Exemption for alleged bogus LTCG restored after retraction, no corroborative evidence u/ss 10(38) and 131

ITAT Pune-AT allowed the assessee's claim of exemption u/s 10(38) on alleged bogus long-term capital gains, reversing the order of CIT(A). The Tribunal noted that the assessee had retracted the statement recorded u/s 131 on the very next day, his name did not appear in any adverse statements collected by the Investigation Wing, Kolkata, and SEBI had revoked its earlier directions. In the absence of corroborative material establishing that the transactions were sham, the denial of exemption was held unjustified and the AO was directed to grant the exemption.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether long term capital gains arising from sale of shares of Mishka Finance and Trading Ltd. were genuine so as to qualify for exemption under section 10(38) of the Income-tax Act, 1961.

1.2 Whether the sale consideration of shares treated as exempt long term capital gains could be taxed as unexplained cash credits under section 68, and the related alleged commission expenditure and initial investment could be brought to tax under sections 69C and 69.

1.3 Whether reliance by the tax authorities on the assessee's survey statement, Investigation Wing reports and an interim SEBI order, in absence of specific incriminating material against the assessee, was sufficient to deny exemption under section 10(38) and sustain additions under sections 68, 69C and 69.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Genuineness of long term capital gains on shares of Mishka Finance and Trading Ltd. and eligibility for exemption under section 10(38); consequential additions under sections 68, 69C and 69

Legal framework (as discussed)

2.1 The Court examined section 10(38) concerning exemption of long term capital gains on listed equity shares where STT is paid, and the provisions of sections 68, 69C and 69 relating to unexplained cash credits, unexplained expenditure and unexplained investments.

2.2 The Court considered the SEBI interim order dated 17.04.2015 passed under sections 11(1), 11(4), 11B of the SEBI Act, 1992 and section 12A of the Securities Contracts (Regulation) Act, 1956 implicating Mishka as a manipulated "penny stock", and the subsequent SEBI final order dated 05.10.2017 revoking earlier directions against 104 entities.

2.3 The Court noted the SEBI circular SMDRP/Policy/CIT-21/99 dated 14.09.1999 banning off-market negotiated and cross deals, relied upon by the Assessing Officer to question the off-market acquisition of the shares.

Interpretation and reasoning

2.4 The Assessing Officer treated the entire long term capital gain as bogus and taxable under section 68, principally on the basis of: (i) off-market purchase of Mishka shares through a Surat broker without regular brokerage trail; (ii) extraordinary rise in share price unbacked by fundamentals; (iii) generalized findings of the Investigation Wing, Kolkata about penny stock accommodation entries, including Mishka; (iv) the interim SEBI order implicating Mishka and its promoters in price manipulation; and (v) a statement of admission by the assessee during survey, later retracted.

2.5 The Court found that the assessee had: (i) paid for purchase of shares through banking channels; (ii) held the shares in a demat account for more than 12 months; (iii) sold the shares through the stock exchange (BOLT of BSE) with STT paid; and (iv) received sale consideration through banking channels, with corresponding entries in demat and bank accounts. No specific defect was pointed out in these primary documents.

2.6 The Court noted that the Assessing Officer did not produce any material establishing that the assessee had participated in, or was connected with, the alleged price rigging, entry operators, or paper companies used as "exit providers." The Investigation Wing report was found to be generalized, describing modus operandi without linking the assessee's specific transactions to the alleged accommodation entries.

2.7 The Court attached importance to the SEBI final order dated 05.10.2017, which, after detailed investigation, recorded that there were "no adverse findings" against 104 entities named in Table No. 2 and revoked the directions earlier issued under the interim order. The appellate authorities in comparable cases had found that entities similarly placed, earning gains on Mishka shares, were exonerated in the SEBI final order.

2.8 Relying on decisions of High Courts and coordinate benches in respect of the same scrip (Mishka Finance and Trading Ltd.) and similarly structured transactions, the Court accepted the proposition that once SEBI's final order exonerates the concerned scrip and entities, and the assessee's transactions are fully supported by contract notes, demat statements and bank records, the mere fact of price rise, poor financials or generic allegations of being a "penny stock" is insufficient to treat genuine long term capital gains as bogus.

2.9 The Court further observed that since the purchase of shares in earlier year(s) had been accepted, and the sale was through the exchange with banking channel receipts, the sale proceeds could not be treated as unexplained cash credit under section 68. Once the underlying capital gain transaction is accepted as genuine, the associated estimated commission under section 69C and addition of initial investment under section 69 could not survive.

Conclusions

2.10 The Court held that the transactions of purchase and sale of Mishka Finance and Trading Ltd. shares were proved through cogent documentary evidence and were not shown to be sham or accommodation entries. The long term capital gains declared by the assessees were genuine and eligible for exemption under section 10(38).

2.11 Consequently, the additions made under section 68 treating the sale consideration as unexplained cash credits, under section 69C on account of alleged commission, and under section 69 on account of alleged unexplained initial investment, were unsustainable.

2.12 The order of the appellate authority sustaining the denial of exemption under section 10(38) and the additions under sections 68, 69C and 69 was set aside, and the Assessing Officer was directed to allow exemption under section 10(38) and delete the related additions in both appeals.

Issue 3: Evidentiary value of the survey statement and reliance on Investigation Wing and interim SEBI findings

Legal framework (as discussed)

3.1 The Court considered the evidentiary value of a statement recorded from the assessee under section 131 during survey proceedings, and the effect of a prompt retraction supported by an affidavit, in the context of assessment based on such admission.

Interpretation and reasoning

3.2 The assessee had, during a prolonged survey at the premises of a company where he was a director, admitted to having earned bogus long term capital gains through Mishka and offered additional income. The very next day he retracted the statement in writing, supported by an affidavit, alleging that the statement was made under exhaustion and pressure and reiterating that the share transactions were genuine.

3.3 The Court noted that, apart from this statement, the Assessing Officer did not produce any independent, transaction-specific evidence implicating the assessee in the alleged accommodation entry network. The assessee's name did not appear in the statements of brokers/entry operators recorded by the Investigation Wing, Kolkata, nor in any adverse list in the SEBI final order.

3.4 The Court, following judicial precedents, held that an assessment cannot rest solely on a retracted statement where the retraction is prompt and contemporaneously supported, and where documentary evidence of the transactions remains unrebutted. General Investigating Wing findings and an interim SEBI order, without specific incriminating material against the assessee and in the face of a later exonerating SEBI final order, were held inadequate to sustain additions or deny statutory exemption.

Conclusions

3.5 The assessee's retracted survey statement, unsupported by corroborative material and contradicted by documentary evidence, could not form a valid basis to reject genuine long term capital gains or to deny exemption under section 10(38).

3.6 Generalized Investigation Wing reports and an interim SEBI order, superseded by a final SEBI order exonerating the concerned entities, could not, in absence of case-specific evidence, justify treating the assessee's documented share transactions as bogus or sustaining additions under sections 68, 69C and 69.

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