2025 (5) TMI 428 - AT - Income Tax

Addition u/s 69 - Bogus LTCG - Unexplained share transactions/cash credit - onus to prove - NCL penny stock company as per the information received from the investigation wing and the shares were manipulated by broker to give bogus entries of LTCG/LTCL therefore assessee was considered to be one of the beneficiaries of the non-genuine LTCG - HELD THAT - Since the assessee has discharged his initial onus by placing on record all the relevant documentary evidences to prove the transactions in the script in question. As undisputed fact that assessee had purchased the shares through registered broker from stock exchange and entire payment was made through banking channel consequently shares were received in her Dmat account maintained in Central Depository Services India Ltd. All the contract notes regarding purchase of shares have been placed on record coupled with the fact that assessee had paid all the required taxes i.e STT stamp duty SEBI turnover tax and all the payments reflected in the purchase contract notes. Besides the fact that the company is listed in BSE and never delisted at any time. As decided in the case of RNR Trading Pvt Ltd 2024 (12) TMI 1567 - ITAT MUMBAI wherein the same script has been considered and dealt with and ultimately additions were deleted. However the revenue failed to rebut the said documentary evidences and to bring on record any evidence to prove that assessee was actively involved in manipulating the script in question therefore adhering to the principles of judicial consistency and judicial discipline and also taking into consideration the totality of facts and circumstances as discussed in detail in the above paras we direct the AO to delete the additions made u/s 68 of the Act. Assessee appeal allowed.

Summary

The core legal questions considered in this appeal pertain to the validity of additions made under section 68 of the Income Tax Act, 1961, arising from alleged bogus long-term capital gains (LTCG) on sale of shares claimed exempt under section 10(38). The issues include:

1. Whether the reopening of the assessment beyond six years was valid (though this ground was not pressed).

2. Whether the Assessing Officer (AO) violated principles of natural justice by not providing the assessee with the opportunity to cross-examine witnesses whose statements were relied upon, particularly the person named Naresh Jain.

3. Whether the AO erred in not furnishing the material evidence (investigation reports and statements) used against the assessee during assessment proceedings.

4. Whether the additions made solely on the basis of investigation reports without independent application of mind by the AO were justified.

5. Whether the share transactions in question were genuine and not part of any price manipulation or bogus accommodation entries.

6. Whether the CIT(A) erred in deleting certain additions made by the AO and sustaining others.

7. Whether the revenue's reliance on investigation reports and statements without substantive inquiry and denial of fair opportunity to the assessee was legally sustainable.

Issue-wise Detailed Analysis:

1. Validity of Reopening Beyond Six Years
This ground was not pressed by the assessee and was dismissed accordingly.

2. Violation of Natural Justice: Opportunity for Cross-Examination and Disclosure of Material
Relevant Legal Framework and Precedents:
The principles of natural justice require that an assessee be given a fair opportunity to defend his case, including the right to cross-examine witnesses whose statements are relied upon. The Hon'ble Supreme Court in the Tin Box Company case held that assessment orders must be made after giving the assessee a reasonable opportunity to set out his case. The Patna High Court in Dhananjaykumar Singh emphasized that a quasi-judicial authority must consider and record reasons when rejecting relevant material and objections. The Supreme Court in Andaman Timber Industries v. CCE held that failure to allow cross-examination of witnesses whose statements are relied upon results in breach of natural justice and renders the order null and void. Similarly, in CIT v. Odeon Builders Pvt. Ltd., it was held that additions made solely on third-party information without scrutiny and denying cross-examination are bad in law. The Bombay High Court in H.R. Mehta v. ACIT stressed that denial of opportunity to meet the case by providing material and cross-examination goes to the root of the matter.

Court's Interpretation and Reasoning:
The Tribunal found that the AO did not provide the assessee with copies of statements or investigation reports used against her, nor allowed cross-examination of persons such as Naresh Jain, whose statements formed the basis of additions. This was held to be a serious breach of natural justice. The AO's failure to furnish material and deny cross-examination was a fundamental flaw rendering the additions unsustainable.

Application of Law to Facts:
Despite specific requests by the assessee, the AO withheld material evidence and denied cross-examination, violating the principles of natural justice. The Tribunal relied on the cited precedents to conclude that such denial invalidated the additions made.

Treatment of Competing Arguments:
The revenue did not effectively rebut the natural justice violation claims but relied on the investigation reports and statements. The Tribunal rejected this approach as it contravened established legal principles.

Conclusion:
Additions based on undisclosed material and without affording cross-examination were held to be invalid.

3. Legitimacy of the Share Transactions and Claim of Exemption under Section 10(38)
Relevant Legal Framework and Precedents:
Section 10(38) exempts long-term capital gains arising from transfer of equity shares if conditions such as payment of securities transaction tax (STT) are met. Section 68 deals with unexplained cash credits, allowing additions if the assessee fails to satisfactorily explain the nature and source of credited sums. The revenue's case relies on the argument that the shares were penny stocks manipulated to generate bogus LTCG. However, various judicial pronouncements have held that mere suspicion or information from investigation wings cannot override documentary evidence proving genuineness of transactions. The Supreme Court in Union of India v. Ashish Agarwal held that mere mentioning of a name (Naresh Jain) does not constitute sufficient material. The Bombay High Court and various ITAT decisions have consistently held that if shares are purchased through recognized brokers, payments made through banking channels, shares held in demat accounts for requisite periods, and STT paid, the claim of LTCG exemption should be accepted unless concrete evidence of manipulation is produced.

Court's Interpretation and Reasoning:
The Tribunal noted that the assessee had purchased shares through a registered stockbroker, made payments through banking channels, held shares in demat accounts, paid all applicable taxes including STT, and sold shares on recognized stock exchanges. The company in question (Nyssa Corporation Ltd.) was listed continuously, regularly filing documents with ROC and exchanges, and was not delisted or blacklisted by SEBI. Financial results showed improving earnings per share (EPS) and significant public shareholding. No regulatory action was taken against the assessee or the company. The AO failed to independently verify the genuineness of transactions and relied solely on investigation reports and statements from unrelated proceedings.

Key Evidence and Findings:
- Contract notes, bank statements, demat account statements.
- Payment of service tax, stamp duty, turnover tax, SEBI turnover tax.
- Financial statements and trading volumes of the company.
- Lack of any SEBI or regulatory action against the company or assessee.
- Judicial precedents supporting genuineness of such transactions when documentary evidence is furnished.
- Coordinate Bench ITAT decision in a case involving the same script where additions were deleted.
- Lack of any direct link between the assessee and the alleged manipulator Naresh Jain.

Application of Law to Facts:
The Tribunal applied the legal principles that documentary evidence of share purchase and sale through recognized channels, coupled with payment of taxes and holding periods, suffices to discharge the onus on the assessee. The AO's reliance on third-party information without inquiry or opportunity to the assessee was insufficient to sustain additions.

Treatment of Competing Arguments:
The revenue argued that the shares were penny stocks manipulated by Naresh Jain's syndicate to generate bogus LTCG. However, the Tribunal found no material evidence linking the assessee to such manipulation. The revenue's reliance on investigation reports without substantiation was rejected.

Conclusion:
The share transactions were genuine, and the exemption claimed under section 10(38) was rightly allowed. The additions under section 68 on account of alleged bogus LTCG were deleted.

4. Quantum of Addition and Treatment of Investment Amount
Relevant Legal Framework:
Section 68 additions relate only to unexplained cash credits. The CIT(A) held that the amount of investment of Rs. 15,04,652/- made in FY 2012-13 was reflected in the assessee's balance sheet and therefore was not unexplained cash credit. Only the gain of Rs. 92,68,701/- was treated as unexplained cash credit and added to income.

Court's Reasoning:
The Tribunal found no new facts or circumstances to overturn the CIT(A)'s finding. The revenue's appeal to treat the entire amount as unexplained was rejected.

Conclusion:
The addition was restricted to the gain amount, and the appeal of the revenue in this regard was dismissed.

5. Reliance on Investigation Wing Reports and Statements of Entry Operators
Relevant Legal Framework and Precedents:
Judicial pronouncements emphasize that additions cannot be sustained solely on the basis of statements recorded in unrelated proceedings or investigation reports without giving the assessee an opportunity to rebut or cross-examine. The Supreme Court and various High Courts have held that mere suspicion or information is insufficient; the AO must apply independent mind and conduct inquiry.

Court's Interpretation:
The Tribunal noted that the AO did not conduct any independent inquiry into the genuineness of transactions after receiving documents from the assessee. The AO's reliance on investigation reports and statements of entry operators without affording opportunity to the assessee was contrary to law.

Conclusion:
Additions based solely on such reports and statements were unsustainable.

6. Treatment of Grounds Raised by Revenue Challenging Deletion of Additions
The revenue challenged the deletion of additions on various grounds including reliance on investigation reports, alleged collusion, price manipulation, and the applicability of judicial precedents supporting additions in similar cases.

Court's Reasoning:
The Tribunal examined the revenue's contentions and found that the CIT(A) had correctly appreciated the facts and evidence. The revenue failed to bring any new material to rebut the documentary evidence produced by the assessee. The Tribunal relied on a plethora of judicial precedents supporting the genuineness of transactions when made through recognized brokers, banking channels, and demat accounts with payment of applicable taxes.

Conclusion:
The revenue's grounds were rejected, and the appeal was dismissed.

Significant Holdings:

"Assessment orders must be made after the assessee has been given a reasonable opportunity of setting out his case." (Tin Box Company)

"It is a cardinal principle of law that if relevant materials and objections are produced before a quasi-judicial authority, the quasi-judicial authority is duty-bound, under law, to advert to them, discuss them and then reject them by recording reasons." (Dhananjaykumar Singh)

"Failure to give the assessee the opportunity to cross examine witness, whose statements are relied upon, results in breach of principles of Natural Justice. It is a serious flaw which renders the order a nullity." (Andaman Timber Industries v. CCE)

"Addition/disallowance made solely on third party information without subjecting it to further scrutiny and denying the opportunity of cross examination of the third party renders the addition/disallowance bad in law." (CIT v. Odeon Builders Pvt. Ltd.)

"A mere mentioning of the name 'Naresh Jain' does not suffice the material relied upon by the Revenue." (Union of India v. Ashish Agarwal)

"Where shares are purchased through a recognized stock broker, payment made through banking channels, shares held in demat account for requisite period and STT paid, the claim of exemption under section 10(38) should be accepted unless concrete evidence of manipulation is produced." (Various High Court and ITAT decisions)

"Additions made by AO relying solely on investigation reports and statements recorded in unrelated proceedings without independent inquiry and without giving opportunity to the assessee are unsustainable."

"Only unexplained cash credits can be added under section 68; amounts reflected in the balance sheet and explained cannot be treated as unexplained."

Final Determinations:

- The reopening beyond six years was not pressed and dismissed.

- The AO's failure to provide material evidence and opportunity for cross-examination violated natural justice, rendering additions invalid.

- The share transactions were genuine, supported by documentary evidence, and the exemption under section 10(38) was rightly allowed.

- The addition under section 68 was correctly restricted to the gain amount and not the entire investment.

- The revenue's reliance on investigation reports and statements without inquiry was rejected.

- The appeal filed by the assessee was allowed, and the appeal filed by the revenue was dismissed.