2025 (9) TMI 347 - AT - Income Tax

Deletion of additions under s.68 and s.69C upheld where bank and Demat records reconciled and onus discharged

Income Tax Officer (IT), 2 (3) (1), Mumbai Versus Subramania Shreenivasan Ganeshnath., Maharashtra.

Income Tax Officer (IT), 2 (3) (1), Mumbai Versus Subramania Shreenivasan Ganeshnath., Maharashtra. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer was justified in treating sale consideration received from sale of shares as unexplained cash credit under section 68 of the Income Tax Act, 1961, by characterising the transactions as accommodation/ sham entries based on investigation report regarding the scrip being a penny stock. 2. Whether deemed commission expense of 3% of the said sale consideration was correctly added as unexplained expenditure under section 69C of the Act consequential to the addition under section 68. 3. Whether the Assessing Officer could invoke section 68 where the sale consideration was not shown to be recorded in the assessee's books of account (i.e., applicability of the requirement that the sum be credited to books before invoking section 68 in the case of an individual not obliged to maintain books). ISSUE-WISE DETAILED ANALYSIS - Issue 1: Validity of addition under section 68 based on characterization of transactions as accommodation/sham Legal framework: Section 68 permits treating unexplained cash credits as income where a sum is found credited in the books and explanation of source is unsatisfactory; Assessing Officer may disallow/bring to tax where transactions are sham/ accommodation entries. Burden of proof principles require the assessee to discharge primary onus of explanation and production of evidence; thereafter revenue must rebut and shift onus back by independent material. Precedent treatment: The CIT(A) relied upon ratios of higher court decisions treating mere reliance on investigation wing reports insufficient; investigative statements must specifically link the assessee to sham transaction to justify treating transaction as accommodation entry. (Precedents applied by the Tribunal were followed, not distinguished or overruled.) Interpretation and reasoning: The Tribunal accepted the CIT(A)'s finding that the Assessing Officer's conclusion rested primarily on the investigation wing's report and a statement under section 131 recorded in unrelated searches, without specific mention of the assessee as a beneficiary of those sham transactions. The assessee had offered short-term capital gains to tax, produced demat account extracts, broker statements, bank statements showing payments through recognised bank accounts (including NRE account), and reconciliations. The purchases and sales occurred through the stock exchange and demat transfers. The Assessing Officer did not undertake independent inquiry or adduce material directly connecting the assessee to the operators of the alleged accommodation scheme nor point out any inconsistency in the transactional records produced by the assessee. Ratio vs. Obiter: Ratio - Where an assessee produces contemporaneous documentary evidence (demat statements, bank statements, broker statements) showing purchase and sale through recognised trading mechanisms and offers resultant short-term capital gains to tax, and where the revenue's sole reliance is on an investigation report/section 131 statement that does not name the assessee or directly impute shamness to the assessee's transactions, the addition under section 68 cannot be sustained without independent corroborative material. Obiter - Observations on the general practice of market manipulation and penny stocks as used by operators were noted but not determinative absent linking evidence. Conclusion: The Tribunal confirmed deletion of the addition under section 68 on facts: assessee discharged primary onus; revenue failed to produce material to shift onus; sale proceeds recorded in bank/demat records and capital gains offered to tax; AO's reliance on investigation report without independent verification was inadequate. Ground 1 dismissed insofar as it challenged deletion under section 68. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Validity of addition under section 69C for deemed commission Legal framework: Section 69C treats unexplained expenditure as income where expenditure is incurred and explanation is not satisfactory; where an addition under section 68 cannot be sustained, consequential additions made under section 69C based on the same premise are dependent on the sustaining of the primary addition. Precedent treatment: Consequential additions deriving from an unsustainable primary finding are not sustainable; the Tribunal followed this principle in upholding the CIT(A)'s deletion. Interpretation and reasoning: The Assessing Officer added deemed commission (3%) as unexplained expenditure premised on the finding that the sale transactions were bogus accommodation entries. Since that primary finding under section 68 was not supported by independent material, the consequential addition under section 69C likewise lacked foundation. There was no separate material demonstrating that such commission was actually paid or that the expenditure was unexplained. Ratio vs. Obiter: Ratio - A consequential addition under section 69C cannot stand where the foundational conclusion under section 68 is not legally sustained by evidence; absent independent proof of unexplained expenditure, deletion is warranted. Obiter - Percentage quantum (3%) as deemed commission was not independently examined and was treated only as consequential. Conclusion: The Tribunal confirmed deletion of the section 69C addition as consequential to deletion under section 68; Ground 1 dismissed insofar as it challenged deletion under section 69C. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Requirement of sum being recorded in books of account to invoke section 68 for an individual not obliged to maintain books Legal framework: Invocation of section 68 presupposes that the sum is 'found credited in the books of account'; where an individual taxpayer is not required to maintain books, Revenue must still demonstrate that the sum has been reflected in the taxpayer's records or accounts; mere suspicion or external investigation report without showing credit in books is insufficient. Precedent treatment: The Tribunal endorsed the view that absence of the sum recorded in assessee's books (or equivalent records) undermines the invocation of section 68; decisions relied upon by the CIT(A) were treated as applicable. Interpretation and reasoning: The CIT(A) observed and the Tribunal noted that the Assessing Officer did not point out that the sale consideration was recorded in the books of the assessee. The assessee, an NRI individual, had produced bank statements and demat records but was not shown to have entries in statutory books (which an individual may not be required to maintain). The Tribunal treated the absence of such a showing as a failure to satisfy a condition for applying section 68 in the assessee's case. Ratio vs. Obiter: Ratio - For an individual not required to maintain books, revenue must still identify recordation or credible documentary evidence showing a sum credited; failure to do so precludes invoking section 68. Obiter - The decision does not comprehensively redefine what constitutes 'books' for different classes of taxpayers beyond the facts. Conclusion: The Tribunal held that one of the conditions to invoke section 68 was not satisfied because the Assessing Officer did not point to the amount being recorded in the assessee's books; this supported deletion of the section 68 addition. Ground No.2 rendered academic and dismissed. Cross-references and Cumulative Finding The Tribunal applied cumulative reasoning: (a) assessee discharged primary onus by documentary proof of bona fide exchange via recognised mechanisms and taxability of gains; (b) revenue relied primarily on an investigation report and unrelated section 131 statement that did not implicate the assessee; (c) absence of independent verification and failure to show sum recorded in assessee's books prevented sustaining section 68; and (d) consequential section 69C addition accordingly failed. The Tribunal affirmed the CIT(A)'s deletions and dismissed the appeal of the Revenue.