2025 (7) TMI 757 - AT - Income Tax

Unexplained income taxable u/s 68 - DDIT(Inv) Mumbai has taken note that the said scrip is a bogus scrip so the entire transaction made by the assessee itself is a bogus transaction - HELD THAT - The assessee in support of the genuineness of the transaction submitted all relevant documents including contract notes broker s ledger confirmation demat account statements showing delivery of shares and proof of transactions undertaken through banking channels. There is no material on record to indicate that the said scrip was ever suspended by the Stock Exchange. It is pertinent to note that the Ld. AO neither rejected any of the documentary evidence furnished by the assessee nor raised any doubt regarding their authenticity. The assessee has earned a short-term capital gain which has been duly disclosed in the return of income. As no independent inquiry or verification has been conducted by the Ld. AO during the assessment proceedings. The addition has been made solely on the basis of the report of the DGIT (Investigation) Mumbai without corroborative evidence specific to the assessee. Assessee appeal allowed.

Summary

The core legal questions considered by the Tribunal in this appeal pertain to the validity and correctness of additions made under sections 68 and 69C of the Income-tax Act, 1961, arising from transactions in alleged bogus penny stocks. Specifically, the issues examined include:

1. Whether the addition of Rs. 59,36,000/- as unexplained income under section 68 was justified on the facts and in law.

2. Whether the addition of Rs. 1,18,720/- as unexplained expenditure under section 69C was sustainable.

3. Whether the Assessing Officer's reliance on investigation reports and statements from third parties, including syndicate members involved in stock manipulation, was sufficient to form a reason to believe for reopening assessment under section 147.

4. Whether the transactions in the penny stock of M/s VMS Industries Limited were genuine and executed through proper stock exchange channels, or part of a colorable device to generate bogus capital gains/losses.

5. Whether the CIT(A) erred in deleting additions without adequately considering direct and circumstantial evidence of market manipulation and accommodation entries.

6. The applicability of judicial precedents regarding the burden of proof, reason to believe versus reason to suspect, and the requirement of cogent material to reopen assessments.

Issue-wise Detailed Analysis

1. Validity of Addition under Section 68 (Unexplained Cash Credit)

The legal framework requires that unexplained cash credits be added to income unless the assessee satisfactorily explains their nature and source. The Assessing Officer relied on a report from the Directorate of Income Tax (Investigation), which implicated the assessee in transactions involving manipulated penny stocks, specifically M/s VMS Industries Limited. The AO treated the entire sale consideration of Rs. 59,36,000/- as unexplained income under section 68.

The CIT(A) and Tribunal referred to Supreme Court precedents emphasizing that "reason to believe" must be based on reasonable grounds and not mere suspicion or conjecture. The Tribunal cited the Supreme Court ruling that re-assessment cannot be initiated on borrowed satisfaction or mere information from another agency without independent application of mind by the AO.

The assessee submitted extensive documentary evidence including contract notes, broker ledger confirmations, demat account statements, and proof of banking transactions. The Tribunal noted that the AO did not reject or discredit this evidence nor conducted any independent verification or inquiry during assessment proceedings. The transactions were executed through recognized stock exchange channels and STT and tax on short-term capital gains were duly paid.

The Tribunal observed that the AO's addition was based solely on the investigation report without corroborative evidence specific to the assessee's case. The burden of proving that the transactions were bogus lay on the revenue, which was not discharged. The CIT(A) rightly applied the principle that unexplained credits must be established by direct evidence or circumstances that unerringly raise an inference of bogusness. The Tribunal upheld this reasoning and concluded that the addition under section 68 was not sustainable.

2. Addition under Section 69C (Unexplained Expenditure)

The addition of Rs. 1,18,720/- representing 2% commission allegedly paid to entry providers was made under section 69C. The assessee contended that this addition was not raised in any show cause notice and lacked tangible basis. The Tribunal found that the AO made this addition on mere presumption without reference to any documentary record or concrete findings.

The CIT(A) and Tribunal held that unexplained expenditure additions must be based on factual material and cannot be sustained on conjecture. The absence of any evidentiary support or cross-examination of witnesses rendered the addition invalid. Consequently, the Tribunal upheld the deletion of this addition.

3. Legality of Reassessment Proceedings under Section 147

The reopening of assessment was challenged on the ground that the AO's "reason to believe" was based on information from the investigation wing and not on independent application of mind. The Tribunal relied on authoritative rulings holding that "reason to believe" must be formed on reasonable grounds by the AO himself and cannot be a mere borrowed satisfaction from another agency's report.

It was noted that the investigation report implicated syndicates manipulating penny stocks but failed to establish a direct nexus or live link to the assessee's transactions. The Tribunal emphasized that reopening on suspicion, gossip, or unverified information is illegal. Thus, the reassessment proceedings were held invalid for lack of jurisdiction.

4. Genuine Nature of Transactions in Penny Stocks

The Tribunal examined whether trading in penny stocks per se justifies treating transactions as bogus. It referred to a recent ITAT Mumbai decision involving the same penny stock, which held that mere trading in penny stocks does not warrant a pre-determined conclusion of bogus transactions.

The assessee demonstrated that the transactions were executed on the Bombay Stock Exchange through normal banking channels, shares were delivered in demat form, and STT was paid. No evidence was produced to show that the stock was suspended or the transactions were fabricated. The Tribunal found no infirmity in the CIT(A)'s acceptance of the genuineness of these transactions.

5. Consideration of Direct and Circumstantial Evidence of Market Manipulation

The revenue argued that statements from syndicate members and investigation reports revealed collusion to manipulate stock prices and funnel funds through the assessee's accounts. However, the Tribunal observed that the AO did not conduct any independent inquiry or cross-examination of these statements in the context of the assessee's case.

The CIT(A) rightly noted that such evidence must be tested and cannot be mechanically applied to the assessee without corroboration. The Tribunal agreed that the evidence on record did not establish that the assessee's transactions were part of a sham or accommodation entry scheme.

6. Burden of Proof and Judicial Precedents

The Tribunal extensively referred to Supreme Court decisions which clarify that the burden to prove a transaction as bogus lies on the revenue, and that suspicion or conjecture is insufficient. The CIT(A) relied on precedents distinguishing "reason to believe" from "reason to suspect" and emphasizing the necessity of a direct nexus between material and belief.

The Tribunal endorsed these principles and noted that the AO failed to rebut the documentary evidence submitted by the assessee or to point out any defects therein. The failure to allow cross-examination of witnesses relied upon by the AO was also held to be a serious flaw.

Conclusions on Issues

The Tribunal concluded that the reopening of assessment under section 147 was invalid due to lack of jurisdiction and absence of reasonable grounds. The addition of Rs. 59,36,000/- under section 68 was based on suspicion and uncorroborated investigation reports, and hence unsustainable. Similarly, the addition under section 69C was made on mere presumption without evidentiary basis and was rightly deleted.

The genuineness of the transactions in penny stocks was established through documentary proof and compliance with stock exchange and tax regulations. The evidence of market manipulation and syndicate activity did not directly implicate the assessee or establish that the transactions were bogus.

Therefore, the Tribunal upheld the order of the CIT(A) deleting the additions and dismissed the revenue's appeal.

Significant Holdings

"The words 'reason to believe' suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income Tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour."

"Re-assessment proceedings cannot be started on the basis of information received from another agency. The only acceptable route is that the Assessing Officer considers the material on record in light of the facts and circumstances of the case and forms an independent opinion in the matter that is not based on borrowed satisfaction."

"The burden of proving that a transaction is bogus lies on the party claiming so, and must be strictly discharged by adducing legal evidence, which would directly prove the fact of bogusness or establish circumstance unerringly and reasonably raising an inference to that effect."

"Once the documentary evidence and the transaction flow of the appellant remains uncontroverted and no defects are pointed out therein, the onus shifts on to the Assessing Officer to substantiate the allegations."

"Addition of unexplained expenditure under section 69C must be based on tangible material and not on mere presumption or imagination."

"Trading in penny stocks per se does not justify a pre-determined conclusion of bogus transactions."

The Tribunal's final determination was to dismiss the revenue's appeal, uphold the deletion of additions under sections 68 and 69C, and confirm the validity of the CIT(A)'s order on all grounds.