2024 (12) TMI 1567 - AT - Income Tax

Bogus Long Term Capital Gain - rejecting the exemption u/s 10(38) - AO has taken the figure from the report given by the Investigation Wing - details furnished by the assessee would show that the assessee has claimed exemption of Long Term Capital Gain u/s. 10(38) - HELD THAT - We notice that the assessee had held the shares of M/s Nyssa Corporation Ltd for quiet long period which is not the modus Operandi adopted in generation of alleged bogus long term capital gains. The Ld.AR further submitted that the purchase and sale of shares is supported by proper evidences and bank transactions. We notice that the AO has simply placed reliance on the information received from the Investigation wing for rejecting the exemption claimed by the assessee. He has not conducted any independent enquiry with regard to the transactions carried out by the assessee. AO also did not mention as to how the search conducted in the hands of Naresh Jain Group would implicate the assessee. We find no reason for the AO/CIT(A) to disbelieve the exemption of Long Term Capital Gain claimed by the assessee. Accordingly we set aside the order passed by the CIT(A) on this issue and direct the AO to delete the impugned addition of made by the him rejecting the exemption claimed u/s.10(38) of the Act. Appeal filed by the assessee is allowed.

Summary

The core legal questions considered by the Tribunal in this appeal are:

a. Whether the re-opening of the assessment under section 148 of the Income Tax Act, 1961, was valid and justified in the facts of the case;

b. Whether the addition of Rs. 1.32 crores as Long Term Capital Gain (LTCG), treating it as bogus and rejecting the exemption claimed under section 10(38) of the Act, was legally sustainable.

Issue 1: Validity of Re-opening of Assessment

The legal framework governing re-opening of assessments is contained in section 148 of the Income Tax Act, which allows reopening if the Assessing Officer (AO) has reason to believe that income chargeable to tax has escaped assessment. Jurisprudence from the Hon'ble Bombay High Court and Supreme Court, including decisions in Hexaware Technologies Ltd. vs. ACIT, Union of India vs. Ashish Agarwal, and Union of India vs. Rajeev Bansal, provide guiding principles on the validity and procedural safeguards in re-opening assessments.

In this case, the AO re-opened the assessment based on information received from the Investigation Wing following a search and seizure operation against a group led by Shri Naresh Jain. The information indicated manipulation of prices of certain penny stocks, including shares of M/s. Nyssa Corporation Ltd., in which the assessee had declared LTCG and claimed exemption under section 10(38).

The AO issued a notice under section 148 and rejected the exemption claim, treating the gains as bogus. However, the AO did not grant the assessee time to submit documents and relied primarily on the Investigation Wing's report without conducting an independent inquiry into the assessee's transactions.

The Tribunal noted that since the addition was deleted on merits, the detailed legal contentions regarding the validity of the re-opening became academic and were left open. Thus, no final determination on this issue was made.

Issue 2: Legitimacy of Long Term Capital Gains and Claim of Exemption under Section 10(38)

The relevant legal provisions include section 10(38) of the Income Tax Act, which exempts LTCG arising from the transfer of equity shares where Securities Transaction Tax (STT) has been paid. The Investigation Wing's report alleged that the gains were bogus, generated through price manipulation of penny stocks, and thus not eligible for exemption.

The assessee's case was that the shares of M/s. Nyssa Corporation Ltd. (formerly M/s. Ravinay Trading Company Ltd.) were purchased long ago in 2003 and 2006, held for over 8 to 11 years, and sold in 2014 through the stock exchange with payment of STT, thereby qualifying for exemption under section 10(38). The shares sold off-market without STT attracted tax liability accordingly.

Evidence submitted by the assessee included purchase and sale details, shareholding history, and bank transactions supporting the genuineness of the transactions. The Tribunal observed that the holding period and mode of sale did not align with the modus operandi of generating bogus LTCG as alleged in the Investigation Wing's report.

The AO's reliance solely on the Investigation Wing's report without independent verification or inquiry into the assessee's transactions was found to be insufficient. The Tribunal emphasized that the AO did not explain how the search in Naresh Jain Group's hands implicated the assessee or how the transactions were fictitious.

Applying the law to the facts, the Tribunal concluded that the exemption under section 10(38) was rightly claimed by the assessee for LTCG arising from sale of shares on the stock exchange with STT paid. The addition of Rs. 1.32 crores as bogus LTCG was therefore unsustainable.

Competing arguments from the Revenue, based on the Investigation Wing's report and the characterization of M/s. Nyssa Corporation Ltd. as a penny stock involved in price manipulation, were rejected due to lack of direct evidence against the assessee and failure to conduct an independent inquiry.

Significant Holdings

The Tribunal held:

"We find no reason for the AO/Ld.CIT(A) to disbelieve the exemption of Long Term Capital Gain claimed by the assessee."

"The AO has simply placed reliance on the information received from the Investigation wing for rejecting the exemption claimed by the assessee. He has not conducted any independent enquiry with regard to the transactions carried out by the assessee."

"Accordingly, we set aside the order passed by the Ld.CIT(A) on this issue and direct the AO to delete the impugned addition of Rs.1.32 crores made by the him rejecting the exemption claimed u/s.10(38) of the Act."

Core principles established include the necessity for the AO to conduct an independent and fair inquiry before rejecting exemption claims based on third-party reports, especially where the assessee's transactions are supported by credible evidence and long-term holding periods inconsistent with alleged manipulative schemes.

Final determinations:

- The addition of Rs. 1.32 crores as bogus LTCG was deleted;

- The exemption under section 10(38) was upheld for the LTCG arising from sale of shares on stock exchange with STT paid;

- The validity of re-opening was not adjudicated on merits due to deletion of addition and was left open.