section 68 addition for alleged bogus Long Term Capital Gain from amalgamated shares

ITAT Raipur remanded the case to CIT(Appeals)/NFAC for fresh adjudication regarding addition under Section 68 for alleged bogus Long Term Capital Gain. The assessee received 49,500 shares post-amalgamation of companies, which AO treated as colourable device. CIT(Appeals) disposed the appeal summarily without recording reasons or making findings on merits, violating Section 250(4) & (6) and principles of natural justice. ITAT directed denovo consideration with proper adjudication on submissions.

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The core legal questions considered in this appeal revolve around the validity of addition made under Section 68 of the Income Tax Act, 1961, relating to the claim of Long Term Capital Gain (LTCG) on sale of shares. The issues include:

1. Whether the addition of Rs. 37,76,063 made under Section 68 on account of alleged bogus LTCG from sale of shares is justified.

2. Whether the shares of M/s Quest Financial Services Ltd. received by the assessee on amalgamation from M/s Dristi Supplies Pvt. Ltd. were correctly valued and legitimately held.

3. Whether the assessee discharged the onus under Section 68 by furnishing adequate documentary evidence and whether the Revenue brought any contrary evidence to prove the transaction as bogus.

4. Whether the exemption under Section 10(38) for LTCG was rightly denied on the ground that the shares were held for less than 12 months, considering the date of purchase and amalgamation.

Issue 1: Justification of Addition Under Section 68 on Account of Bogus LTCG

The legal framework under Section 68 of the Income Tax Act places the burden on the assessee to prove the identity and genuineness of any unexplained cash credits, including share transactions. The Revenue alleged that the LTCG claimed was bogus, based on the disproportionate number of shares allotted post-amalgamation and the inflated value of shares sold.

The Assessing Officer (A.O.) found that the assessee originally purchased 550 shares of M/s Dristi Supplies Pvt. Ltd. for Rs. 2,75,000, but post-amalgamation, received 49,500 shares of M/s Quest Financial Services Ltd., valued at Rs. 36,77,850. The A.O. held that there was no basis for allotting such a large number of shares in exchange for shares worth Rs. 2,75,000, branding the transaction as a sham and the LTCG as bogus. The A.O. also relied on statements from directors of the broker involved, admitting to providing accommodation entries in the form of bogus LTCG.

The Court noted that the first appellate authority (CIT(A)) upheld the addition but failed to provide any reasoning or independent findings on the merits, thereby issuing a non-speaking and summary order. The appellate order did not comply with the requirements under Section 250(4) and (6) of the Act, which mandate that the appellate authority must record reasons for its decision after considering the submissions and evidence.

The Court emphasized that the absence of a speaking order violates principles of natural justice and renders the appellate order perverse. Consequently, the matter was remanded for a de novo hearing where the CIT(A) must consider all evidence and submissions and pass a reasoned order.

Issue 2: Legitimacy and Valuation of Shares Received on Amalgamation

The crux of this issue is whether the allotment of 49,500 shares of Quest Financial Services Ltd. in exchange for 550 shares of Dristi Supplies Pvt. Ltd. was valid and based on a proper valuation, or whether it was a device to inflate LTCG.

The A.O. found that the number of shares allotted was disproportionate to the original investment, and the assessee failed to explain the basis for such allotment. The share certificates and dematerialization dates were inconsistent with the payment date, raising suspicion about the genuineness of the transaction. The A.O. also noted that the shares were sold within less than 12 months of actual purchase, negating the claim for LTCG exemption.

The CIT(A) accepted the A.O.'s findings without independent inquiry or verification of the valuation or legitimacy of the shares. The Court found this approach inadequate and remanded the matter for detailed examination and recording of findings.

Issue 3: Discharge of Onus Under Section 68 and Evidence on Record

The assessee contended that he had furnished documentary evidence, including share certificates, bank statements, and demat account statements, to prove the genuineness of the transactions and discharge the onus under Section 68. The Revenue, however, did not bring any contrary material or evidence on record to disprove the assessee's submissions.

The A.O. relied on statements of the broker's directors admitting to accommodation entries and inconsistencies in dates and share allotment to conclude the transaction was bogus. The CIT(A) did not independently analyze the evidence or the assessee's submissions but upheld the addition summarily.

The Court observed that the appellate authority's failure to consider the evidence and submissions in detail and to record reasons violated the statutory mandate and principles of natural justice. The Court directed the CIT(A) to examine the documentary evidence and submissions afresh and pass a reasoned order.

Issue 4: Eligibility for Exemption Under Section 10(38) on LTCG

Section 10(38) exempts LTCG arising from the transfer of listed securities held for more than 12 months. The assessee claimed exemption on the ground that the original shares of Dristi Supplies Pvt. Ltd. were purchased on 13-11-2010, converted into Quest shares on amalgamation on 22-2-2012, and sold on 5-6-2012, thus holding the shares for over 19 months.

The A.O. and CIT(A) rejected this claim, relying on the payment date of 06-08-2011 and dematerialization date of 17-10-2011 to hold that the shares were held for less than 12 months, thus disqualifying the exemption. The A.O. also questioned the genuineness of the purchase and conversion dates.

The Court found that the appellate order did not address this issue substantively and failed to analyze the evidence regarding dates of purchase, allotment, and amalgamation. The Court remanded the matter for fresh consideration of the exemption claim in light of the documentary evidence and submissions.

Significant Holdings and Principles Established

The Court underscored the mandatory requirement for the appellate authority to pass a speaking order in compliance with Section 250(4) and (6) of the Income Tax Act, emphasizing that:

"The order u/s.250 of the Act attains the character of a summary order bereft of facts, findings and independent application of mind which is mandatory for a quasi-judicial authority. Any summary order by an appellate authority is a perverse order since violative of principles of natural justice."

The Court held that the CIT(A)'s order was non-speaking and failed to adjudicate on the merits, thereby necessitating remand for a de novo hearing.

On the merits, the Court recognized the Revenue's concerns regarding disproportionate share allotment, inconsistent dates, and statements indicating accommodation entries. However, it also acknowledged the assessee's claim of documentary evidence and the need for a proper inquiry before sustaining additions under Section 68.

The Court directed that the CIT(A) should:

• Conduct a fresh hearing after giving the assessee an opportunity to present documentary evidence.
• Consider the genuineness of the share allotment, valuation, and dates of purchase and amalgamation.
• Examine the claim for exemption under Section 10(38) on the basis of holding period.
• Record detailed reasons and findings in a speaking order in accordance with statutory provisions and principles of natural justice.

Accordingly, the appeal was allowed for statistical purposes by setting aside the CIT(A) order and remanding the matter for fresh adjudication.

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