2025 (6) TMI 1135 - AT - Income Tax

Additions under Section 68 deleted for accommodation entries and penny stock transactions lacking corroborating evidence

DCIT – Central Circle -1 Versus Ashok Kumar Agrawal And (Vice-Versa) And Santosh Agrawal L/R of Ram Charan Agrawal C/o. M.V. Prasad, CA Versus DCIT – Central Circle -1, Visakhapatnam

ITAT Visakhapatnam allowed the assessee's appeal, deleting additions made u/s 68 for accommodation entries and penny stock transactions. The AO relied ... Addition u/s 68 - accommodation entries receipt - investment in shell companies - HELD THAT:- AO has relied on the sworn statement recorded during the search and seizure operations but has not corroborated with any evidences to prove that the assessee paid cash in order to avail accommodation entries for a facilitative fee. Assessee has paid an amount to the Kolkata and Delhi based companies for acquiring the shares held by them AO based on the assumptions concluded that the assessee ought to have paid Rs. 17.50 Crores and Rs. 4.70 Crores to the shell companies and therefore proceeded to make addition in the hands of the assessee. We also find merit in the argument of the Ld.AR that if the investment is made by the shell companies wherein the sources have not been proved to the satisfaction of the Ld. AO, additions ought to have been made in the hands of the shell companies and not in the hands of the assessee who have subsequently purchased the investments held by the shell companies. The genuineness of the investment in share capital by the investor companies has not been disputed by the revenue. Revenue has not seized any incriminating material nor placed any material on record indicating the involvement of the assessee in the cash payments made to the shell companies. AO has made additions based on assumptions and surmises. Various judicial pronouncements have held that in the case of search seizure no additions can be made based on assumptions and surmises without any incriminating documents seized during the search operations and corroborating it with other evidences. In the instant case, the Ld. AO has not brought any material on record corroborating the investments made by the assessee. The various decisions relied on by the Ld.DR being distinguishable on facts cannot be applied to the instant case. In these circumstances, we find that the addition confirmed by the Ld. CIT(A) shall be deleted as source for the payments were not disputed by the revenue authorities as evidenced by the orders of the Ld. AO and Ld. CIT(A). Further, in the case of minor Shri Anunay Agrawal, it has been proven beyond doubt that the investments were made in the A.Y. 2010-11 whereas the addition made by the Ld. AO during the A.Y. 2006-07. Ld. CIT(A) thus considered the fact that Shri Anunay Agrawal has not made any investment during the A.Y. 2006-07 and the revenue has not proved beyond doubt the transfer of cash to the shell companies by Shri Anunay Agrawal during the A.Y.2006-07 has rightly deleted the addition made by the Ld. AO which does not need any interference. Accordingly, grounds raised by the revenue is dismissed. Assessment u/s 153A - assessee has traded in shares which was considered as “Penny Stock” - HELD THAT:- In the present case, it is an admitted fact there is no involvement by the assessee in the manipulation of stock prices and also no incriminating material was referred to by the Ld. AO in the assessment order and hence the decision laid down by the Hon’ble Supreme Court in the case of PCIT v. Abhisar Buildwell Pvt. Ltd [2023 (4) TMI 1056 - SUPREME COURT] holds good. Whether can sworn statement recorded from the brokers can form the basis for making the addition in the hands of the assessee? - Since, no material has been brought to our notice either in the assessment order or in the order of the CIT(A) to show that the said brokers in their respective statements indicating the assessee involvement in manipulation of stock prices. The undisclosed income of an assessee has to be computed on the basis of the evidences and material found during the search. The statement recorded under section 132(4) of the Act may be used for making additions only to the extent it is relating to the incriminating evidences material found during the search. There must be nexus between statement recorded and the evidences found during the search. In the instant case, no such nexus was observed in the order of the Ld. AO. No dispute on the fact that the shares of the various companies were purchased by the assessee which were entered into the DMAT account of the assessee and the payments were made through the banking channels. Further while selling the shares the consideration was received through banking channels. The conclusions made by the Ld. AO is not based on any cogent material and was just purely assumptions based on conjecture by the Ld. AO. Ld. AO has placed reliance on the sworn statements of the various brokers without further corroborating with the cogent material and hence it does not justify his conclusion that the transaction is a sham. Revenue Authorities is not justified in making the addition by disallowing the long-term capital gains claimed as exemption under section 10(38) of the Act and thereby we allow the ground raised by the assessee. Issues Presented and ConsideredThe core legal questions considered by the Tribunal in these appeals include:Whether the addition of Rs. 16.62 crores made by the Assessing Officer (AO) on account of alleged accommodation entries through Kolkata and Delhi based shell companies investing in share capital of M/s. Maa Mahamaya Industries Limited and M/s. GVA Industries Pvt. Ltd. is justified.Whether the addition of Rs. 4.70 crores made in the hands of the minor Shri Anunay Agrawal for investments purportedly made during the assessment year (AY) 2006-07 is justified.Whether the addition of Rs. 8.51 crores disallowing exemption claimed under section 10(38) of the Income Tax Act, 1961 (the Act) on long-term capital gains arising from trading in penny stocks is sustainable.Whether the addition based on statements recorded during search and seizure operations without corroborative incriminating material seized from the assessee's premises is legally sustainable.Whether the assessment order for AY 2006-07 is barred by limitation under section 153B of the Act.Issue-wise Detailed Analysis1. Addition of Rs. 16.62 crores on account of alleged accommodation entries through shell companiesLegal Framework and Precedents: The AO invoked provisions relating to unexplained cash credits under section 68 of the Act and relied on statements recorded under section 132(4) during search operations. The AO also relied on presumption under section 132(4A) that documents found during search belong to the searched person. The Supreme Court decisions in B. Kishore Kumar v. DCIT and Bannalal Jat Constructions P. Ltd. v. ACIT were cited to support the evidentiary value of statements recorded during search. The principle that the onus lies on the assessee to prove the genuineness, creditworthiness, and identity of investors was emphasized, supported by PCIT v. NRA Iron & Steel Pvt. Ltd., NDR Promotors P. Ltd. v. PCIT, and JJ Development P. Ltd. v. CIT.Court's Interpretation and Reasoning: The AO alleged that the assessee routed unaccounted money through Kolkata and Delhi based shell companies, which invested at a high premium and subsequently transferred shares to the assessee and family members at face value, indicating accommodation entries. The AO relied on sworn statements of brokers and seized documents. However, the Tribunal found that the AO failed to produce any direct evidence or incriminating material demonstrating that the assessee paid cash to these shell companies or was involved in sham transactions. The Tribunal noted that the assessee had paid Rs. 87.50 lakhs for acquiring shares from the shell companies through banking channels, which was undisputed. The AO's additions were based largely on assumptions and surmises without corroborative evidence.Key Evidence and Findings: No incriminating documents or seized evidence linked the assessee directly to the alleged cash payments to shell companies. Share certificates in the name of shell companies were seized, but the genuineness of investments by those companies was not disputed. The sworn statements of brokers did not establish the assessee's involvement in any wrongdoing. The Tribunal emphasized that additions cannot be made on assumptions without concrete evidence, especially in search cases.Application of Law to Facts: The Tribunal applied the principle that additions under section 68 require proof of unexplained credits and the failure of the assessee to prove source. However, where the AO fails to establish the source of funds or involvement in sham transactions, additions cannot be confirmed. The Tribunal held that if the source of funds of the shell companies was not proved, the addition should be made in their hands, not the assessee's, who merely purchased shares from them.Treatment of Competing Arguments: The revenue argued that the sworn statements and seized documents justified additions, relying on judicial precedents upholding statements recorded under section 132(4). The assessee contended that no evidence showed payment of cash to shell companies and that payments were made through banking channels. The Tribunal sided with the assessee, emphasizing the absence of incriminating material and the principle that assumptions cannot substitute evidence.Conclusion: The addition of Rs. 16.62 crores was deleted as the AO failed to prove the source or the assessee's involvement in accommodation entries beyond assumptions.2. Addition of Rs. 4.70 crores in the hands of minor Shri Anunay AgrawalLegal Framework and Precedents: The AO made additions for AY 2006-07 despite the investment being made in AY 2010-11. The principles of limitation and correct assessment year applicability apply.Court's Interpretation and Reasoning: The Tribunal found that investments by Shri Anunay Agrawal were made during AY 2010-11, not AY 2006-07. No material was produced to prove any cash transfer or investment during AY 2006-07. The CIT(A) rightly deleted the addition, and the Tribunal upheld this deletion.Conclusion: The addition of Rs. 4.70 crores was rightly deleted as the investment did not pertain to the assessment year in question and no evidence supported otherwise.3. Addition of Rs. 8.51 crores disallowing exemption under section 10(38) on long-term capital gains from penny stock tradingLegal Framework and Precedents: Section 10(38) exempts long-term capital gains on listed securities. The AO disallowed exemption alleging bogus transactions in penny stocks with manipulated prices. The Tribunal considered the Supreme Court's ruling in PCIT v. Renu Aggarwal, which held that additions disallowing exemption under section 10(38) based on mere suspicion without adverse findings against the assessee are not sustainable.Court's Interpretation and Reasoning: The AO relied on SEBI reports penalizing brokers for price manipulation and statements recorded under section 132(4). However, no evidence implicated the assessee in manipulation or connivance with brokers. The shares were purchased and sold through banking channels, and no incriminating material was seized from the assessee's premises. The Tribunal held that mere trading in penny stocks, without proof of involvement in price rigging, does not justify denial of exemption.Key Evidence and Findings: SEBI penalized brokers but did not implicate the assessee. No incriminating documents or evidence linked the assessee to rigging or sham transactions. The assessee's transactions were reflected in demat and bank accounts.Application of Law to Facts: The Tribunal applied the principle that disallowance of exemption under section 10(38) requires cogent evidence of wrongdoing by the assessee. The absence of such evidence precludes additions solely on suspicion or third-party statements.Treatment of Competing Arguments: The revenue argued that the gains were unnatural and linked to manipulation. The assessee argued innocence and lack of incriminating evidence. The Tribunal accepted the assessee's submissions, relying on the Supreme Court's precedent.Conclusion: The addition of Rs. 8.51 crores was deleted as the revenue failed to prove the assessee's involvement in price manipulation or sham transactions.4. Reliance on statements recorded during search and seizure without corroborative evidenceLegal Framework and Precedents: Statements under section 132(4) have evidentiary value but must be corroborated by seized material or other evidence. The Supreme Court decisions emphasize the necessity of nexus between statements and incriminating material found during search.Court's Interpretation and Reasoning: The Tribunal found that the AO relied heavily on statements of brokers without any corroboration linking the assessee to wrongdoing. No incriminating documents or evidence seized from the assessee's premises supported the AO's conclusions. The Tribunal held that such reliance without corroboration is unsustainable.Conclusion: Additions based solely on uncorroborated statements recorded during search are not justified.5. Limitation under section 153B of the ActThe assessee raised the ground that the assessment order was barred by limitation under section 153B. However, this ground was not pressed and dismissed accordingly.Significant Holdings'The undisclosed income of an assessee has to be computed on the basis of the evidences and material found during the search. The statement recorded under section 132(4) of the Act may be used for making additions only to the extent it is relating to the incriminating evidences material found during the search. There must be nexus between statement recorded and the evidences found during the search. In the instant case, no such nexus was observed in the order of the Ld. AO.''If the investment is made by the shell companies wherein the sources have not been proved to the satisfaction of the Ld. AO, additions ought to have been made in the hands of the shell companies and not in the hands of the assessee who have subsequently purchased the investments held by the shell companies.''It is an undisputed fact that the assessee has traded in shares which was considered as 'Penny Stock'. However, the revenue has not brought any material on record to show that the assessee was involved in manipulating of the share prices of these companies. The assessee being an investor has gained in the process of price rigging by various brokers for which assessee has not acted in connivance with the other brokers.''The conclusions made by the Ld. AO is not based on any cogent material and was just purely assumptions based on conjecture by the Ld. AO.'Core Principles EstablishedAdditions under sections 68 and 69 of the Act require concrete evidence linking the assessee to unexplained credits or transactions; assumptions or surmises are insufficient.Statements recorded under section 132(4) during search and seizure proceedings have evidentiary value only when corroborated by incriminating material found during the search.Where investments are made by third-party shell companies and the source of their funds is unexplained, additions should be made in their hands, not the subsequent purchaser, absent evidence of the purchaser's involvement in sham transactions.Exemption under section 10(38) cannot be denied merely because the shares traded are penny stocks or because brokers were penalized unless the assessee is shown to have been involved in manipulation or connivance.Assessment orders must comply with limitation provisions; unpressed limitation grounds are dismissed.Final Determinations on Each IssueThe revenue's appeal challenging deletion of Rs. 16.62 crores addition was dismissed for lack of evidence linking the assessee to accommodation entries.The addition of Rs. 4.70 crores in the hands of the minor was rightly deleted as it pertained to a different assessment year.The assessee's appeal against disallowance of exemption of Rs. 8.51 crores on long-term capital gains was allowed due to absence of evidence implicating the assessee in price manipulation.Additions based on uncorroborated statements recorded during search were held unsustainable.Limitation ground was dismissed as not pressed.