Genuine share transfer evidence defeats unexplained income addition and consequential penalty where banking records support the transaction.

Documentary evidence of shareholding and transfer, including share transfer deeds, ROC filings, annual returns, bonus allotment records and bank proof, established that the share sale was genuine and that the sale proceeds were not unexplained income. The ITAT Delhi therefore deleted the addition made under section 68 and section 56(2)(vii), holding the transfer consideration could not be taxed as unexplained. Because the penalty under section 271(1)(c) was founded entirely on that deleted addition, the basis for penalty ceased to exist and the penalty was also deleted. Both appeals were allowed in favour of the assessee.

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Issues: (i) Whether the addition of Rs. 1 crore made on account of sale of shares as unexplained income under section 68 and section 56(2)(vii) of the Income-tax Act, 1961 was sustainable. (ii) Whether the penalty levied under section 271(1)(c) of the Income-tax Act, 1961 survived after deletion of the quantum addition.

Issue (i): Whether the addition of Rs. 1 crore made on account of sale of shares as unexplained income under section 68 and section 56(2)(vii) of the Income-tax Act, 1961 was sustainable.

Analysis: The assessee produced share transfer deeds, ROC filings, annual returns, bonus share allotment records and bank evidence to show that the shares sold were actually held by her and were transferred for consideration through banking channels. The additional evidence admitted under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 supported continuity of shareholding and the genuineness of the share transactions. On these facts, the conclusion that the sale proceeds were unexplained or that section 56(2)(vii) applied was not justified.

Conclusion: The addition of Rs. 1 crore under section 68 and section 56(2)(vii) was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the penalty levied under section 271(1)(c) of the Income-tax Act, 1961 survived after deletion of the quantum addition.

Analysis: The penalty was founded on the addition made in the quantum proceedings. Once the underlying addition was found unsustainable and deleted, the basis for the penalty ceased to exist.

Conclusion: The penalty was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The quantum addition and the consequential penalty were both set aside, resulting in allowance of both appeals filed by the assessee.

Ratio Decidendi: Where documentary and record evidence establishes genuine shareholding and bona fide transfer of shares through banking channels, the sale consideration cannot be treated as unexplained income, and any penalty founded solely on such addition cannot survive.

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