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2025 (6) TMI 1768 - AT - Income TaxDisallowance on account of bogus penny stock - AO received information from DDIT (Investigation) Calcutta that M/s. Jai Maa Kali Enterprise (Proprietor Shri Mukesh Kumar Gupta) later transferred to Mr. Ashok Kumar Kayan a share broker and accommodation entry provider indulged in suspicious transactions relating to cash deposits and assessee was one of the beneficiaries who had taken accommodation entries - HELD THAT - We are of the considered view that in each and every case it is not possible / viable to give opportunity of cross-examination. In the instant case the additions have not been made solely on the basis of statement of Mr. Ashok Kumar Kayan but also on account of various discrepancies noted by the Assessing Officer in the assessee s set of facts. Assessee was not a regular investor in shares the company whose shares the assessee sold i.e. M/s. Vindus Holding Ltd. did not have any sound financials so as to justify making investment in the shares of such company there is no justifiable reason as to why such a company with weak financials could make such astronomical gains and that too within a short duration of time AO also noted that the other family members of the assessee s family has also engaged in obtaining similar bogus LTCG the shares were purchased through off market transactions and the same were dematerialized only shortly before such sale of shares. Therefore all the facts point out that the assessee had obtained bogus LTCG for the purpose of introducing his unaccounted cash in the garb of LTCG on which exemption was claimed by the assessee. In the case of Sumati Dayal 1995 (3) TMI 3 - SUPREME COURT has held that the genuineness of transactions could validly be tested on the grounds or principle of preponderance of human probabilities. The Court have held that documentary evidences are not by themselves to conclusive and the truth of the matter or the documents could be determined on the basis of or on the anvil of the surrounding facts and circumstances of the case. As noted that in the instant case assessee submitted before us that the company M/s. Neopolymers Pvt. Ltd. in which the assessee had initially purchased the shares in the month of October 2009 had amalgamated into M/s. Vindus Holdings Ltd. which issued shares certificate to the assessee (for allotting 18750 shares) on 19.11.2010. However on perusal of the stock holding statement of the assessee it is seen that the shares of M/s. Vindus Holdings Ltd. were credited / appearing in the account of the assessee on 15.02.2010 itself whereas as per the assessee s own statement such shares were allotted to the assessee vide share certificate dated 19.11.2010. Therefore it is quite unusual that shares of M/s. Vindus Holdings Ltd. had been allotted to the assessee on a date much prior to the date on which share certificate was issued by M/s. Vindus Holdings Ltd. to the assessee. All these facts further establish that the assessee has clearly engaged in fictitious / bogus transaction to obtain bogus LTCG. Accordingly looking into the facts of the assessee s case we hold that there is no infirmity in the order of Ld. CIT(A) so as to call for any interference.
1. ISSUES PRESENTED and CONSIDERED
The Tribunal considered two core legal issues in this appeal: (a) Whether the addition of Rs. 55,52,890/- on account of alleged bogus Long Term Capital Gains (LTCG) exemption under Section 10(38) of the Income Tax Act, 1961, was justified; (b) Whether the addition of Rs. 32,70,000/- as unexplained cash credit under Section 68 of the Income Tax Act, 1961, was warranted. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Legitimacy of LTCG Exemption and Allegation of Bogus Penny Stock Transactions Relevant Legal Framework and Precedents: The exemption under Section 10(38) exempts LTCG arising from transfer of equity shares on which Securities Transaction Tax (STT) is paid. However, the genuineness of transactions can be examined under the principle laid down in Sumati Dayal vs. CIT (214 ITR 801), where the Supreme Court held that the truth of transactions can be tested on the anvil of human probabilities and surrounding facts and circumstances, not merely on documentary evidence. Court's Interpretation and Reasoning: The Assessing Officer (AO) initiated proceedings based on information from the Directorate of Income Tax Investigation (DDIT), Kolkata, which revealed suspicious transactions involving cash deposits routed through a share broker known for providing accommodation entries for bogus LTCG/STCL. The assessee was identified as a beneficiary of such accommodation entries amounting to approximately Rs. 59 lakhs. The AO noted that the assessee purchased shares of M/s. Neo Polymers (later Vindus Holdings) through off-market transactions, with initial part payment in cash and balance by cheque after a significant delay. The shares were dematerialized shortly before sale, and the company's financials were unsound, making the large gains suspicious. Further, the assessee was not a regular trader in shares, and family members were also engaged in similar transactions. The shares were acquired through preferential allotment, bonus shares were granted, and face value was split to reduce share price, all indicating manipulation to generate bogus LTCG. The AO concluded that these facts indicated the assessee had introduced unaccounted cash disguised as exempt LTCG. The addition of Rs. 55,52,890/- was made accordingly. The Commissioner of Income Tax (Appeals) upheld this addition, relying on the investigation report, SEBI findings, and the modus operandi of the scheme involving penny stock companies. The CIT(A) observed that the shares were acquired at low prices through entities controlled by promoters or operators, and sold at inflated prices after a lock-in period, enabling routing of unaccounted money as exempt LTCG. The CIT(A) also rejected the assessee's claim of cross-examination opportunity of the broker whose statement implicated the assessee, holding that such opportunity is not viable in every case and that the addition was not solely based on the broker's statement but on multiple discrepancies. Key Evidence and Findings:
Application of Law to Facts: The Tribunal applied the principle from Sumati Dayal, emphasizing that genuineness of transactions is to be tested on probabilities and surrounding circumstances. The cumulative evidence pointed to a scheme to introduce unaccounted money as exempt LTCG. The Tribunal found no infirmity in the CIT(A)'s order confirming the addition. Treatment of Competing Arguments: The assessee argued that the transactions were carried out through banking channels with proper Demat account statements and share certificates on record. The assessee also contended that cross-examination of the implicated broker was not allowed despite a specific request and that the assessee traded in other scripts as well, not exclusively in the suspicious penny stock. The Tribunal rejected these arguments, holding that cross-examination is not mandatory in every case and that the addition was based on multiple factors beyond the broker's statement. The inconsistencies in share allotment and dematerialization dates further supported the finding of bogus transactions. Conclusions: The Tribunal dismissed the appeal on this ground, confirming the addition of Rs. 55,52,890/- as bogus LTCG. Issue 2: Addition of Rs. 32,70,000/- as Unexplained Cash Credit under Section 68 Relevant Legal Framework: Section 68 of the Income Tax Act requires that unexplained cash credits be added to income if the assessee fails to satisfactorily explain the nature and source of such credits. The burden is on the assessee to prove that the cash credits represent genuine income or receipts. Court's Interpretation and Reasoning: The AO observed substantial cash deposits in the assessee's bank account during the year under consideration. The assessee claimed these deposits were from accumulated cash balances sourced from earlier bank withdrawals and opening cash on hand, supported by a cash book. However, the AO found the opening cash balance to be only Rs. 5,00,000/- and noted the assessee failed to provide documentary evidence to substantiate the claim for deposits amounting to Rs. 32,70,000/-. Consequently, the AO treated the amount as unexplained cash credit and added it to the income. The CIT(A) upheld the addition, noting that the assessee did not bring any new material or supporting evidence during appellate proceedings. The CIT(A) emphasized that the assessee, having income from other sources, failed to prove that the cash deposits were accounted money and offered to tax. The burden of proof was on the assessee, which was not discharged. Key Evidence and Findings:
Application of Law to Facts: The Tribunal noted the assessee's submissions regarding withdrawals and deposits but observed that these aspects were not verified by the AO. Given the lack of verification and supporting evidence, the Tribunal found it appropriate to restore the matter to the AO for de novo consideration, allowing the assessee to file supporting evidence to prove the source of cash deposits. Treatment of Competing Arguments: The assessee argued that the cash deposits were sourced from earlier withdrawals and opening cash balances, supported by bank statements and cash book. The AO and CIT(A) found the explanation insufficient due to lack of documentary proof and verification. The Department did not oppose restoration of the issue for fresh consideration. Conclusions: The Tribunal allowed the appeal on this ground for statistical purposes and restored the issue to the AO for de novo adjudication with liberty to the assessee to produce evidence. 3. SIGNIFICANT HOLDINGS On the issue of bogus LTCG, the Tribunal held: "In the case of Sumati Dayal vs. CIT, the Hon'ble Supreme Court has held that the genuineness of transactions could validly be tested on the grounds or principle of preponderance of human probabilities. The Court have held that documentary evidences are not by themselves conclusive and the truth of the matter or the documents could be determined on the basis of or on the anvil of the surrounding facts and circumstances of the case." The Tribunal further observed: "The assessee was not a regular investor in shares, the company whose shares the assessee sold did not have any sound financials so as to justify making investment in the shares of such company, there is no justifiable reason as to why such a company with weak financials could make such astronomical gains and that too within a short duration of time... the shares were purchased through off market transactions and the same were dematerialized only shortly before such sale of shares. Therefore, all the facts point out that the assessee had obtained bogus LTCG for the purpose of introducing his unaccounted cash in the garb of LTCG, on which exemption was claimed by the assessee." On the issue of unexplained cash credits under Section 68, the Tribunal held: "In view of the instant facts, Ground No. 2 of the assessee's appeal is hereby restored to the file of Assessing Officer for denovo consideration and liberty is granted to the assessee to file supporting evidences in support of its case and thereafter, the Assessing Officer may pass appropriate orders in accordance with law." The core principles established include the Tribunal's reliance on holistic evaluation of facts and circumstances beyond mere documentary evidence to determine genuineness of transactions, the discretionary power to condone delay in filing appeals in the interest of justice, and the procedural fairness in allowing reassessment of unexplained cash credits with opportunity to produce evidence. Final determinations:
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