2025 (5) TMI 1636 - AT - Income Tax

Addition u/s 68 - Bogus LTCG - HELD THAT - Undisputed fact of the case that the shares of M/s Gold Line Finvest International Ltd. were purchased by the assessee through a public offer and sold through Bombay Stock Exchange. Thus both the sales as well as purchase were made using public platforms. It is not a case where shares were purchased off the stock exchange by way of a private placement. Similarly the sale has also taken place on the Bombay Stock Exchange platforms leaving no scope for any artificial rigging or manipulation. It would be too far-fetched to presume any manipulation in these transactions which were happening in public scrutiny. We find force in the sufficient arguments of the CIT(A) that the ratio laid down in the case of Smt. Krishna Devi 2021 (1) TMI 1008 - DELHI HIGH COURT is squarely applicable as the facts of the present case are nearly identical as held that finding of the Ld. AO were purely an estimation based on conjectures. Appeal of the Revenue is dismissed.

Summary

The core legal question considered in this appeal is whether the addition of Rs. 1,99,42,030/- under Section 68 of the Income Tax Act, made by the Assessing Officer (AO) on account of alleged sham transactions involving shares of M/s Gold Line Finvest International Ltd., was justified or whether the deletion of this addition by the Commissioner of Income Tax (Appeals) [CIT(A)] was appropriate.

The issue arises from the AO's conclusion that the assessee's sale of shares, which yielded extraordinarily high returns (approximately 4000%), was a product of artificial price manipulation and collusive cartel activity, thereby rendering the capital gains claim invalid. The Revenue challenged the CIT(A)'s deletion of this addition, asserting that the AO's findings were correct and supported by evidence including investigations by the Directorate of Investigation and statements from local parties indicating market manipulation in penny stock companies.

Regarding the legal framework, Section 68 of the Income Tax Act deals with unexplained cash credits, and its application to share transactions requires the AO to establish that the source of funds or the transaction itself is not genuine, or is a sham, to justify additions. The AO relied on precedents from various ITAT benches and the Supreme Court to support the proposition that artificial price inflation and collusive manipulations in penny stocks can justify invoking Section 68 to deny capital gains benefits.

However, the CIT(A) and subsequently the Tribunal emphasized the fundamental fact that the shares were both purchased and sold on recognized public stock exchanges-specifically, the public issue and the Bombay Stock Exchange (BSE). This public nature of the transactions was held to significantly diminish the likelihood of manipulation or artificial rigging, as such transactions are subject to public scrutiny and regulatory oversight. The Tribunal noted that the AO's conclusion was largely based on conjecture and estimation rather than concrete, cogent evidence directly linking the assessee to any collusive activity.

The Tribunal gave considerable weight to the precedent set by the Hon'ble Delhi High Court in a case involving nearly identical facts, where the Court had overruled a similar addition under Section 68. In that case, the Court held that the AO's findings were speculative and not supported by substantive evidence, and that reliance on other decisions (such as those in Suman Poddar and Sumati Dayal) was misplaced. The Tribunal found the facts of the present case to be closely analogous to those in the Delhi High Court's decision and noted that the Revenue had failed to distinguish the current facts from that precedent.

In applying the law to the facts, the Tribunal concluded that since the shares were transacted through public platforms, the assumption of manipulation was unfounded. The Tribunal rejected the Revenue's argument that the penny stock status of the company alone sufficed to presume artificial price inflation. It held that mere suspicion or generalized allegations of market manipulation without direct evidence against the assessee could not justify additions under Section 68.

The Tribunal also addressed the competing arguments by the Revenue, which relied on investigations and statements suggesting market manipulation, and the assessee's contention that it was a bona fide investor who had legitimately purchased and sold shares on recognized exchanges. The Tribunal sided with the assessee, emphasizing the absence of any direct evidence implicating the assessee in manipulative practices and the presence of authoritative judicial precedent supporting the assessee's position.

Accordingly, the Tribunal upheld the CIT(A)'s deletion of the addition under Section 68 and dismissed the Revenue's appeal.

Significant holdings from the judgment include the following:

"It would be too far-fetched to presume any manipulation in these transactions which were happening in public scrutiny."

"The Hon'ble Delhi High Court... had held that findings of the AO were purely an estimation based on conjectures... not based upon any cogent evidences."

"The ratio laid down in the case of Smt. Krishna Devi (supra) is squarely applicable as the facts of the present case are nearly identical."

These statements underscore the principle that additions under Section 68 require concrete evidence and cannot be sustained on mere suspicion or conjecture, especially where transactions occur on recognized stock exchanges. The judgment affirms that the bona fide nature of share transactions conducted through public platforms must be presumed unless disproved by compelling evidence.

In conclusion, the Tribunal confirmed the CIT(A)'s order deleting the addition under Section 68, thereby allowing the assessee's claim of long-term capital gains on the sale of shares of M/s Gold Line Finvest International Ltd. The appeal filed by the Revenue was dismissed in its entirety.