2025 (5) TMI 1170 - AT - Income Tax

Addition u/s 68 - bogus LTCG - assessee has taken accommodation entries for claiming exempt income in guise of exempt LTCG - HELD THAT - AO and 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. Therefore we are inclined to allow the grounds raised by the assessee.

Summary

The core legal issues considered by the Tribunal in this appeal pertain to the validity and legality of additions made by the Assessing Officer (AO) under Section 68 of the Income-tax Act, 1961, regarding alleged bogus Long Term Capital Gains (LTCG) from sale of shares of a penny stock company. Specifically, the Tribunal examined whether the AO was justified in treating the LTCG declared as exempt under Section 10(38) as income from undisclosed sources, purportedly arising from accommodation entries, and whether the procedural and substantive requirements for initiating reassessment proceedings under Sections 147/148 and 143(3) were satisfied. Further, the Tribunal considered the sufficiency and reliability of evidence supporting the AO's conclusion of bogus transactions, the applicability of exemption under Section 10(38), and the burden of proof on the assessee to establish genuineness of transactions.

The first issue relates to the jurisdictional facts and legal prerequisites for invoking Section 68 and initiating reassessment proceedings under Sections 147/148 read with 143(3). The AO relied primarily on information from the Investigation Wing alleging that the assessee had engaged in accommodation entries involving shares of a penny stock company, Global Capital Markets Ltd., to claim bogus LTCG exempt under Section 10(38). The AO observed a substantial gain of approximately 411% within 15 months, which was not supported by the company's financial credentials, and concluded the transactions were sham. The assessee challenged the initiation of reassessment proceedings, asserting that the AO's reliance on information without independent application of mind amounted to borrowed satisfaction and jurisdictional error. The assessee also contended non-compliance with mandatory approval requirements under Section 151 and failure to provide the investigation report forming the basis of reassessment, rendering the proceedings void ab initio.

On this issue, the Tribunal emphasized the principle that jurisdictional facts must exist before a tax authority can validly exercise power to reassess income. Citing authoritative precedent, it was reiterated that absence of jurisdictional facts vitiates the proceedings. The Tribunal found that the AO had failed to establish any independent material or evidence beyond the investigation report excerpts to justify reopening the assessment. The AO's conclusions were based on suspicion and conjecture rather than cogent proof. The Tribunal noted that mere suspicion or a startling increase in share price does not satisfy the threshold of "reason to believe" required for reassessment. Consequently, the reassessment proceedings were held to lack valid jurisdictional foundation.

The second issue concerns the application of Section 68 to the alleged accommodation entries and the onus on the assessee to explain the nature and source of credited sums. Section 68 mandates that if a sum credited in the books is unexplained or the explanation is unsatisfactory, it may be treated as income. The AO treated the LTCG of Rs. 17,25,000 as unexplained cash credit, disallowing exemption under Section 10(38). The assessee submitted detailed documentary evidence including purchase and sale bills, bank statements evidencing payments through banking channels, dematerialized share account details, and broker transaction statements. The assessee argued that all statutory ingredients for invoking Section 68 were absent since the transactions were genuine, conducted through recognized stock exchanges and banking channels, and STT was duly paid.

The Tribunal analyzed the legal framework and precedents emphasizing that the burden initially lies on the assessee to explain the nature and source of credit, which once discharged, shifts the burden to the Revenue to prove the explanation unsatisfactory. The Tribunal relied on recent High Court and Tribunal decisions holding that mere suspicion arising from price volatility or the penny stock nature of shares cannot substitute for concrete evidence of bogus transactions. It was noted that the AO failed to establish any direct link between the assessee and any fraudulent scheme or entry provider. The Tribunal highlighted that the assessee's use of banking channels and dematerialized accounts, supported by documentary evidence, sufficed to discharge the initial onus under Section 68.

The Tribunal further addressed the contention that the assessee was vicariously liable for alleged fraudulent activities of third parties. It was held that absent statutory provision or direct evidence linking the assessee to such activities, no adverse inference or vicarious liability could be imposed. The Tribunal cited authoritative Supreme Court rulings affirming that suspicion or allegations against third parties cannot be imputed to the assessee without proof.

The third issue relates to the applicability of exemption under Section 10(38) on LTCG arising from sale of listed shares where Securities Transaction Tax (STT) has been paid. The AO disallowed exemption on the premise that the LTCG was bogus. The assessee contended that all conditions for exemption were met, including purchase and sale through recognized stock exchanges, payment via banking channels, and payment of STT. The Tribunal examined relevant case law affirming that when these conditions are satisfied and genuineness of transactions is established, exemption under Section 10(38) must be allowed. The Tribunal observed that the AO's reliance on the company's financials and price movement without corroborative evidence to impugn the genuineness of transactions was insufficient to deny exemption.

Regarding the treatment of competing arguments, the Tribunal critically examined the AO's reliance on investigation reports and the concept of human probabilities to conclude the existence of accommodation entries. It noted that the AO did not pursue deeper inquiry or issue effective notices to other parties involved, resulting in a deficient enquiry. The Tribunal contrasted this with the assessee's detailed documentary submissions and found the AO's approach to be based on conjecture rather than evidence. The Tribunal also considered the Revenue's reliance on precedents involving non-genuine transactions but distinguished them on facts, where in the present case the assessee had substantiated the transactions adequately.

In conclusion, the Tribunal held that the AO and the Commissioner of Income Tax (Appeals) erred in sustaining the addition. The reassessment proceedings lacked valid jurisdictional basis, the statutory ingredients for invoking Section 68 were not satisfied, and the exemption under Section 10(38) was rightly claimed by the assessee. The Tribunal underscored that suspicion and surmise cannot replace evidence and proof in tax proceedings. The appeal was allowed, and the addition was quashed.

Significant holdings of the Tribunal include the following verbatim excerpts encapsulating crucial legal reasoning:

"The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking fictitious LTCG in a pre-planned manner, is therefore entirely unsupported by any material on record. This finding is thus purely an assumption based on conjecture made by the AO."

"Mere suspicion or a startling spike in share price cannot be the basis for disallowance of exemption or additions under Section 68 without cogent material."

"The statutory ingredients for making the impugned addition under Section 68 stand unsatisfied as the source of funds stands explained and the quantum of sale of shares having been done through banking channels makes the addition non-est and untenable."

"There can be no imposition of vicarious liability on the assessee for allegations against third parties unless expressly provided under law."

Core principles established include the necessity of jurisdictional facts for reassessment, the burden of proof framework under Section 68, the inadmissibility of suspicion or conjecture in tax assessments, and the protection of bona fide investors who transact through recognized channels and comply with statutory requirements for exemption under Section 10(38).

Final determinations on the issues are as follows: The reassessment proceedings under Sections 147/148 and 143(3) were invalid due to lack of jurisdictional facts; the addition under Section 68 was unsustainable as the assessee satisfactorily explained the nature and source of the credited amount; the exemption under Section 10(38) rightly applied to the LTCG; and no vicarious liability or adverse inference could be drawn against the assessee based on unsubstantiated allegations against third parties. Accordingly, the appeal was allowed, and the additions were quashed.