Bogus LTCG Addition Quashed as Assessee's Documentary Evidence Was Unrebutted.

Bogus LTCG Addition Quashed as Assessee’s Documentary Evidence Was Unrebutted.

Issue

Can an Assessing Officer (AO) make an addition under Section 68 for alleged bogus long-term capital gains (LTCG), when the assessee has provided a complete documentary trail (contract notes, demat statements, bank statements, STT proof) to substantiate the transactions, and the AO has failed to provide any contrary evidence to disprove these documents?

Facts

The assessee’s case for Assessment Year 2012-13 was reopened based on information that the assessee was a beneficiary of bogus LTCG in specific scrips (VMS Industries Ltd. and Scan Steels Ltd.).
The AO alleged that the transactions were non-genuine, involved price rigging, and that the funds for the share purchase were routed through an accommodation entry provider (Shri Naresh Jain).
The AO treated the entire sale value of ₹8.47 lakhs as bogus, disallowed the exemption under Section 10(38), and made an addition to the assessee’s income under Section 68.
The Commissioner (Appeals) deleted this addition, noting that:
1. The assessee had submitted a complete documentary trail, including contract notes, demat statements, bank statements, and STT payment details.
2. The AO had not pointed out a single flaw in any of these documents.
3. There was no material on record to prove the broker’s involvement in rigging or to establish a cash trail linking the assessee to Shri Naresh Jain.
4. The AO’s premise was flawed, as the assessee had not even claimed any LTCG/STCG; the transactions were shown as part of the Profit and Loss account.

Decision

The High Court (by implication) upheld the order of the Commissioner (Appeals) and ruled in favour of the assessee.
It held that the assessee had duly supported the share transactions by filing all relevant and necessary documents, thereby prima facie discharging the onus cast upon them.
Since the revenue failed to rebut this evidence or provide any concrete proof of collusion or a cash trail, the addition was held to be unsustainable.

Key Takeaways

Documentary Evidence is Key: In cases of alleged bogus share transactions, the taxpayer’s primary onus is to provide a complete documentary trail (contract notes, STT, demat, and bank statements).
Suspicion is Not a Substitute for Proof: An AO cannot make an addition based on third-party information or mere suspicion of price rigging. The burden shifts to the AO to bring specific, contrary evidence on record to disprove the assessee’s documents.
AO Must Rebut the Evidence: If the AO fails to find a flaw in the assessee’s evidence and cannot establish a cash trail, the addition is legally unsustainable.
No Exemption, No Disallowance: An addition for bogus LTCG (and disallowance of Section 10(38) exemption) is fundamentally flawed if the assessee never claimed the income as LTCG in the first place.

IN THE ITAT MUMBAI BENCH ‘J (SMC)’

Deputy Commissioner of Income-tax

Arihant Suresh Jain

NARENDER KUMAR CHOUDHRY, Judicial Member
and Gagan Goyal, Accountant Member

IT APPEAL No. 3147 (Mum.) of 2024
[Assessment year 2012-13]

NOVEMBER 29, 2024

Asif Karmali, Sr. D.R for the Appellant. J.R. Bhatt, A.R. for the Respondent.

ORDER

Narender Kumar Choudhry, Judicial Member.- This appeal has been preferred by the Assessee against the order dated 05.03.2024, impugned herein, passed by the Ld. Commissioner of Income Tax (A)- Pune-12 (in short Ld. Commissioner) under section 250 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Y. 2012-13.

2. The brief facts relevant for adjudication of the instant case are that the Assessee by filing his return of income for the assessment year under consideration on 30.03.2013, had declared its income of Rs.56,790/-. Subsequently, search action u/s 132 of the Act was conducted on 20.10.2016 on Ranka Group and a warrant was executed in case of the Assessee. Thereafter notice u/s 153 of the Act was issued, in response to which the Assessee filed its return of income on 19.09.2018 declaring the same income of Rs.56,790/- as declared by filing the original return of income. Subsequently the case of the Assessee was reopened u/s 147 of the Act mainly on the ground that as per information, the Assessee is one of the beneficiaries of the bogus Long Term Capital Gains (LTCG)/ Short Term Capital Loss (STCL), qua trading in the identified scrips as detailed below:

Scrip Code	Scrip Name	Sale Value inAY2O12-13
533427	VMS Industries Ltd,	Rs.6,74,550/-
SI 2673	Scan Steels Limited	Rs.1,72,772/-
Total		Rs.8,47,321/-

3. The Assessing Officer (AO) vide show cause notice dated 19.11.2019 show caused the Assessee “as to why the LTCG of Rs.8,47,921/-earned on account of sale of shares of aforesaid scrips as claimed as exempt, be not disallowed and treated as unexplained income and taxed accordingly”. The Assessee did not file any reply and therefore the AO by presuming that non -compliance of the Assessee clearly means that the Assessee has accepted the reason for reopening, ultimately disallowed the claim of the Assessee u/s 10(38) of the Act by treating the LTCG of Rs.8,47,921/- as bogus and unexplained cash credit and added back to the income of the Assessee u/s 68 of the Act mainly on the reason that price of the scrips was rigged in preplanned and manipulated manner and the Assessee did not disclose that the money that was used to buy shares was his own money and was routed with the help of Shri Naresh Jain.

4. The Assessee, being aggrieved, challenged the said addition before the Ld. Commissioner on legal issue i.e. reopening of case as well as on merit. The Ld. Commissioner vide impugned order not only held the reopening of the case as bad in law but also deleted the addition on merits mainly on the reasons “that the Assessee during the course of assessment proceedings duly filed the copies of contract notes, bank statement, details of STT paid and also computation of income. It is not the case of the AO that the broker through whom the Assessee had entered into the transaction of bolt, had ever admitted having indulged in any rigging as alleged. It is also not the case of the AO that the documentary evidence filed before him had any flaws or the AO could point out any fault with the same. Though the AO has held that Shri Naresh Jain had facilitated the Assessee to earn the bogus gain, however, the AO has not brought on record any material which showed that Shri Naresh Jain had either paid the money to the Assessee or for that matter any cash trail is there, which is prime to support the claim of the AO”.

The Ld. Commissioner further observed that it is true that price fluctuation does rise doubt about the transactions being non-genuine but presumption how so ever strong and it cannot partake the character to prove. Since the AO has failed to bring any evidence or found fault with the evidence produced, therefore the Ld. Commissioner by following the judgments of Hon’ble Delhi High Court as well as Hon’ble Gujarat High Court respectively rendered in the cases of Pr. CIT v. Smt. Krishna Devi ITR 361 (Delhi) and Pr. CIT v. Parasben kasturchand Kochar (Gujarat) ultimately held that the addition made by the AO deserves to be deleted. The Ld. Commissioner further observed that the AO failed to appreciate that the Assessee has not claimed any LTCG/STCG. All purchases and sales are part of the profit & loss account, therefore the addition of Rs.8,47,321/- made by the AO is deleted.

5. The Revenue Department, being aggrieved, is in appeal before us.

6. We have heard the parties and perused the material available on record. We observe as stated above that the Ld. Commissioner thoroughly examined the case of the Assessee and also taken into consideration the peculiar facts and circumstances that the Assessee has duly supported its transactions by filing the relevant documents such as copies of contract notes, D-mat statement, bank statements evidencing the transactions and prima-facie discharged onus cast upon him. Further, the Ld. Commissioner also taken into consideration the fact that the Assessee has not claimed any LTCG/STCG but in fact purchases and sales have been shown part of profit and loss account, meaning thereby the addition in our considered view, on this aspect itself is un-sustainable. Therefore, we are of the considered view that the Ld. Commissioner righty deleted the addition made by the AO and thus order deleting the addition does not require any interference and consequently the same is upheld.

7. In the result, the appeal filed by the Revenue Department stands dismissed.