2026 (3) TMI 950 - AT - Income Tax

Long Term Capital Gains accepted where demat, banking and trading records negate linkage to manipulation or accommodation entries.

The note addresses whether claimed long term capital gains exempt under Section 10(38) from share sales were genuine or sham accommodation entries ... Bogus LTCG - Genuineness of long-term capital gains from penny-stock transactions - onus of proof u/s 68 and reliance on investigation reports - applying the test of human probabilities Validity of disallowance of claimed exemption under section 10(38) by treating the LTCG as unexplained income under section 69A and addition of commission under section 69C - HELD THAT: - The Tribunal found that, on the facts of this case, the Revenue did not produce material linking the assessee to price-rigging, entry operators or other dubious transactions; SEBI's proceedings and investigation reports identified suspect scripts and entities but did not name the assessee as involved. The Tribunal noted that the AO proceeded largely on the basis of suspicion and application of human probabilities without independent corroborative evidence against the assessee, and that a coordinate bench decision on the same scrip had decided in favour of the assessee. Assessing Officer and Ld. CIT(A) has applied the concept of Human probabilities and held the above said scrip to be a penny stock without bring on record how the assessee is involved in any of the scrupulous activities or directly linked to one of the person who has involved in manipulation/rigging of share prices, entry operator or exit provider as observed in the case of Ziauddin A Siddique [2022 (3) TMI 1437 - BOMBAY HIGH COURT] - Therefore, there is no material with the tax authorities to substantiate their findings that the impugned transaction is non-genuine. [Paras 13, 14] The addition of the claimed long-term capital gain and the related commission is not sustained for want of material linking the assessee to the alleged fraudulent transactions; the assessee's grounds are allowed. Onus of proof u/s 68 and reliance on investigation reports - Whether reliance on general investigation reports and SEBI orders, without specific material against the assessee, sufficed to shift the onus and permit treating claimed LTCG as unexplained income - HELD THAT: - The Tribunal held that while investigation reports and SEBI findings identifying a modus operandi for bogus LTCG are relevant, they do not automatically establish that every investor in the implicated scrips is a beneficiary of accommodation entries. The Tribunal emphasised that the Revenue must bring material linking the particular assessee to the tainted scheme; absent such linkage, mere suspicion or application of human probabilities cannot supplant evidentiary proof. On the facts, the AO did not produce cogent material against the assessee and did not carry out independent enquiries sufficient to discharge the burden of establishing non-genuineness, so the onus remained unmet. [Paras 13] Reliance on general investigation reports and SEBI orders, without specific corroborative material against the assessee, was insufficient to sustain the additions; the assessee successfully discharged the onus on the facts of this case. Final Conclusion: The Tribunal allowed the appeal, holding that the Revenue failed to produce material linking the assessee to the alleged fraudulent penny-stock scheme and therefore the additions treating the exempted LTCG as unexplained income (and related commission) cannot be sustained; the assessee's claim of exemption is accepted for the Assessment Year 2015-16. Issues: (i) Whether the long term capital gains claimed as exempt under section 10(38) arising from sale of shares of HPC Biosciences Ltd. were genuine or were bogus accommodation entries so as to justify additions under Sections 69A and 69C of the Income-tax Act, 1961.Analysis: The Tribunal examined the evidence relied upon by the Assessing Officer and Commissioner (Appeals) including SEBI and Directorate of Investigation material, contract notes, bank and demat records, the application of the test of human probabilities and numerous judicial precedents on penny-stock transactions and accommodation entries. The Tribunal analysed whether the Revenue had produced material linking the assessee specifically to price manipulation, entry operators or exit providers and whether the assessee had failed to discharge the onus cast upon him in respect of the claimed LTCG. The Tribunal also considered coordinate-bench decisions and High Court rulings which emphasise that reliance on investigation reports must be supported by cogent material connecting the taxpayer to the fraudulent scheme, and that where transactions are through banking channels, demat accounts and screen trading with supporting documents, mere suspicion or steep gains alone do not justify treating LTCG as unexplained income.Conclusion: The Tribunal concluded that on the facts and evidence in the present case the Revenue did not bring sufficient material to link the assessee to manipulative or entry-provider activities and that the assessee had established the transactions through demat and banking channels; accordingly the additions under Sections 69A and 69C were not sustainable and the exemption under Section 10(38) is to be accepted.