2025 (8) TMI 1180 - AT - Income Tax

Appeal against addition under s.68 dismissed as sham share sale, fabricated income and tax-avoidance scheme

Krutik Ashokkumar Parikh-HUF Versus Income Tax Officer, Ward-1 (2) (2), Ahmedabad

Krutik Ashokkumar Parikh-HUF Versus Income Tax Officer, Ward-1 (2) (2), Ahmedabad - TMI 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the delay in filing the appeal (363 days) should be condoned on the facts presented. 2. Whether the reopening of assessment under section 147 (and consequential proceedings) was valid in the circumstances of the transaction involving a penny-stock scrip. 3. Whether the sale of listed shares (claimed as long-term capital gain exempt under section 10(38)) was a genuine transaction or a sham/manipulative transaction warranting disallowance and addition. 4. Whether the Assessing Officer's addition of the entire sale consideration (Rs. 21,72,300) under the relevant provisions (including invocation of section 68 principles and framing under best-judgment assessment) was justified, having regard to burden of proof and standards of proof. 5. To the extent raised, whether procedural infirmities (non-furnishing of information, denial of cross-examination) rendered the addition invalid. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of Delay Legal framework: Section 253(5) of the Act permits condonation of delay in filing appeals where sufficient cause is shown; court exercises discretion considering bona fides and reasons for delay. Precedent Treatment: The Court applied established discretionary principles (as reflected in the judgment) to assess sufficiency of cause and bona fide explanation. Interpretation and reasoning: Delay was explained by miscommunication/dispatch of notices and final order to an incorrect email ID and proceedings having been carried out through a previous authorized representative, causing the assessee to be unaware. On being apprised, the assessee acted promptly and filed the appeal with affidavit. The Court found the reasons bona fide and in the interest of justice. Ratio vs. Obiter: Ratio - the Court's finding that such a factual explanation (misdirected electronic communication and lack of notice) constitutes sufficient cause for condonation is a binding exercise of discretion on the facts. Conclusion: Delay of 363 days condoned; appeal admitted for adjudication on merits. Issue 2 - Validity of Reopening under Section 147 Legal framework: Reopening requires satisfaction of jurisdictional facts and basis to believe income has escaped assessment; subsequent proceedings must be lawful and reasonable. Precedent Treatment: The Court relied on established tests allowing authorities to look into surrounding circumstances and test apparent transactions against commercial probabilities (as referenced in the judgment authorities). Interpretation and reasoning: The AO's reopening was premised on information identifying the scrip as part of penny-stock manipulations and the extraordinary return from a single scrip. The Tribunal reviewed surrounding circumstances: long delay between purchase and payment, one-time isolated transaction, absence of trading pattern, and departmental/investigative findings regarding the scrip. These facts supported a reasonable belief that income may have escaped assessment and justified reopening. Ratio vs. Obiter: Ratio - on the facts, reopening was held valid because material existed to form a belief that assessment required reopening; the Court applied the accepted principle of examining commercial reality. Conclusion: Reopening under section 147 was valid in the present facts and did not vitiate subsequent assessment action. Issue 3 - Genuineness of the Transaction and Applicability of Exemption under Section 10(38) Legal framework: Exemption for long-term capital gains on listed securities requires genuine trading on recognized stock exchanges with STT paid; however genuineness of transaction and substance over form are subject to scrutiny by tax authorities under the doctrine of commercial substance and human probabilities. Precedent Treatment: The Court followed and applied principles from cited authorities emphasizing that apparent facts must yield to real substance and that authorities can examine surrounding circumstances (as cited in the judgment: Durga Prasad More, Sumati Dayal, Miller's 'preponderance of probabilities' principle). Interpretation and reasoning: The Tribunal examined commercial indicia: (a) payment for shares was deferred by ~11 months without explanation; (b) the equity scrip was a known penny stock flagged by investigation and CBDT guidance as used in tax-avoidance schemes; (c) a singular extraordinary gain (over 1,100% in ~15-16 months) without business rationale or trading pattern; (d) lack of company fundamentals to justify such increase. These surrounding circumstances, tested against human probabilities and commercial prudence, led the Court to conclude the transaction lacked commercial substance and was a colourable device to generate exempt gains. The presence of STT and exchange trading was not conclusive in the face of overwhelming indicia of sham transaction; the assessee failed to discharge the burden to prove genuineness on preponderance of probabilities. Ratio vs. Obiter: Ratio - where an alleged exchange transaction exhibits features inconsistent with commercial reality (delayed payment, isolated transaction, investigative identification of the scrip as manipulated, implausible profit), exemption cannot be allowed; factual failure to rebut such indicia warrants treating the transaction as non-genuine. Conclusion: The claim of exemption under section 10(38) was rightly denied; transaction held to be sham/manipulative and not qualifying for exemption. Issue 4 - Justification for Addition of Entire Sale Consideration and Standard/Burden of Proof Legal framework: Additions under section 68 (or by best-judgment assessment measures where return not filed) require that unexplained credits or suspicious receipts be established as such; burden lies on assessee to satisfactorily prove genuineness and source; where assessee fails, AO may make addition based on material. Precedent Treatment: The Court adhered to the doctrine that burden of proof lies on the assessee to substantiate the transaction; authorities may rely on surrounding circumstances to make additions when assessee fails to furnish credible explanation. Interpretation and reasoning: The AO framed assessment under section 144 (best judgment) because the assessee did not file a return in response to section 148 notice. The AO added the entire sale consideration given absence of response and corroborative evidence. The Tribunal reviewed evidence and concurrent findings of CIT(A) that assessee did not discharge the burden to show commercial credibility. Given the isolated nature of the transaction, delayed payment, departmental findings on the scrip, and lack of corroboration, addition of Rs.21,72,300 was found justified. The Court treated the addition as sustainable under the relevant charging and evidential provisions. Ratio vs. Obiter: Ratio - where an assessee fails to respond to reopening/assessment proceedings and fails to discharge the burden to demonstrate genuineness, the AO's addition of the questionable consideration is sustainable on the preponderance of probabilities and available materials. Conclusion: The addition of Rs.21,72,300 was justified and correctly upheld by the appellate authority and the Tribunal. Issue 5 - Alleged Procedural Infirmities (Non-furnishing of Information, Denial of Cross-examination) Legal framework: Principles of natural justice and opportunity of hearing require that relevant material relied upon be made available and that parties be afforded opportunity to meet evidence, including cross-examination where mandated by law/procedure. Precedent Treatment: The Tribunal did not find or record any material procedural violation sufficient to vitiate the assessment on the facts before it; the adjudication rested on absence of credible rebuttal and the weight of surrounding circumstances. Interpretation and reasoning: Although raised as a ground, the judgment's analysis focuses on the substantive lack of credibility of the transaction and the assessee's failure to discharge the evidential burden. No specific finding was recorded that denial of cross-examination or non-furnishing of behind-the-back information caused prejudice that would invalidate the additions. The Tribunal accepted the materials on record (including remand report and investigative references) and concluded that the assessee's substantive failure justified the result. Ratio vs. Obiter: Obiter/Ruled-in-context - absence of a detailed ruling on procedural infractions indicates the Tribunal found no miscarriage of justice; the decision turns on substantive sufficiency of evidence rather than procedural lapses. Conclusion: Procedural objections did not persuade the Tribunal to overturn the addition; no interference warranted on procedural grounds in the factual matrix of the case. Overall Disposition The Tribunal condoned the delay and dismissed the appeal on merits, upholding the reopening, treating the transaction as non-genuine, and sustaining the addition of Rs.21,72,300 on the ground that the assessee failed to discharge the burden of proving genuineness by the preponderance of probabilities.