2025 (11) TMI 1887 - AT - Income Tax

Bogus LTCG allegation under sections 69 and 115BBE fails as documented share trades accepted, revenue appeal dismissed

ITAT Ahmedabad upheld the CIT(A)'s deletion of additions made on alleged bogus LTCG from shares of Kushal Ltd. The AO had treated the capital gains as ... Bogus LTCG - AO held that the capital gains earned by the assessee were unexplained credits assessable under section 69 r.w.s.115BBE - additions were made on the ground that the transactions of sale of shares were nothing but accommodation entries and lacked genuineness - AO observed that the share price of Kushal Ltd. had risen from Rs. 2 to Rs.469 within a short span without any corresponding financial fundamentals, and concluded that the price movement was artificially manipulated - CIT(A) that no adverse inference could be drawn merely on the basis of price movement or general allegations against the scrip when the assessee had discharged her onus by furnishing cogent documentation, thus deleted addition HELD THAT:- We find no infirmity in the conclusion drawn by the CIT(A) that the AO proceeded merely on presumptions drawn from third-party investigations without making any enquiry or verification specific to the assessee’s case. The explanation of the assessee that her sale prices (ranging from Rs. 71.40 to Rs. 112.86) were much lower than the peak price of Rs. 611 per share was not controverted by the AO and negates the theory of a pre-mediated accommodation exit. Thus, considering the documentary evidence on record and the settled legal position that suspicion cannot replace proof, we are in agreement with the findings of the learned CIT(A) that the long-term capital gain earned by the assessee was genuine and cannot be brought to tax under section 69. The Revenue’s appeal, bereft of any fresh material or cogent reasoning, merits no interference. Decided against revenue. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether long-term capital gains arising from sale of shares of Kushal Tradelink Ltd., supported by regular exchange, demat and banking records, could be treated as unexplained income assessable under section 69 of the Income-tax Act on the basis of an Investigation Wing report alleging accommodation entries and price rigging. 1.2 Whether, in the absence of assessee-specific incriminating material or opportunity of cross-examination of persons relied upon in the Investigation Wing material, the additions based solely on generalized suspicion regarding 'penny stock' rigging and abnormal price rise were sustainable in law. 1.3 Whether the appellate authority was justified in deleting the additions made under section 69 by holding that the assessee had discharged the primary onus and that suspicion could not substitute proof in taxing long-term capital gains. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation of LTCG on Kushal Tradelink Ltd. shares as unexplained income under section 69 Legal framework (as discussed) 2.1 The Assessing Officer invoked section 69 read with section 115BBE to treat the declared long-term capital gains from sale of shares as unexplained credits on the premise that the transactions represented accommodation entries arising from alleged penny stock price manipulation. Interpretation and reasoning 2.2 The Tribunal noted that the additions related to sale of Kushal Tradelink Ltd. shares which the Assessing Officer treated as bogus solely on the basis of an Investigation Wing report and generalized allegations of price rigging in the scrip. 2.3 The Tribunal endorsed the CIT(A)'s appreciation that the assessee had furnished complete primary evidences: contract notes for purchase and sale, demat statements showing credit and debit of shares, NSDL transaction statement, broker's ledger, and bank statements evidencing payment on purchase and receipt of sale proceeds; all transactions were routed through a recognized stock exchange and a SEBI-registered broker with STT paid, and the shares were held in demat for over two years prior to sale. 2.4 The Tribunal observed that the Assessing Officer did not dispute the genuineness of these documents, did not find any defect therein, and did not bring on record any money trail, cash movement or direct material indicating that unaccounted funds of the assessee were laundered as long-term capital gains. 2.5 The Tribunal concurred with the CIT(A) that Kushal Tradelink Ltd. could not be treated as a mere 'penny stock' on record, noting its status as a listed, dividend-paying, profit-making company with substantial turnover and net profit, bonus issue history, foreign subsidiaries and significant market capitalization, and that the price movement did not follow the typical bell-curve pattern often relied upon to infer rigging. 2.6 The Tribunal further agreed that the assessee's sale prices, ranging between Rs. 71.40 and Rs. 112.86 per share, were significantly below the peak price of Rs. 611, which militated against the allegation of a pre-arranged accommodation exit at artificially rigged prices. Conclusions 2.7 The Tribunal held that, in the face of uncontroverted documentary evidence establishing regular, demat and banking-channel share transactions, and in the absence of any cogent contrary material linking the assessee to any accommodation entry provider or price rigging, the long-term capital gains could not be recharacterised as unexplained income under section 69. 2.8 The additions made by the Assessing Officer under section 69 for both assessment years were therefore unsustainable in law. Issue 2: Reliance on Investigation Wing report, absence of assessee-specific evidence, and denial of cross-examination Legal framework (as discussed) 2.9 The Tribunal, following the reasoning of the CIT(A), referred to settled principles that: (i) additions cannot rest solely on general investigation reports or third-party statements without assessee-specific nexus; and (ii) denial of cross-examination of persons whose statements are relied upon infringes principles of natural justice and vitiates such reliance. Interpretation and reasoning 2.10 The Tribunal recorded that the Assessing Officer based the additions primarily on the Investigation Wing report alleging large-scale accommodation entries and artificial LTCG generation in Kushal Tradelink Ltd., without bringing on record any tangible material directly implicating the assessee. 2.11 It was noted that no enquiry was made from the assessee's broker, no verification was undertaken with the stock exchange, and no document or statement establishing a live link between the assessee and any alleged operator or entry provider was produced. 2.12 The Tribunal agreed with the CIT(A) that the Assessing Officer did not allow cross-examination of the person(s) whose statements or information underlay the Investigation Wing report, despite those materials being used to draw adverse inference against the assessee, thereby violating the principles of natural justice. 2.13 The Tribunal accepted the CIT(A)'s reliance on precedents holding that generalized reports and untested statements cannot, without corroboration and cross-examination, be the sole basis for treating documented share transactions as sham, especially when no specific defect is found in the assessee's evidences. Conclusions 2.14 The Tribunal concluded that the Assessing Officer's action, based only on presumptions from an Investigation Wing report and unsupported suspicion about abnormal price rise, without assessee-specific incriminating material or opportunity for cross-examination, could not legally sustain the impugned additions. Issue 3: Onus of proof, role of suspicion, and propriety of the appellate deletion of additions Interpretation and reasoning 2.15 The Tribunal accepted the CIT(A)'s finding that the assessee had discharged the initial onus by producing full documentary trail of the share transactions, thereby shifting the burden to the Revenue to rebut such evidence with credible material; the Revenue failed to do so. 2.16 It was emphasized that mere abnormal or steep rise in share price, or the general reputation of a scrip, cannot by itself justify discarding otherwise genuine, fully documented transactions, in the absence of evidence that the assessee colluded in manipulation or introduced unaccounted money. 2.17 The Tribunal endorsed the settled proposition, relied upon by the CIT(A), that suspicion, however strong, cannot replace proof, and that adverse conclusions must rest on demonstrable material rather than conjectures and generalized modus operandi narratives. Conclusions 2.18 The Tribunal found no infirmity in the CIT(A)'s order deleting the additions, holding that the appellate authority had correctly applied the law on burden of proof, evaluation of evidence, and natural justice. 2.19 Consequently, the Tribunal upheld the deletion of the additions made under section 69 for both assessment years and dismissed the Revenue's appeals in entirety.