2025 (12) TMI 60 - AT - Income Tax

Addition under s.68 for alleged bogus SSL LTCG deleted; genuine trading, documented demat, no s.10(38) claim

ITAT Mumbai held that the addition under s.68 on account of alleged bogus LTCG from sale of SSL shares was unsustainable. It noted the assessee was a ... Bogus LTCG - Addition u/s 68 - AO thus denied the long term capital gain exemption claimed by the assessee u/s 10(38) - reliance on statement of third parties - HELD THAT:- From the statement of profit and loss account filed by the assessee, it is further noted that, the assessee is a regular trader and invested in various other securities all of which have been held as stock in the balance-sheet. Demat statement as on the date of sale of SSL is placed on record showing the sale of 5000 shares on 18/11/2015 for a price of Rs. 32,887.31/-. As when the shares were purchased by the assessee there was no requirement for dematting the same. Letter showing transfer of shares, serves as an initial proof of the entitlement of shares and has to be treated as a valid document in the hands of the assessee. Assessment order does not reveal any evidence that could lead to the conclusion that the assessee was involved directly in rigging of the share prices of SSL. There is no item of evidence against assessee’s broker and that could lead to a conclusion that the assessee was aware of the prices being rigged. Even otherwise, assessee has declared the sale proceeds as business receipts and no benefit under long-term capital gain/long term capital loss has been claimed during the year under consideration. This itself leads to the conclusion that the reopening of the assessment was though on primary suspicion, the assessment completed was without proper application of mind to the peculiar facts that existed in the present case. AO relied on the statement of third parties and did not conduct any independent investigation. The revenue could not make out a case that there is unaccounted money transaction by the assessee. The fact remains that the assessee furnished relevant evidence to prove the purchase and sale of the shares. Another relevant point that cannot be ignored is that the assessee held the shares since 1996, which further establishes the bonafide intention of the assessee. We, therefore, are unable to concur with the observations of the authorities below which do not stand the test of law. Based on the above discussions, we direct the Ld. AO to delete the addition made in the hands of the assessee. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether reassessment proceedings under Section 147, initiated on the basis of information alleging bogus Long-Term Capital Gain/Long-Term Capital Loss in respect of shares of a penny stock company, were sustainable when the assessee had not claimed any exemption under Section 10(38) and had offered the income from the said shares as business income. 1.2 Whether the addition under Section 68 read with Section 115BBE in respect of sale proceeds of shares of Safal Securities Ltd. (earlier Arrow Securities Ltd.), treated as penny stock and alleged accommodation entry, was justified on the basis of Investigation Wing report and third-party statements without independent enquiry, despite the assessee's documentary evidence of purchase, holding and sale, and without any material showing assessee's involvement in price rigging or unaccounted money. 1.3 Whether absence of a Demat statement at the time of original acquisition of shares (in a period when dematerialisation was not mandatory) was sufficient to discredit the genuineness of the shareholding when supported by contemporaneous share transfer letters and reflected as stock-in-trade in the books of account. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity and sustainability of reassessment under Section 147 based on allegation of bogus LTCG Interpretation and reasoning 2.1 The reassessment was initiated on the premise that the assessee had availed bogus Long-Term Capital Gain/Long-Term Capital Loss through dealings in shares of a penny stock company and had claimed exemption under Section 10(38). 2.2 The Tribunal noted from the computation of income and financial statements that the assessee had not earned or reported any Long-Term Capital Gain for the relevant year, nor claimed any exemption under Section 10(38); instead, the income from shares, including Safal Securities Ltd., was offered under the head 'income from business and profession' as trading in shares/stock-in-trade. 2.3 The Tribunal observed that these basic facts were not properly appreciated either by the Assessing Officer or by the appellate authority, and that the assessment was completed on a mere suspicion arising from the Investigation Wing report, without proper application of mind to the assessee's actual claim and treatment of the impugned transaction. Conclusions 2.4 The Tribunal held that, in the factual backdrop where no Long-Term Capital Gain was declared and no exemption under Section 10(38) was claimed, the very premise of reopening founded on alleged bogus Long-Term Capital Gain/Long-Term Capital Loss was factually misconceived, and the subsequent reassessment suffered from lack of due consideration of the peculiar facts of the case. Issue 2: Justification of addition under Section 68 r.w.s. 115BBE on penny stock share transactions Legal framework (as discussed) 2.5 The Tribunal referred to the requirement under Section 68 that any sum credited in the books must be explained by the assessee to the satisfaction of the Assessing Officer, failing which it may be treated as unexplained and taxed accordingly, including under Section 115BBE. Interpretation and reasoning 2.6 The assessee produced evidence that 10,000 shares of Arrow Securities Ltd. (later Safal Securities Ltd.) had been transferred in his name on 01/10/1996 by a share transfer letter, and that no further purchases of this scrip were made after 1996. The shares were consistently reflected as stock-in-trade in the balance sheet and profit and loss account. 2.7 The Tribunal found that, as on the date of sale (18/11/2015), a Demat statement was available showing sale of 5,000 shares for Rs. 32,887.31 through banking channels, with the balance 15,000 shares continuing as stock-in-trade in the books. The transactions were thus duly recorded in the assessee's accounts and routed through bank. 2.8 The Tribunal held that, in the period when the shares were originally acquired (1996), dematerialisation was not mandatory, and therefore the contemporaneous transfer letter issued by the company constituted valid primary evidence of ownership. In the absence of any finding that this document was fabricated, it could not be rejected summarily. 2.9 The Tribunal noted that the Assessing Officer merely relied on the Investigation Wing's general report that the scrip was a penny stock used for accommodation entries and on statements of third parties, without undertaking any independent investigation specifically linking the assessee to price rigging, accommodation entries, or circulation of unaccounted money. 2.10 There was no material on record to show that the assessee, or his broker, was involved in manipulation of share prices of Safal Securities Ltd., or that the sale proceeds represented the assessee's own unaccounted money brought back in the guise of share sale. 2.11 The Tribunal emphasised that the assessee's conduct in holding the shares since 1996, treating them as stock-in-trade and offering the sale proceeds as business income, supported the bona fide nature of the transaction and was inconsistent with the typical profile of penny stock accommodation entry cases. Conclusions 2.12 The Tribunal concluded that the assessee had satisfactorily explained the nature and source of the credit representing sale proceeds of shares through cogent documentary evidence, and that the Revenue had failed to rebut this evidence or to demonstrate any unaccounted money trail. 2.13 The mere fact that the scrip was later identified as a penny stock and that a general Investigation Wing report existed, without specific incriminating material against the assessee, was held insufficient to invoke Section 68 or to justify addition under Section 115BBE. 2.14 The addition made under Section 68 read with Section 115BBE, as confirmed by the appellate authority, was therefore directed to be deleted. Issue 3: Effect of absence of Demat statement at the time of original purchase and evidentiary value of share transfer letters Interpretation and reasoning 2.15 The Revenue contended that the transaction was doubtful solely because the assessee could not produce a Demat statement evidencing the original purchases. 2.16 The Tribunal held that, during the period of initial acquisition (1996), dematerialisation of shares was not mandated, and thus physical share certificates and transfer letters were the prevailing mode of evidencing title. 2.17 The Tribunal found that the share transfer letter issued by the then Arrow Securities Ltd. on 01/10/1996, reflecting transfer of 10,000 shares to the assessee with specific distinctive numbers, constituted a valid and sufficient initial proof of entitlement. This document, coupled with reflection in stock records, profit and loss account, and subsequent Demat-based sale, formed a consistent evidentiary chain. 2.18 In the absence of any adverse finding that the transfer letter was fabricated or unreliable, the Tribunal held that non-availability of a Demat statement for the year of purchase could not, by itself, discredit the genuineness of the assessee's holding and ensuing sale. Conclusions 2.19 The Tribunal rejected the Revenue's objection based solely on absence of a Demat statement for the original purchase period and accepted the share transfer documents and accounting records as valid proof of acquisition and holding, supporting the genuineness of the impugned transactions.