2025 (6) TMI 1385 - AT - Income Tax

Addition u/s. 68 - Bogus sale of shares - disallowing the claim of exemption u/s. 10(38) in respect of long term capital gains on sale of shares - HELD THAT - Apart from the fact that the shares were purchased and sold only on electronic platform of Bombay Stock Exchange through registered stock broker from SEBI after paying STT it has been brought on record by the Ld. Counsel that husband of the assessee was a regular trader and investor in shares and assessee had also made investments in several other shares. Thus assessee was also a regular investor in shares. General Manager Investigation Department of SEBI vide report have submitted the report of the Investigation Wing and also to the ACIT Central Circle -4(4) Mumbai that the investigation of SEBI did not find violation of provisions of the SEBI Act 1992 and SEBI (PFUTP) Regulations. Along with the letter there is a confidential report given to Pr.DIT (Investigation) Kolkata which had sought for the information regarding the alleged manipulation in market price of shares of certain companies including M/s. Splash Media Infra Ltd. The SEBI in his report has analysed the volume and price of the trading of the M/s. Splash Media Infra Ltd. for various patch starting from 15.09.2009 onwards. In their exhaustive report they categorically stated that there was no manipulation pattern observed in the trading of M/s. Splash Media Infra Ltd. and therefore no adverse inference is drawn. The report deals with all the buyers and the sellers of the scrip in the Stock Exchange in various periods and after detailed examination and inquiry in the report it is categorically stated that in none of the period there was no specific instance or manipulative pattern which can show that price was rigged or scrip was manipulated to provide any accommodation entry. Thus it was reported that there was no manipulation and no adverse has been drawn. Since it is an exhaustive report therefore the contents of the same cannot be reproduced. This SEBI report itself clarifies the doubts of the ld. AO and also Director Investigation Wing Kolkata who had specifically referred this matter that it should be further investigated by the SEBI. SEBI did not find any manipulation in the prices or that the prices were rigged by some entities either by the buyers or by the sellers and no adverse inference have been drawn even with regard to the exit providers. Thus the SEBI report itself absolves the case of the assessee. Accordingly in view of the documents submitted by the assessee as well as the report of the SEBI specifically with regard to the M/s. Splash Media Infra Ltd. the transaction of purchase and sale of shares online through Bombay Stock Exchange cannot be held to be bogus or non-genuine and accordingly addition made u/s. 68 of the Act is deleted - Consequentially the adhoc commission made @3% is also deleted - Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

• Whether the addition of Rs. 1,00,99,878/- made under Section 68 of the Income Tax Act, 1961 on account of alleged bogus long-term capital gains from sale of shares is justified.
• Whether the claim of exemption under Section 10(38) of the Act in respect of long-term capital gains on sale of shares is rightly disallowed.
• Whether the transactions of purchase and sale of shares of M/s. Splash Media & Infra Ltd. (later renamed Luharuka Media & Infra Ltd.) were genuine, considering allegations of manipulation and bogus entries.
• Whether the addition of commission @3% under Section 69C of the Act on account of alleged arrangement of bogus long-term capital gains is sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legitimacy of Addition under Section 68 on Alleged Bogus Long-Term Capital Gains

Legal Framework and Precedents: Section 68 of the Income Tax Act empowers the Assessing Officer (AO) to treat unexplained cash credits or unexplained investments as income if the assessee fails to satisfactorily explain the nature and source of such credits. The burden lies on the assessee to prove the genuineness of the transactions. The exemption under Section 10(38) applies to long-term capital gains arising from transfer of equity shares where Securities Transaction Tax (STT) has been paid.

Court's Interpretation and Reasoning: The AO relied heavily on the investigation report of the Principal Director of Income Tax (Investigation), Kolkata, which alleged that the sale of shares was part of a scheme involving bogus capital gains on penny stocks. The AO observed that the market price of the shares rose from Rs. 3.26 in August 2009 to Rs. 72 in September 2010, a nearly 22-fold increase, followed by a steep decline, suggesting price manipulation. The AO also noted the company's financials indicating it was a penny stock with limited turnover and reserves. Based on these findings and the failure to serve notices under Section 133(6) to exit providers, the AO concluded the entire sale consideration was bogus and added the amount under Section 68. Further, commission @3% was added under Section 69C for arranging the bogus gains.

Key Evidence and Findings: The assessee had purchased shares through a registered SEBI broker on the Bombay Stock Exchange (BSE) electronic platform, paid consideration by account payee cheque, and shares were credited to her demat account. The sale was also through the BSE platform with STT paid. The assessee's husband was a regular trader and investor, and the assessee had investments in other shares, indicating familiarity with the securities market. Crucially, the Securities and Exchange Board of India (SEBI) conducted an exhaustive investigation into the scrip of M/s. Splash Media & Infra Ltd. and reported no violation of SEBI Act or PFUTP Regulations, no manipulation or rigging of prices, and no adverse inference against buyers or sellers, including exit providers.

Application of Law to Facts: The Tribunal noted that the AO's primary basis for addition was the investigation report alleging manipulation, which was expressly negated by the SEBI's detailed investigation and report. Since the shares were transacted on the recognized stock exchange through registered brokers with STT paid, the transactions prima facie appeared genuine. The SEBI report, being an authoritative regulatory finding, effectively discredited the AO's suspicion of bogus entries or price rigging. The assessee's explanation was supported by documentary evidence of payment and demat account credits.

Treatment of Competing Arguments: The Revenue relied on the investigation report and the unusual price movement of the shares. The assessee countered by producing the SEBI report, demonstrating absence of manipulation, and evidence of genuine trading on the stock exchange. The Tribunal gave significant weight to the SEBI findings, which are critical in securities market matters, and found the Revenue's reliance on the investigation report insufficient to sustain the addition.

Conclusion: The addition of Rs. 1,00,99,878/- under Section 68 on account of alleged bogus long-term capital gains was not justified and was deleted.

Issue 2: Disallowance of Exemption under Section 10(38) on Long-Term Capital Gains

Legal Framework and Precedents: Section 10(38) exempts long-term capital gains arising from transfer of equity shares where STT is paid. The exemption is contingent on the genuineness of the transaction and compliance with statutory requirements.

Court's Interpretation and Reasoning: Since the Tribunal held the transactions to be genuine and not bogus, the basis for disallowing exemption under Section 10(38) fell away. The assessee had paid STT on the sales, and the shares were held for the requisite period qualifying as long-term capital assets.

Application of Law to Facts: The shares were transacted on the BSE platform with STT paid, and the holding period was sufficient to qualify as long-term capital assets. The genuineness of transactions was affirmed by the SEBI report and documentary evidence.

Conclusion: The disallowance of exemption under Section 10(38) was not sustainable and was effectively reversed by allowing the genuineness of the transactions.

Issue 3: Addition of Commission @3% under Section 69C

Legal Framework and Precedents: Section 69C permits addition of unexplained expenditure incurred in making investments or in connection with any expenditure, if the assessee fails to explain the source or nature of such expenditure.

Court's Interpretation and Reasoning: The commission @3% was added on the premise that the assessee might have paid commission to arrange bogus long-term capital gains. However, since the Tribunal concluded that the long-term capital gains were not bogus and the transactions were genuine, the premise for this addition failed.

Conclusion: The addition of commission under Section 69C was deleted consequentially.

3. SIGNIFICANT HOLDINGS

The Tribunal held that:

"Since the SEBI report itself absolves the case of the assessee by categorically stating that there was no manipulation and no adverse inference has been drawn even with regard to the exit providers, the transaction of purchase and sale of shares online through Bombay Stock Exchange cannot be held to be bogus or non-genuine."

"Accordingly, addition of Rs.1,00,99,878/- made u/s. 68 of the Act is deleted. Consequentially, the adhoc commission made @3% is also deleted."

Core principles established include the primacy of regulatory findings by SEBI in assessing genuineness of securities transactions, and that mere suspicion or price volatility without corroborative evidence of manipulation is insufficient to treat transactions as bogus under Section 68. The Tribunal emphasized that transactions executed through recognized stock exchanges with payment through banking channels and demat credit are presumed genuine unless disproved by credible evidence.

Final determinations on each issue were in favor of the assessee, allowing the appeal, deleting the addition under Section 68, reinstating exemption under Section 10(38), and deleting the Section 69C addition.