Share gain held genuine; s.68 addition deleted as assessee proved exempt LTCG u/s10(38) with records

The ITAT Mumbai allowed the assessee's appeal and deleted the addition made under s. 68 on alleged bogus share transactions. The Tribunal held that the assessee had duly demonstrated genuine long-term capital gains exempt under s. 10(38) by furnishing contract notes, bank statements, STT payment proof, and Demat records showing purchase and sale of SAL shares through BSE, with no dispute regarding receipt of sale proceeds. Once these primary facts were established, the burden shifted to the AO, who failed to produce cogent material to prove the transactions were sham. The impugned appellate order was set aside and the addition quashed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the long term capital gains arising from sale of shares of Sunrise Asian Limited and Monarch Health Services Limited, claimed as exempt under section 10(38) of the Income-tax Act, 1961, could be treated as bogus and added as unexplained cash credit under section 68.

1.2 Whether, upon treating the aforesaid capital gains as accommodation entries, an addition towards alleged commission payment to entry providers under section 69C was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Treatment of LTCG on sale of SAL and MHSL shares as unexplained cash credit u/s 68

Legal framework (as discussed)

2.1 The Tribunal considered the applicability of sections 10(38) and 68 of the Act in the context of alleged "penny stock"/bogus long term capital gain transactions. The burden of proof under section 68 and the evidentiary value of contemporaneous documents such as contract notes, demat statements, bank statements and payment of STT were examined in light of judicial precedents.

Interpretation and reasoning

2.2 The assessee had purchased 10,000 shares of Conart Traders Ltd. through off-market purchase from Santoshima Tradelink Pvt. Ltd., which were later converted into shares of Sunrise Asian Limited pursuant to amalgamation, and also dealt in shares of Monarch Health Services Limited. The purchases were made through banking channels, the shares were held in demat account, and sales were executed through the BSE with delivery from the same demat account and payment of STT. The Assessing Officer did not dispute the receipt of sale proceeds.

2.3 The Tribunal noted that the assessee had furnished comprehensive documentary evidence, including debit note, bank statements, physical share certificates, demat statements, broker's contract notes and ledger, and return/computation documents. Upon such production, the initial onus stood discharged and the burden shifted to the Assessing Officer to produce cogent material establishing that the transactions were non-genuine.

2.4 The Tribunal held that the Assessing Officer and the first appellate authority had merely relied on general allegations regarding "penny stock" and on statements of third parties and external reports, without bringing any corroborative material to specifically connect the assessee with any price rigging, accommodation entries, or the alleged modus operandi. No link was established between the assessee and the alleged operators/entry providers.

2.5 The Tribunal distinguished the reliance placed by the first appellate authority on the decision of the Delhi High Court in the case involving the scrip Kappac Pharma Ltd., holding that it related to a different company with distinct facts and findings, and therefore was not applicable to the present scrips.

2.6 The Tribunal took note that the scrip of Sunrise Asian Limited had been examined by the Gujarat High Court and the Madhya Pradesh High Court in separate matters, where transactions were not held to be sham, and that Santoshima Leasing & Finance Pvt. Ltd. was held to have been duly amalgamated with Sunrise Asian Limited, a listed company. It also relied on co-ordinate bench decisions and the principle that transactions supported by regular documentary records could not be treated as bogus in the absence of contrary material.

2.7 Relying particularly on the judgment of the Bombay High Court in the case of Shyam R. Pawar and the principle reiterated therefrom, the Tribunal held that mere suspicion, discrepancies at the stock exchange level or general findings regarding promoters/operators, without an inquiry carried forward to connect the assessee with any such activities, are insufficient to sustain an addition under section 68. The investigation in the present case had similarly not been carried to the point of establishing any connection between the assessee and the alleged rigging or accommodation entries.

Conclusions

2.8 The Tribunal concluded that the assessee's transactions in shares of Sunrise Asian Limited and Monarch Health Services Limited were supported by proper documentary evidence and were not shown to be sham or bogus by the Revenue.

2.9 The addition of Rs. 2,41,53,979/- as unexplained cash credit under section 68, by treating the long term capital gains as bogus, was held to be unjustified and was deleted.

Issue 2 - Addition towards alleged commission payment to entry provider u/s 69C

Legal framework (as discussed)

2.10 The Tribunal examined the application of section 69C to an assumed commission expenditure, computed as a fixed percentage of the alleged bogus capital gains, purportedly paid to entry operators in accommodation entry cases.

Interpretation and reasoning

2.11 The Assessing Officer had assumed that a commission of 3-4% is normally paid for accommodation entries and, on that basis, made an addition of Rs. 9,66,159/- at 4% of the long term capital gains, treating it as unexplained expenditure under section 69C. The first appellate authority upheld this by placing reliance on another Tribunal decision where such percentage-based estimation was accepted in the context of established bogus transactions.

2.12 The Tribunal noted that the very foundation for treating the assessee's capital gains as bogus had not been established and stood rejected. In the absence of any evidence of the assessee having paid any commission, or of any specific arrangement or link with any operator or broker for providing accommodation entries, there was no factual basis for estimating commission expenditure.

2.13 The Tribunal held that a presumptive or percentage-based addition under section 69C cannot be sustained in isolation, particularly where the primary allegation of bogus capital gains has been disbelieved and where there is no independent material to show that any such expenditure was actually incurred.

Conclusions

2.14 Since the long term capital gains were accepted as genuine and exempt under section 10(38), and no evidence existed of any commission payment, the addition of Rs. 9,66,159/- under section 69C towards alleged commission to entry providers was held to be unsustainable and was deleted.

Overall Disposition

2.15 The Tribunal set aside the appellate order, quashed the total additions of Rs. 2,88,73,138/- (comprising the section 68 and section 69C additions), and allowed the assessee's appeal in full.

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