2023 (4) TMI 1411 - AT - Income Tax

Bogus share transactions - shares were purchased from a broker who was penalized by SEBI for malpractices with mala fide intention - denial of LTCG - CIT(A) deleted addition - HELD THAT - The assessee has submitted all details and documentary evidences in support of purchase sales and holding of impugned shares. The AO has not found any infirmity in those documents. The shares were purchased and sold online through recognized stock exchange. The purchase price was paid through A/c payee cheques and the sale consideration was also received through A/c payee cheques. Immediately after purchase the shares were credited to assessee s demat A/c and they were held therein for a period as long as 4 years before sale. It is an undisputed fact that the assessee has sold only part of the holding and even after such sale continued to hold remaining quantity which were carried to subsequent year. The AO has not identified any iota of negativity in these factors. Regarding the penal action taken by SEBI we note that the said action was taken against Shyam through whom the assessee purchased shares in the year 2004-05. Thereafter Shyam does not have any role. As both sale and purchase are very much established/accepted. At the cost of repetition we may also add that during entire period of 4 years from purchase to sale the assessee had held the impugned shares in Demat A/c with Indusind Bank. Thus no adverse conclusion can be taken on the basis of mere imposition of penalty by SEBI on Shyam who had no role except purchase of shares in the year 2004-05. We finally conclude that the Ld. CIT(A) was very much justified in deleting the addition made by AO. We approve his action. The revenue fails in this appeal. Before parting we would like to make a specific note that there is a plethora of decisions by Hon ble courts/benches of ITAT on what is called penny stock in favour of assessee as well as revenue. But every case has its own set of facts/evidences and there cannot be a single view in all cases. The present case has its own set of facts/evidences and it cannot be used as indicating something universal applicable to every situation. Appeal of Revenue is dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issue considered was whether the addition of Rs. 2,48,02,084/- made by the Assessing Officer (AO) as income from other sources, instead of recognizing it as a long-term capital gain exempt under Section 10(38) of the Income Tax Act, 1961, was justified. The core questions included:

1. Whether the shares in question were genuinely purchased and sold, thus qualifying for exemption as a long-term capital gain.

2. Whether the involvement of a broker penalized by SEBI affected the legitimacy of the transactions.

3. Whether the CIT(A)'s reliance on precedents was appropriate given the facts of the case.

4. Whether the findings from previous assessment years could be applied to the current assessment year.

ISSUE-WISE DETAILED ANALYSIS

1. Legitimacy of Share Transactions

Relevant Legal Framework and Precedents: The Income Tax Act, 1961, specifically Section 10(38), exempts long-term capital gains from tax if certain conditions are met. The AO relied on precedents such as CIT Vs. Durga Prasad More and CIT Vs. P. Mohankala to argue against the genuineness of the transactions.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee provided comprehensive documentation, including purchase and sale bills, demat account statements, and bank statements, proving the genuineness of the transactions. The shares were held in a demat account for four years, indicating long-term holding.

Key Evidence and Findings: The Tribunal found no discrepancies in the documentation provided by the assessee. The shares were purchased and sold through recognized stock exchanges, and all transactions were conducted via account payee cheques.

Application of Law to Facts: The Tribunal applied Section 10(38) and found that the transactions met the criteria for long-term capital gains exemption.

Treatment of Competing Arguments: The Tribunal dismissed the AO's argument that the involvement of a penalized broker tainted the transactions, noting that the broker's penalty was unrelated to the specific transactions in question.

Conclusions: The Tribunal concluded that the transactions were genuine and qualified for exemption as long-term capital gains.

2. Impact of Broker's SEBI Penalty

Relevant Legal Framework and Precedents: The AO argued that the penalty imposed on the broker by SEBI indicated manipulation, relying on the SEBI order against the broker.

Court's Interpretation and Reasoning: The Tribunal found that the SEBI penalty was for a different period and did not directly relate to the transactions under review. The broker involved in the sale was not penalized.

Key Evidence and Findings: The Tribunal noted that the SEBI order did not quantify any disproportionate gains or unfair advantages from the broker's actions during the relevant period.

Application of Law to Facts: The Tribunal determined that the SEBI penalty had no bearing on the legitimacy of the transactions for the assessment year in question.

Treatment of Competing Arguments: The Tribunal rejected the AO's reliance on the SEBI penalty, emphasizing the lack of direct connection to the transactions.

Conclusions: The Tribunal concluded that the SEBI penalty did not invalidate the transactions.

3. Appropriateness of CIT(A)'s Reliance on Precedents

Relevant Legal Framework and Precedents: The CIT(A) relied on various precedents where similar transactions were deemed genuine.

Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A)'s reliance on precedents, noting that the facts of the case aligned with those in the cited judgments.

Key Evidence and Findings: The Tribunal found that the CIT(A) appropriately applied precedents to the facts of the case.

Application of Law to Facts: The Tribunal upheld the CIT(A)'s application of relevant case law.

Treatment of Competing Arguments: The Tribunal dismissed the AO's argument that the precedents were inapplicable, citing the factual similarities.

Conclusions: The Tribunal concluded that the CIT(A) correctly applied precedents.

4. Applicability of Previous Assessment Years' Findings

Relevant Legal Framework and Precedents: The AO argued that findings from previous assessment years should apply to the current year.

Court's Interpretation and Reasoning: The Tribunal noted that the previous findings were overturned by the ITAT, which had accepted the transactions as genuine.

Key Evidence and Findings: The Tribunal highlighted the ITAT's prior decision, which supported the assessee's position.

Application of Law to Facts: The Tribunal found that the previous assessment years' findings were not applicable due to the ITAT's reversal.

Treatment of Competing Arguments: The Tribunal rejected the AO's argument, emphasizing the ITAT's earlier decision.

Conclusions: The Tribunal concluded that the previous findings were not applicable to the current assessment year.

SIGNIFICANT HOLDINGS

The Tribunal upheld the CIT(A)'s decision to delete the addition made by the AO, affirming the genuineness of the long-term capital gain. It emphasized that each case must be judged on its own facts and evidence, and the presence of a penalized broker did not automatically invalidate the transactions. The Tribunal also noted that the SEBI penalty did not directly relate to the transactions in question, and the CIT(A)'s reliance on precedents was appropriate given the factual similarities. The Tribunal concluded that the AO's addition was based on conjecture and surmise, and the CIT(A) was justified in granting relief to the assessee. The appeal by the Revenue was dismissed.