2025 (10) TMI 1012 - AT - Income Tax

Deletion of Section 68 additions on alleged bogus LTCG and brokerage after assessee produced bank, demat, contract notes evidence

Yogeshkumar Pravinkumar Shah Versus Asstt. CIT-19 (3), Mumbai

ITAT MUMBAI (AT) allowed the appeal of the assessee, directing deletion of additions under section 68 for alleged bogus LTCG and related ... Addition of the sale proceeds of the share u/s 68 - Bogus LTCG - AO after perusing the details held the impugned transaction as non-genuine and accordingly added the entire capital gain as unexplained u/s 68 - AO added commission on the sale of alleged penny stock - It is the contention of the revenue that based on the findings of the Kolkata Investigation Directorate the impugned shares are found to be penny stock and hence the LTCG claimed as exempt by the assessee is non-genuine HELD THAT:- We notice in this regard that the assessee during the course of assessment has furnished documentary evidences with regard to purchases through banking channel, shares certificate, Demat Statements, contract note for sale, broker statement etc. It is relevant to mention here that the AO did not record any adverse finding with regard to the various documentary evidences furnished by the assessee. We notice that various findings as reasons for making the addition is that the assessee unable to substantiate the price movement in the share market, failed to prove assessee's knowledge about the company etc. We further notice that the other findings of the AO are general pertaining to the scrip of M/s Sunrise Asian Ltd. Though the AO has recorded that the assessee has traded through exit providers who did not respond to notice under section 133(6), the AO did not record any specific finding with regard to the names of the exit providers and any evidence that the assessee has transacted through the exit providers. Therefore in our view, the reasons as recorded by the AO as above cannot be considered as only reason for treating the impugned transactions as bogus in the hands of the assessee without establishing assessee's involvement in the price movement or that the assessee has transacted through the exit providers. The findings of the AO with regard to SEBI report mentions a company name M/s. Monarch Health Services Ltd and its director without recording any finding regarding the assessee's connection with the brokers / entry operator. The assessee in the present case has discharged the onus by submitting the relevant details and the AO has not recorded any adverse findings with regard to the details submitted. Though the AO has elaborated the modus operandi and the findings of investigation wing, the AO in the assessment order did not record anything that links the assessee to the exit providers or entry operators or the assessee's involvement in price rigging. It is also relevant to notice that the assessee during the year under consideration has sold other shares and from the details of investments submitted, we see merit in the submission that the assessee is a regular investor. According we are of the considered view that the ratio laid down in Lalitaben Pravin Shah [2024 (4) TMI 1239 - ITAT MUMBAI] would apply to the present assessee also and therefore we direct the AO to delete the addition made with regard to the sale of shares of Sunrise Asian Ltd and the brokerage / commission thereon. Appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether sale proceeds of shares claimed as long-term capital gains can be treated as unexplained cash credit under section 68 when the assessee has produced documentary evidence of purchase, dematerialisation and sale through stock-exchange with receipt of consideration through banking channels. 2. Whether findings in a generalized investigation report (regarding modus operandi of price-rigging in penny stocks) and statements of third-party 'operators' suffice to treat transactions of an individual assessee as non-genuine without specific material linking the assessee to price-manipulation or exit/entry operators. 3. Whether the Assessing Officer (AO) and Commissioner (CIT(A)) erred in applying investigative conclusions to an assessee when the AO recorded no adverse findings on the documentary record furnished by the assessee. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 68 where documentary evidence shows purchase, demat and sale through stock exchange and banking channels Legal framework: Section 68 permits treating amounts as unexplained cash credits if the assessee fails to satisfactorily account for the source of sums. Transactions in securities executed and evidenced through recognized stock-exchange procedures and banking channels, with STT paid and demat records, bear on whether consideration is 'unexplained'. Precedent treatment: The Tribunal relied on decisions of the jurisdictional High Court and other authorities holding that where purchases and sales are reflected in the assessee's demat account, contract notes exist, deliveries were effected, sale proceeds received through banking channels and AO finds no defect in documentary proof, capital gains cannot be treated as unexplained under section 68. Those precedents were followed. Interpretation and reasoning: The Tribunal examined the evidentiary record - purchase through banking channel, share certificates/demat statements, sale on stock-exchange platform, contract notes and receipt of sale proceeds through banking channels - and observed the AO recorded no adverse finding on these documents. Given the absence of any positive finding that the documentary trail was fabricated or defective, the Tribunal held the AO could not convert lawful sale proceeds into unexplained cash credit solely on the basis of an external investigative report concerning the scrip generally. Ratio vs. Obiter: Ratio - where documentary evidence establishes a genuine purchase-demat-sale cycle and AO records no defect in those documents, the sale consideration cannot be treated as unexplained under section 68. Obiter - general observations about STT payment and market mechanics ancillary to the primary finding. Conclusion: The Tribunal set aside the addition under section 68 and directed deletion of the sale proceeds and brokerage addition, applying the above ratio. Issue 2 - Reliance on generalized investigation reports and third-party statements without specific linking evidence Legal framework: Administrative/ investigative reports and statements of third parties may be admissible material, but their probative value depends on linkage between investigative findings and the particular taxpayer. The burden to show transactions are sham remains on the revenue once the assessee furnishes prima facie documentary proof. Precedent treatment: The Tribunal followed authorities that held an AO cannot rely solely on a generalized investigation report to impugn an individual assessee's transactions absent further enquiries, bank-account analysis or material establishing connection between the assessee and price-rigging operators. Earlier decisions criticized AOs that accepted investigative reports as primary material without independent inquiries; those decisions were applied. Interpretation and reasoning: The Tribunal reviewed the AO's reliance on the Kolkata Investigation Wing report describing a modus operandi for generating bogus LTCG through penny stocks and statements of operators who admitted to providing accommodation entries. It found that, while the report described a general modus operandi and the scrip was categorized as a penny stock, the AO did not record any specific finding linking the assessee to exit providers, entry operators or brokers alleged to have manipulated prices. The AO also did not disprove the assessee's documentary trail or conduct further enquiries into bank accounts or counterparties. Consequently, the investigative material remained generalized and insufficient to negate the evidentiary showing by the assessee. Ratio vs. Obiter: Ratio - generalized investigative findings and third-party confessions cannot be mechanically applied to treat an individual's transactions as sham without case-specific evidence connecting that individual to the manipulation; the revenue must make further enquiries where the assessee furnishes documentary proof. Obiter - discussion of the investigative modus operandi as background. Conclusion: The Tribunal refused to treat the transactions as non-genuine solely on the basis of the generalized report and third-party statements, concluding absence of specific adverse findings tying the assessee to the scheme. Issue 3 - Adequacy of AO's reasons where AO accepted purchase in earlier year but treated sale as fabricated based on improbability of price rise Legal framework: Assessment reopening and additions must rest on cogent reasons demonstrating how the particular taxpayer's transactions are suspect; improbability of price movement is a relevant factor but does not, by itself, convert documented exchange transactions into unexplained credits. Precedent treatment: The Tribunal relied on authorities that criticized AOs for treating extraordinary price appreciation as conclusive proof of sham transactions without establishing the taxpayer's involvement in manipulation, particularly when purchase was in an earlier year and documentary evidence of sale exists. Interpretation and reasoning: The AO emphasized the extraordinary percentage increase in price and invoked human probability and the investigation's finding of fabricated LTCG entries. The Tribunal noted these general conclusions, but observed the AO recorded no adverse finding about the authenticity of the assessee's documents nor any specific evidence of the assessee's knowledge of or participation in artificial price movement. The Tribunal further observed that the assessee had other bona fide trading activity and had followed stock-exchange and banking procedures, weighing in favour of genuineness. Ratio vs. Obiter: Ratio - suspicion based on price movement alone, absent targeted evidence against the taxpayer and absent defects in documentary proof, cannot sustain an addition under section 68. Obiter - remarks on human probability and market fundamentals as context. Conclusion: The AO's reasons were inadequate to uphold the addition; the Tribunal set aside the CIT(A)'s confirmation and directed deletion of the addition and the brokerage/commission estimate. Cross-references and final disposition The Tribunal expressly applied the reasoning and ratios of jurisdictional High Court and coordinate bench decisions holding that where documentary evidence of dematerialisation, exchange-based sale, contract notes and banking receipts are undisputed and no specific link to investigators' named operators is established, the addition under section 68 cannot be sustained. Consequently, the Tribunal allowed the appeal, deleted the addition of sale proceeds and the estimated commission.