2025 (6) TMI 2014 - HC - Income Tax

Addition u/s 68 and Section 69C - larger scam of tax evasion by way of bogus capital gain generated in penny stock - ITAT deleted addition - whether Assessee is entitled to tax exception u/s 10(38) when the records and materials indicate that the alleged income shown as Long Term Capital Gain is result of manipulation and malpractice of an organized tax evasion? AO reopened the assessment u/s 147 on specific information from the Investigation Wing at Mumbai that the assessee had claimed an amount exemption u/s 10(38) which arose in the share scrip called VMS Industries Ltd. HELD THAT - There is nothing on record to indicate as to where from the Assessing Officer received such information that the assessee had a gain of which according to the assessee is a short term capital gain which was offered to tax in the original assessment itself. Furthermore it is clear from the records that there has been no long term capital gain by the appellant in the shares of VMS Industries Ltd. as alleged by the Assessing Officer and therefore the learned Tribunal was fully justified in holding that the reopening of assessment was not bad in law. When the assessee has not claimed any exemption under Section 10(38) of the Act the question of reopening would not arise. Therefore Tribunal after examining the facts has rightly allowed the appeal filed by the assessee and set aside the order passed by the AO as well as the first appellate authority. No substantial question of law.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Court considered the following core legal questions:

i) Whether the Learned Tribunal erred in law in deleting the addition made under Sections 68 and 69C of the Income Tax Act, 1961, by ignoring the alleged larger scam of tax evasion through bogus capital gains generated in penny stocks?

ii) Whether the assessee is entitled to exemption under Section 10(38) of the Income Tax Act when the records and materials indicate that the purported long-term capital gain is a result of manipulation and malpractice constituting organized tax evasion?

iii) Whether the Learned Tribunal erred in ignoring the assessee's failure to produce documents or evidence to establish the genuineness of transactions involving the penny stock "VMS Industries Ltd.", and disregarded direct and circumstantial evidence brought on record by the Assessing Officer that the assessee indulged in manipulation of share prices to claim fictitious long-term capital gains exempt from taxation?

2. ISSUE-WISE DETAILED ANALYSIS

Issue i: Legality of Deletion of Addition under Sections 68 and 69C

The relevant legal framework involves Sections 68 and 69C of the Income Tax Act, which deal with unexplained cash credits and unexplained investments respectively, allowing the Assessing Officer to make additions to income where transactions are not satisfactorily explained.

The Assessing Officer had made additions under these sections based on information received from the Principal Directorate of Income Tax (Investigation), Mumbai, alleging bogus capital gains in penny stocks. The reopening of the assessment under Section 147 was premised on this information.

The Tribunal found that the information on which the reopening was based was factually incorrect. The Assessing Officer had relied on an alleged long-term capital gain amount of Rs. 90,95,000/- claimed as exempt under Section 10(38), but the assessee's return showed a long-term capital gain of Rs. 41,98,896/- after adjustments, and the gain in question was not claimed as exempt. The Tribunal noted that there was no evidence on record to substantiate the Assessing Officer's claim about the Rs. 90,95,000/- gain.

The Court noted that the reopening of assessment must be based on tangible and credible information. Since the information was factually incorrect and the assessee had not claimed any exemption under Section 10(38) for the alleged amount, the reopening was not sustainable in law.

The Court upheld the Tribunal's reasoning that the Assessing Officer's addition under Sections 68 and 69C was not justified due to lack of proper factual foundation and that the Tribunal was correct in deleting the addition.

Issue ii: Entitlement to Exemption under Section 10(38) in Case of Alleged Manipulation

Section 10(38) exempts long-term capital gains arising from transfer of equity shares or units of equity-oriented mutual funds, subject to certain conditions.

The revenue argued that the alleged long-term capital gain was a product of manipulation and malpractice, constituting organized tax evasion, and thus the exemption should not be allowed.

The Tribunal examined the facts and records and found that the assessee did not claim exemption under Section 10(38) for the amount alleged by the Assessing Officer. The actual long-term capital gain as per the assessee's accounts was Rs. 41,98,896/-, which was claimed as exempt, and the short-term capital gain of Rs. 57,46,787/- was offered to tax in the original assessment.

The Court agreed with the Tribunal's finding that since the assessee did not claim exemption for the alleged manipulated amount, the question of entitlement to exemption under Section 10(38) did not arise. Moreover, the Court noted that the allegation of manipulation was not substantiated by evidence on record.

Thus, the Court found no merit in the contention that the exemption was wrongly allowed in the face of manipulation allegations.

Issue iii: Failure to Produce Evidence and Alleged Manipulation of Penny Stock Transactions

The Assessing Officer contended that the assessee failed to produce documents or evidence to establish the genuineness of transactions in "VMS Industries Ltd." shares and that direct and circumstantial evidence showed manipulation of share prices to claim fictitious long-term capital gains.

The Tribunal carefully considered the evidence and found that the reopening was based on incorrect information, and there was no credible material on record to prove manipulation. It was also noted that the first appellate authority's order was ex parte due to the assessee's non-appearance, but the Tribunal set aside that order after hearing the assessee.

The Court endorsed the Tribunal's approach, emphasizing that allegations of manipulation require cogent evidence. Mere suspicion or information without substantiation cannot justify additions or reopening of assessments. The Court observed that the Assessing Officer did not produce any material to establish manipulation conclusively.

Therefore, the Court held that the Tribunal rightly disregarded the Assessing Officer's allegations in the absence of supporting evidence and correctly allowed the appeal.

3. SIGNIFICANT HOLDINGS

The Court held that reopening of assessment under Section 147 must be based on credible and accurate information. The Court stated: "The information based on which the reopening was done was factually incorrect."

It was further held that when the assessee has not claimed exemption under Section 10(38), the question of reopening on the basis of alleged exemption does not arise.

The Court emphasized the principle that additions under Sections 68 and 69C require proper factual foundation and cannot be sustained on vague or unsubstantiated allegations.

On the issue of manipulation and tax evasion, the Court underscored that allegations must be supported by direct or circumstantial evidence, and in its absence, the benefit of doubt goes to the assessee.

Accordingly, the Court dismissed the appeal filed by the revenue, affirming the Tribunal's order deleting the additions and rejecting the reopening of the assessment.