2025 (9) TMI 1010 - AT - Income Tax

Deletion of s.69C addition where penny-stock purchases recorded in books, trades on exchange, bank payments, and broker FIR

ITAT MUMBAI (AT) upheld deletion of addition under s.69C relating to purchase of penny-stock scrips. The tribunal found investments recorded in books, ... Addition u/s. 69C - purchase of penny stock scrip - assessee entered into transactions in the scrip as found to be bogus scrip on the basis of search investigation - HELD THAT:- Entire investments were recorded in assessee’s books of accounts. The assessee bought and sold the shares through a recognised stock exchange, where the assessee had no control. The payments have been made through banking channels. No independent inquiry was conducted by AO. It is further noticed that the assessee filed first information report in the DB police station, Mumbai in respect of the fraudulent transactions entered into by assessee’s broker without assessee’s knowledge. AO has ignored all these material facts. Learned assessing officer thus failed to bring out any evidence to show that the purchase cost was incurred by the assessee outside regular books of accounts. CIT(A) has thus rightly deleted the aforesaid amount. The aforesaid point is accordingly determined in negative against the appellant revenue and in favour of the respondent assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether additions under Section 69C of the Income-Tax Act (unexplained expenditure) are sustainable in respect of purchase cost and related commission of shares in a penny stock found to be a bogus scrip on the basis of a third-party search/investigation? 2. Whether the existence of transaction records (books of account, contract notes, trade confirmations), bank payments and contemporaneous criminal complaints/FIRs filed by the taxpayer preclude treating the transaction amounts as unexplained expenditure under Section 69C? 3. Whether, in the absence of independent inquiry or evidence that expenditure was incurred outside regular books of account, additions under Section 69C can appropriately be sustained merely on the basis of a search in a third-party case and statements recorded therein? ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sustainability of additions under Section 69C for transactions in a scrip alleged to be bogus Legal framework: Section 69C permits treating expenditure as unexplained and adding it to income where the assessee is unable to satisfactorily account for money, bullion, jewellery or other valuable articles or things found to be in possession of the assessee, or where expenditure is not recorded in books of account or cannot be explained from the books. Precedent Treatment: No specific precedent was cited or applied by the Tribunal or the CIT(A) in the impugned order; the authorities applied statutory criteria and fact-based analysis. Interpretation and reasoning: The assessing officer treated the purchase cost and commission as unexplained on the basis that the scrip was found to be bogus in a search of another group and on statements of a third-party operative admitting rigging/ accommodation entries. The Tribunal examined whether such findings, when applied to the assessee, satisfied the requirements of Section 69C. The Tribunal noted that the transactions were recorded in the assessee's books, contract notes and trade confirmations were on record, purchases and sales were executed through a recognised stock exchange, and payments were routed through banking channels. Further, the assessee had filed contemporaneous police complaints/FIRs alleging fraud by its broker well before the third-party search. The AO had not conducted any independent inquiry into the assessee's books, bank records or the broker's role, nor produced evidence that the expenditure was incurred outside regular books of account. Given these facts, the mere identification of a scrip as bogus in a separate search and statements in that search were insufficient to displace the recorded books and documentary evidence of the assessee and to attract Section 69C. Ratio vs. Obiter: Ratio - where an assessee's transactions are recorded in books of account, executed through recognised stock exchanges, supported by contract notes, bank payments and contemporaneous complaints of fraud, additions under Section 69C cannot be sustained merely on the basis of a third-party search identifying a scrip as bogus unless the assessing authority adduces independent evidence showing that the expenditure was incurred outside the books of account. Obiter - observations on the identity of persons involved in the separate search are incidental to this conclusion. Conclusion: Additions under Section 69C in respect of the purchase cost and commission relating to the penny stock were not sustainable and were correctly deleted by the appellate authority. Issue 2 - Effect of documentary evidence and contemporaneous criminal complaints on treatment under Section 69C Legal framework: The statutory onus in assessments involving unexplained expenditure requires that the assessing officer demonstrate that the expenditure is not recorded in the books of account or cannot be satisfactorily explained. Documentary and banking evidence showing entries in books and bank transactions bears on the satisfaction of this onus. Precedent Treatment: The decision applies these statutory principles to the facts; no case law was invoked to distinguish or follow. Interpretation and reasoning: The Tribunal emphasized that the assessee produced books of account, contract notes and trade confirmations and that payments were through banking channels. Importantly, the assessee had lodged police complaints reporting that it was defrauded by broker entities, with the first complaint predating the external search. These facts provided an explanation for the alleged loss and supported the genuineness of the recorded transactions. The AO's failure to undertake independent verification (e.g., scrutiny of bank trails, broker records, or further enquiries) undermined the foundation for treating the amounts as unexplained. Accordingly, the presence of contemporaneous documentary evidence and police complaints created reasonable doubt about the conclusion that the expenditure was unexplained or fictitious. Ratio vs. Obiter: Ratio - documentary evidence of transactions in books, supported by bank payments and contemporaneous criminal complaints, can negate the presumption of unexplained expenditure under Section 69C unless the assessing authority produces independent and contrary evidence. Obiter - the Tribunal's reference to the timing of complaints and lack of AO inquiry is explanatory of the fact-based approach. Conclusion: The documentary evidence and police complaints warranted deletion of the Section 69C additions; the appellate authority rightly afforded the assessee the benefit of doubt. Issue 3 - Reliance on third-party search findings and statements to justify additions against affected taxpayers Legal framework: While material unearthed in searches may be relevant, the applicability of search findings to other taxpayers requires that a nexus and probative evidence be established linking the taxpayer to the illegal or unexplained activity; general or collateral findings in a third-party search do not automatically justify additions against unrelated taxpayers without corroborative inquiry. Precedent Treatment: The reasoning rests on statutory standards of proof and the requirement for independent evidence; no specific precedents were cited. Interpretation and reasoning: The Tribunal observed that the AO relied mainly on the search in the PMC Fincorp group and statements recorded therein (including admissions of rigging by a director/operator), but did not demonstrate independently that the assessee's purchase monies were not recorded or that the transactions were sham. Absent independent corroboration that the assessee's entries were fabricated or payments fabricated (for example, bank account interception, broker acknowledgements specific to the assessee, trace of funds to a benami account), the third-party search findings could not by themselves convert recorded transactions into unexplained expenditure under Section 69C. The Tribunal thus required an evidentiary link rather than mere association with a scrip implicated elsewhere. Ratio vs. Obiter: Ratio - third-party search findings and statements cannot, in isolation, sustain additions under Section 69C against a taxpayer who has recorded transactions in books and produced supporting documentary and banking evidence; the assessing authority must adduce independent evidence tying the taxpayer's transactions to the unlawful scheme. Obiter - commentary on what specific steps the AO failed to take is illustrative guidance for future inquiries. Conclusion: The Tribunal concluded that the AO's reliance on unrelated search material without independent inquiry was insufficient to sustain additions; deletions under Section 69C were upheld. Consolidated Conclusion The Court/Tribunal affirmed that, on the facts before it, additions made under Section 69C in respect of purchase cost and commission for penny-stock transactions identified in a third-party search were unsustainable where the taxpayer maintained books of account, produced contract notes, effected payments through banking channels, and filed contemporaneous police complaints alleging broker fraud, and where the assessing officer failed to produce independent evidence that expenditures were incurred outside the regular books of account; the appellate deletions were therefore confirmed.