2025 (6) TMI 326 - AT - Income Tax

Unexplained cash credit u/s 68 - Bogus LTCG - HELD THAT - From the perusal of details of offline purchase of the scrip it can be seen that the dematerialization of the said scrip was in January 2011. The payment was made through banking channel. The shares were held for more than one year (33 months) and sold on the floor of recognized stock exchange. It is an undisputed fact that the Security Transaction Tax (STT) was duly paid. The details of dematerialization request form letter with respect to allotment of shares shares certificate ledger of Parasnath Textile Ltd. bank statement IPO documents of the scrip in question Demat holding statement. AO has not at all pointed out as to how the assessee was involve in the manipulation of the price difference at the time of purchase as well as at the time of sale of the said scrip. The contention of the AR appears to be correct that it is a mere incidental benefit gained by the assessee due to the rise in price of said script. Therefore the AO as well as the CIT(A) was not correct in treating the same as bogus transaction u/s 68 of the Act. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are:

- Whether the Commissioner of Income Tax (Appeals) erred in law and on facts by confirming the addition of Long Term Capital Gain (LTCG) of Rs. 2,23,95,400/- as unexplained cash credit under Section 68 of the Income Tax Act, 1961, despite the assessee's claim of exemption under Section 10(38).

- Whether the assessee was denied a fair opportunity of cross-examination of a key witness (Mr. Anil Agrawal) whose statement was relied upon for making the addition.

- Whether the assessee failed to prove the nature and source of the LTCG and hence the addition under Section 68 was justified.

- Whether the reliance on precedents such as Andaman Timber Industries, Kishanchand Chellaram, and Sumti Daya by the CIT(A) was appropriate given the facts of the case.

- Whether the initiation of penalty proceedings under Section 271(1) was justified.

- Whether the submissions and evidence furnished by the assessee were properly appreciated by the authorities.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Addition of LTCG as Unexplained Cash Credit under Section 68

Legal Framework and Precedents: Section 68 of the Income Tax Act deals with unexplained cash credits. The burden lies on the assessee to satisfactorily explain the nature and source of such credits. Exemption of LTCG on sale of listed shares is provided under Section 10(38), subject to payment of Securities Transaction Tax (STT). Precedents such as Kishanchand Chellaram and Andaman Timber Industries provide guidance on the evidentiary requirements and treatment of unexplained credits.

Court's Interpretation and Reasoning: The Tribunal examined the facts that the assessee had purchased 75,000 shares of M/s Comfort Fincap Ltd. (formerly Parasnath Textile Ltd.) through off-market transactions in March 2011, paid through banking channels, and held the shares for over 33 months before selling them on the recognized stock exchange. The shares were dematerialized and STT was paid on sale. The Tribunal noted that the AO had not pointed out any direct involvement of the assessee in price manipulation or any nexus with entry providers.

Key Evidence and Findings: The assessee furnished dematerialization request forms, share allotment letters, share certificates, bank statements, ledger accounts, IPO documents, and Demat holding statements. The payment was made through banking channels, and the shares were sold on the exchange after a holding period exceeding one year.

Application of Law to Facts: Given the compliance with procedural formalities, payment through banking channels, and holding period, the Tribunal found no justification for treating the LTCG as unexplained cash credit under Section 68. The mere rise in share price and subsequent gain was considered an incidental benefit, not indicative of bogus transactions.

Treatment of Competing Arguments: The Revenue relied on SEBI investigations and the suspicious price rise of the scrip to allege accommodation entries. However, the Tribunal observed that the SEBI investigation report and statements were not furnished to the assessee, denying a fair opportunity to rebut. The Tribunal also noted that suspension of trading by SEBI occurred after the assessee's transactions and thus was not relevant to the assessment year in question.

Conclusion: The Tribunal held that the addition under Section 68 was unjustified and set aside the orders of the AO and CIT(A) on this ground.

Issue 2: Denial of Opportunity for Cross-Examination

Legal Framework: Principles of natural justice require that an assessee be given a fair opportunity to cross-examine witnesses whose statements are relied upon for making additions.

Court's Interpretation and Reasoning: The assessee contended that the CIT(A) passed the appellate order without adjudicating the ground relating to denial of cross-examination of Mr. Anil Agrawal, whose statement formed the basis of addition. The Tribunal noted this omission but did not find that the absence of cross-examination affected the outcome since the addition itself was not sustainable on merits.

Conclusion: While the issue of denial of cross-examination was raised, the Tribunal's decision to allow the appeal on substantive grounds rendered this issue moot.

Issue 3: Applicability of Judicial Precedents

Legal Framework: The assessee relied on several judicial pronouncements including Andaman Timber Industries, Kishanchand Chellaram, and Sumti Daya to argue that the facts of the present case did not warrant addition under Section 68.

Court's Interpretation and Reasoning: The Tribunal observed that the CIT(A) had relied on Sumti Daya but failed to appreciate that the facts of that case were materially different. The Tribunal found the reliance on Andaman Timber Industries and Kishanchand Chellaram more applicable, which emphasize that unexplained credits require a live nexus or direct evidence of bogus transactions, which was absent here.

Conclusion: The Tribunal held that the precedents cited by the assessee supported the claim of exemption and the non-addition of LTCG.

Issue 4: Initiation of Penalty Proceedings under Section 271(1)

Legal Framework: Penalty under Section 271(1)(c) can be imposed for concealment of income or furnishing inaccurate particulars.

Court's Interpretation and Reasoning: Since the Tribunal found that the addition of LTCG was not justified, the basis for penalty initiation also fell away. No evidence of concealment or misreporting was established.

Conclusion: The penalty proceedings were not upheld.

Issue 5: Appreciation of Submissions and Evidence by Authorities

Court's Interpretation and Reasoning: The Tribunal noted that the AO and CIT(A) failed to properly appreciate the documentary evidence furnished by the assessee, including banking transactions, dematerialization, and holding period, which negated the claim of bogus transactions.

Conclusion: The orders of the lower authorities were set aside for failure to appreciate the evidence on record.

3. SIGNIFICANT HOLDINGS

"From the perusal of details of offline purchase of the scrip of M/s Comfort Fincap Ltd., it can be seen that the dematerialization of the said scrip was in January, 2011. The payment was made through banking channel. The shares were held for more than one year (33 months) and sold on the floor of recognized stock exchange. It is an undisputed fact that the Security Transaction Tax (STT) was duly paid."

"The Assessing Officer has not at all pointed out as to how the assessee was involved in the manipulation of the price difference at the time of purchase as well as at the time of sale of the said scrip."

"Therefore, the Assessing Officer as well as the CIT(A) was not correct in treating the same as bogus transaction under Section 68 of the Act."

Core principles established include:

- Mere rise in share price and resultant capital gain, in the absence of evidence of nexus with entry providers or manipulation, cannot be treated as unexplained cash credit under Section 68.

- Compliance with procedural formalities such as payment through banking channels, dematerialization of shares, payment of STT, and holding period exceeding one year supports the claim of exemption under Section 10(38).

- Denial of opportunity for cross-examination of witnesses is a procedural lapse but may not affect the outcome if the addition itself is unsustainable on merits.

- Penalty proceedings under Section 271(1) cannot be sustained in absence of evidence of concealment or inaccurate particulars.

Final determinations:

- The addition of LTCG as unexplained cash credit under Section 68 was set aside.

- The claim of exemption under Section 10(38) was upheld.

- Penalty proceedings were quashed.

- The appeals filed by the different assessees were allowed.