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2025 (5) TMI 1161 - AT - Income TaxDenial of LTCG claimed exempt u/s. 10(38) - addition u/s 68 - HELD THAT - Assessee does not have any history of investment in previous years and succeeding years. Despite of having opportunity to substantiate the transactions she failed to do the same for the reasons best known to her. A person first time enters into a transaction with large quantity of shares and made a huge profit in that despite the fact that never before that and after that she entered into any transaction of shares. Views of the revenue further fortified in the matter of Suman Poddar vs. Income Tax Officer 2019 (11) TMI 1237 - SC ORDER wherein seen that the Cressanda Solutions Ltd. was in fact identified by the Bombay Stock Exchange as a penny stock being used for obtaining bogus Long Term Capital Gain. No evidence of actual sale except the contract notes issued by the share broker was produced by the assessee. No question of law therefore arises in the present case and the consistent finding of fact returned against the Appellant are based on evidence on record. Appeal of the assessee is dismissed.
The core legal issues considered in this appeal are:
1. Whether the Long Term Capital Gains (LTCG) exemption under Section 10(38) of the Income Tax Act, 1961, was rightly disallowed by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) (CIT(A)) despite the assessee's claim supported by contract notes, Demat statements, and bank records evidencing genuine share transactions on recognized stock exchanges and subject to Securities Transaction Tax (STT). 2. Whether principles of natural justice were violated by denying the assessee an opportunity to cross-examine witnesses or inspect investigation reports relied upon by the AO, particularly in light of Section 250(6) of the Income Tax Act. 3. Whether the addition of Rs. 4,01,680/- as commission for alleged accommodation entries was arbitrary and unsupported by evidence, thereby violating the burden of proof requirements under Sections 37 and 69C of the Act. 4. Whether the transactions involving shares of a penny stock company, M/s. HPC Bio Sciences Ltd., were genuine investments or part of a pre-planned scheme of accommodation entries to convert unaccounted money into purportedly tax-exempt LTCG. 5. Whether the delay of 500 days in filing the appeal before the Tribunal could be condoned considering the circumstances presented. Issue-wise Detailed Analysis 1. Disallowance of LTCG Exemption under Section 10(38) The legal framework governing this issue is Section 10(38) of the Income Tax Act, which exempts LTCG arising from the transfer of equity shares on which STT has been paid. The assessee claimed exemption on gains from shares allotted through IPO of M/s. HPC Bio Sciences Ltd. and subsequent sale. The AO and CIT(A) rejected the claim on the basis that the transactions were not genuine but part of a scheme involving price rigging and circular trading of penny stocks to create bogus LTCG. The AO's reasoning was supported by findings from the Investigation Wing and SEBI reports which identified the company as a conduit for accommodation entries. The AO noted the following key facts:
The Court relied on precedents such as the Hon'ble Supreme Court judgment in the case of Suman Poddar, which held that where overwhelming evidence of accommodation entries exists, mere contract notes and bank statements are insufficient to establish genuineness. The burden lies on the assessee to prove the bona fide nature of transactions, especially when the price rise is unnatural and the company's fundamentals do not support such gains. The Court applied the test of preponderance of probabilities, considering the totality of facts including the absence of prior or subsequent share trading activity by the assessee, the nature of the company involved, and the findings of investigating agencies. The Court concluded that the LTCG claimed was bogus and rightly disallowed. 2. Alleged Violation of Natural Justice by Denial of Cross-Examination The assessee contended that reliance on third-party statements and investigation reports without allowing cross-examination violated principles of natural justice and Section 250(6) of the Act. The Court referred to authoritative rulings, including the Calcutta High Court decision in PCIT vs. Swati Bajaj, which held that mere non-furnishing of investigation reports or denial of cross-examination does not vitiate proceedings unless the assessee shows specific prejudice. The assessee was given ample opportunity to produce documents and make submissions during assessment and appellate proceedings. Since the assessee was not named in the investigation report and failed to demonstrate any prejudice or inability to defend the claim, the Court found no violation of natural justice. The Court emphasized that the burden to prove genuineness lies on the assessee, and the AO's reliance on circumstantial evidence and inferential reasoning is permissible. 3. Addition of Commission as Accommodation Entry The addition of Rs. 4,01,680/- as commission purportedly paid for arranging bogus LTCG was challenged as arbitrary and unsupported by evidence. The Court observed that the AO's addition was based on the investigation findings and corroborated by the modus operandi of accommodation entries involving multiple entities and operators. The burden to prove the expenditure lies with the Revenue, but here the addition was made on the basis of cogent circumstantial evidence and linked to the overall scheme. Precedents such as Parasmal Bhandari and Reena Kumari were cited to emphasize that unsupported presumptions cannot justify additions; however, in this case, the addition was not a mere presumption but based on a well-documented investigation and consistent findings. The Court upheld the addition as justified. 4. Genuine Investment or Accommodation Entry Scheme The Court analyzed the modus operandi of the alleged accommodation entry scheme as established by the Investigation Wing, SEBI, and corroborated by various judicial pronouncements. The key elements included:
The Court noted that the assessee had no history of substantial share trading before or after the transactions, indicating a pre-determined intent to generate bogus LTCG. The Court also relied on SEBI's findings and various High Court and Supreme Court decisions confirming that such transactions are colorable devices and not genuine investments. The Court emphasized that the onus to prove the genuineness of the price rise and the creditworthiness of the company lies on the assessee under Section 68, and failure to discharge this burden justifies additions. 5. Condonation of Delay in Filing Appeal The appeal was filed with a delay of 500 days. The Court examined the reasons, including the assessee's age (above 60) and claimed illness, and the failure of the counsel to file the original affidavit, only a photocopy. Despite procedural deficiencies and the substantial delay, the Court took a lenient view considering the circumstances and allowed condonation of delay subject to a cost of Rs. 10,000/- imposed on the counsel to be deposited in the Prime Minister Relief Fund. Significant Holdings "The entire scheme gets revealed after the above analysis: the huge capital gains earned by the assessee within a very short period of time by investing in a penny stock i.e. M/s. HPC BIOSCIENCES LTD. whose fundamentals had no support for the premium it commanded, was neither the result of a coincidence nor of a genuine investment activity but were created through well planned and executed scheme in which the company, the brokers and the buyers and sellers of the scrip worked in tandem to achieve the predetermined objectives." "The assessee having not proved the genuineness of the claim, the creditworthiness of the companies in which they had invested and the identity of the persons to whom the transactions were done, have to necessarily fail. In such factual scenario, the Assessing Officers as well as the Commissioner (Appeals) have adopted an inferential process which is found to be a process which would be followed by a reasonable and prudent person." "Mere mentioning that statements have not been furnished can in no manner advance the case of the assessee. If the report was available in the public domain as has been downloaded and produced by the revenue, nothing prevented the assessees who are ably defended by the Chartered Accountants and Advocates to download such reports and examine the same and thereafter put up their defense." "The evidences put forth by the Revenue regarding the entry operation fairly leads to a conclusion that the assessee is one of the beneficiaries of the accommodation entry receipts in the form of long-term capital gains. The earnings @ 491% over a period of 5 months are beyond human probability and defy business logic of any business enterprise dealing with share transactions." "The burden to prove the genuineness of the price rise which is undoubtedly alarming that to within a short span of time. The assessees cannot be heard to say that their claim has to be examined only based upon the documents produced by them namely bank details, the purchase/sell documents, the details of the D-Mat Account etc." "The Tribunal being the last fact finding authority was required to go deeper into the issue as the matter has manifested large scale scam. Thus, the orders of the Tribunal are not only perfunctory but perverse as well." The Court ultimately dismissed the appeal, confirming the disallowance of LTCG exemption, upholding the addition of commission as accommodation entry, and rejecting the claim of violation of natural justice. The condonation of delay was granted with costs, but the substantive findings against the assessee were affirmed based on comprehensive investigation, credible evidence, and settled legal principles.
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