LTCG Exemption and Commission Additions for Penny Stocks Cannot Stand Without Direct Evidence Against Assessee

ORDER

Pawan Singh Judicial Member.- These two appeals by Revenue are directed against the separate orders of ld. CIT(A) both dated 21.06.2024 for Assessment Year (AY) 2014-15 & 2015-16. In both the appeals the revenue has raised similar ground of appeals, except variation in the figure of additions under section 68 & 69C, certain facts in both the years are common. Thus, with the consent of parties both the appeals were clubbed heard together and are decided by common order. For appreciation of facts, the appeal for AY 2014-15 is treated as lead case. The revenue in its appeal for AY 2014-15 has raised following grounds of appeal:

“1. On the facts and the circumstances of the case and in law the Ld. CIT(A) erred in deleting the addition of Rs. 24,00,000/- as unexplained cash credit made by the AO without appreciating the facts of the case and modus operandi as a detailed investigation has been carried out by the Investigation Wing of Kolkata in the scrip M/s. Life Line Drugs and Pharma Ltd.

2. On the facts and the circumstances of the case and in law the Ld. CIT(A) erred in deleting the addition made by the AO without appreciating the facts that in such penny scrip, trading transactions of purchase and sales are not affected for commercial purpose but to create artificial Gain/loss and complete the cycle of circular trading with a view to evade taxes.

3. On the facts and the circumstance of the case and in law the Ld. CIT(A) erred in not appreciating the fact that transaction of shares of such penny scrip are not governed by market factors prevalent at relevant time rather transactions are product of design and mutual connivance on part of assessee and operators.

4. On the facts and the circumstance of the case and in law the Ld. CIT(A) erred in not appreciating the fact of the case and modus operandi of the scrip is utilized by entry operators for providing accommodation entries under the garb of Long Term Capital Gain/Short Term Capital Gain Loss by manipulating/rigging up the share price.

5. On the facts and circumstance of the case and in law the order of the Ld. CIT(A) suffers from perversity as it ignores the facts brought on record establishing manipulation of share prices of M/s. Life Line Drugs and Pharma Ltd. as part of colourable device to generate fictitious Long Term Capital Gain/ Short Term Capital Loss with the aim to evade taxes due.

6. On the facts and circumstance of the case and in law the Learned ld. CIT(A) erred in deleting the addition of 72,000/- being commission u/s 69C of the Act overlooking the fact that the entire transactions were stage managed with the object to facilitate the assessee to plough back its unaccounted income in the form of fictitious Long Term Capital Gain/ Short Term Capital Loss/Gain.”

2. Brief facts of the case are that assessee is individual, filed his return of income for A.Y. 2014-15 on 30.08.2014 declaring income of Rs. 5,67,540/-. Later on, the case of assessee was reopened under section 147 on 21.09.2016. The case was reopened on the basis of information with the Assessing Officer (AO) that Investigation Wing carried out investigation about racket of bogus entry provider of long term or short term capital gain or loss in various penny scrips. The assessee is one of the beneficiaries of penny scrip transaction. The assessee is beneficiary of long term capital gain on sale of scrip of Lifeline Drugs and Pharma Ltd. The AO after recording reasons of reopening issued notice under section 148 on 21.09.2016. In response to notice under section 148, the assessee filed reply and sated that return filed originally may be treated as return in response to notice under section 148. The AO after serving statutory notices proceeded for reassessment. During reassessment, the AO recorded that as per computation of income, the assessee has claimed long term capital gain of Rs. 23,27,832/- on sale of share of Lifeline Drugs and Pharma Ltd. which is claimed as exempt under section 10(38). The AO further recorded that statement of assessee was recorded under section 131 on 12.12.2017. The AO issued show cause notice dated 15.12.2017. As per show cause notice, the long term capital gain shown by assessee is not genuine and assessee was asked as to why the gain earned on sale of such share should not be treated as unexplained credit. In para 10 of assessment order, the AO recorded that assessee has not filed reply. The AO on the basis of information with him and by referring modus operandi of entry provider treated the entire sale consideration on sale of shares of Lifeline Drugs and Pharma Ltd of Rs. 24.00 as unexplained credit under section 68. The AO also added 3.00%commission expenses as unexplained expenditure for taking alleged entry of capital gain in the assessment order dated 27.12.2017.

3. Aggrieved by the action of AO, the assessee filed appeal before ld. CIT(A). Before ld. CIT(A), the assessee filed very details written submission running into 70 pages. The assessee also relied on various case laws wherein addition on sale of scrip of Lifeline Drugs and Pharma Ltd. was deleted. The assessee in its submissions submitted that his case also covered by various decision of Mumbai High Court of various Tribunals. The AO made addition on the basis of third party information. The assessee has earned genuine long term capital gain. The assessee purchased 15000 shares of Lifeline Drugs Pharma Ltd. The shares were purchased through bank account cheque. The shares were sold through Demat account. The shares were split for a face value of Rs. 6.00/- each. The investigation is recorded in the books of account. The shares were sold through stock broker registered with SEBI. The assessee furnished complete details. The security transaction was paid on sale of shares. The sale consideration was received in his bank account. No enquiry was conducted in respect of the evidences furnished by assessee. The action of AO is based on mere suspicious. The assessee also relied on various case laws, wherein it was held that where the assessee filed complete evidence to prove transaction and the AO has not brought any adverse evidence to counter such evidence and merely relied on the third party information, the additions are not justified.

4. The ld. CIT(A) on considering submission of assessee recorded the contention of assessee in various sub-para of para 7 of his order. The ld. CIT(A) recorded that assessee purchased 15000 shares of Lifeline Drugs & Pharma Ltd. the shares were purchased @ Rs.60.00 per share. The assessee made investment of Rs. 9.00 lakhs. Subsequently, the shares were split in the ratio of 1:10. Resultantly, the assessee held 1,50,000 shares in total. Out of which 10000 was sold in A.Y. 2014-15 for a consideration of Rs. 24.00 lacs resultant capital gain of Rs. 23,27,832/-. The AO treated the entire sale consideration as unexplained credit. The assessee claimed that transaction made by him is genuine and in support of his claim he has furnished share application form, broker note for sale and purchase of shares, bank statement showing the payment of Demat statement with Nirmal Bang Securities Private Ltd., Bank statement showing the sale consideration. The assessee has raised various factual and legal issue that whole show cause notice was based on assumption and presumption, no concreate evidence is brought on record by AO. The evidence produced by assessee was not negated by the AO. The price rise shown by AO is erroneous and beyond the control of assessee. There is no prohibition under the Act for purchasing share offline period of held is not disputed. He is not aware about entry or exit providers. The ld. CIT(A) by referring various decisions of jurisdictional High Court and Tribunal held that AO failed to bring on record any material to prove that transaction of assessee was shame transacted. The evidence could not be rejected. There is no evidence with the AO to implicate the assessee. The allegation of AO is without any evidence and contrary to the facts and the evidence available on record. The ld. CIT(A) also held that no investigation was carried out to prove the involvement of assessee in the alleged shame transaction. The AO has not brought any evidence against the assessee. On the basis of such categorical finding, the ld. CIT(A) deleted the addition of section 68. While deleting the addition of commission expenses of Rs. 72,000/-, the ld. CIT(A) held that estimation of commission expenses is not supported by any evidence. Moreover, when addition of section 68 is deleted, the disallowance of commission expenses has no independent force. Aggrieved by the order of ld. CIT(A), the Revenue has filed present appeal before Tribunal.

5. We have heard the submission of learned Authorised Representative (ld. AR) of the assessee and the learned Senior Departmental Representative (ld. Sr. DR) for the Revenue. The ld. Sr. DR for the Revenue submits that Investigation Wing carried out a full-fledged investigation about the penny stock companies which were managed by entry operator for providing accommodation entry of short term capital gain or long term capital gain or loss. As per Investigation Wing, the AO was having sufficient evidence to treat the gain on sale of impugned scrip as bogus capital gain. The AO meticulously gave his finding in the assessment order. The AO in his show cause notice clearly mentioned the facts that the assessee purchased shares off the market in the form of preferential shares. The said company was not having good financial result. The ld. CIT(A) allowed relief by simply taking view that there is no involvement of assessee in the same transaction. The ld. Sr. DR for the revenue prayed for reversing the finding of ld. CIT(A) and to restore the order of AO.

6. On the other hand, the ld. AR of the assessee supported the order of ld. CIT(A). The ld. AR of the assessee submits that entire transaction of assessee is genuine. The assessee furnished complete details to prove his transaction beyond doubt. The copy of reply filed by assessee vide reply dated 18.11.2017 and 19.12.2017 is placed on record. Despite filing complete evidence, the AO simply recorded that no reply is filed by assessee. The assessee purchased 15000 shares @ Rs. 60/- per share of impugned scrip. Later on, the shares were split in the ration of 1.10. The assessee sold 1000 share @ Rs. 2400/- per share and after set off of cost of acquisition, the assessee earned long term capital gain of Rs. 23,27,832/-. The assessee also sold other share in subsequent assessment years. The assessee furnished complete details to substantiate the transaction. The AO conveniently ignored the evidence furnished by assessee. The AO acted solely on the basis of information without giving any weightage to the documentary evidence. The co-ordinate bench of Tribunal in a series of decision of similar transaction deleted the addition by taking a consistent view that AO cannot make addition solely on the basis of third-party information. The ld. AR of the assessee submits that on similar set of fact, the co-ordinate bench in case of Pravin C. Bokadia v. ITO [ITA No. 736(Mum) of 2022, dated 13-12-2022] and in Nitesh KumarGadia v. ITO [2024]  (Surat – Trib.) deleted the similar addition on sale of similar scrip. The ld. AR of the assessee also relied on the following case laws:

7. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We find that the AO made additions solely on the basis of information received from investigation with him. The AO also held that no reply was filed by the assessee. Before us, the ld AR of the assessee vehemently argued that the assessee filed reply before AO, copies of such reply along with the evidences filed before AO is also placed on record. We find that the ld CIT(A) while allowing relief to the assessee held that in support of his claim the assessee has furnished share application form, broker note for sale and purchase of shares, bank statement showing the payment of Demat statement with Nirmal Bang Securities Private Ltd., Bank statement showing the sale consideration. The ld CIT(A) noted that the assessee has raised various factual and legal issue that whole show cause notice was based on assumption and presumption, no concreate evidence is brought on record by AO. The evidence produced by assessee was not negated by the AO. The price rise shown by AO is erroneous and beyond the control of assessee. It was held that there is no prohibition under the Act for purchasing share offline. The period of holding is not disputed. We find that ld. CIT(A) by referring various decisions of jurisdictional High Court and Tribunal held that AO failed to bring on record any material to prove that transaction of assessee was shame transacted. The evidence could not be rejected. There is no evidence with the AO to implicate the assessee. The allegation of AO is without any evidence and contrary to the facts and the evidence available on record. The ld. CIT(A) also held that no investigation was carried out to prove the involvement of assessee in the alleged shame transaction. It was also held that the AO has not brought any evidence against the assessee and deleted both the additions.

8. We find that Hon’ble Gujarat High Court in the case of CIT v. Himani M. Vakil  (Gujarat) held that where assessee duly proved genuineness of sale transaction by bringing on record contract notes of sale and purchase, bank statement of broker and Demat account showing transfer in and out of shares, AO was not justified in bringing to tax capital gain arising from sale of shares as unexplained cash credit. Gujarat High Court in the case of Pr. CIT v. Parasben Kasturchand Kocher  (Gujarat), also held that when assessee discharged his onus by establishing that transactions were fair and transparent and all relevant details with regard to transfer furnished to Income Tax Authority and the Tribunal have also took the notice of fact that the shares remained in the account of assessee, the assessee also furnished Demat account and details of bank transaction about the sale and purchase of shares, the addition was deleted.

9. Further, we find of Hon’ble Jurisdictional High Court in the case of PCIT v. Indravadan Jain, HUF [2023]  [2024] 463 ITR 711 /in Income Tax Appeal No.454 of 2018 dated 12.07.2023 also held that when Assessing Officer nowhere alleged that transactions made by assessee with a particular broker or share broker was bogus, merely because investigation was done by SEBI against the broker or its activities, the assessee cannot be said to have entered into ingenuine transaction. In a recent decision in PCIT v. Mamta Rajiv Kumar Agarwal  (Gujarat) also held that where the assessee had sold the shares and earned LTCG and the Assessing Officer alleged that transaction was penny stock deal aim at illegitimately claiming LTCG exemption under section 10(38), since there was no allegation on record suggesting the assessee is involved in rigging up the price of scrips, the addition was rightly deleted by Tribunal. We find that assessee made sale of shares through BSE and paid security transaction tax (STT) and there is no allegation against the assessee he was involved in entry provider or acted as exit provider on in price manipulation. Therefore, we do not find any justification in treating the LTCG as unexplained cash credit in absence of any cogent evidence against the assessee specific.

10. We find that while considering the similar scrips that is on sale of share of Lifeline Drugs and Pharma Ltd, the coordinate bench of this Tribunal in Nitesh KumarGadia (supra) and in Praveen Bokadia (supra) deleted similar additions by taking view that held that where there is no material in brought to controvert the evidence filed by the assessee on record. We find that similar view was taken by various bench of Tribunal that when the assessee has discharged his primary onus in furnishing complete evidence to substantiate the transaction and the AO neither commented on such evidence nor brought any adverse material on record, the reliance on the third party statement for making addition is not justified. Thus, in view of the above factual and legal discussions, we do not find justification in making addition under section 68. Once, the addition of section 68, therefore, the addition of alleged unexplained investment under section 69C is also deleted. Otherwise, there is no evidence that the assessee has incurred alleged unexplained expenditure. Hence, we affirm the order of ld CIT(A) with our additional observations.

11. In the result, the appeal of revenue for AY 2014-15 is dismissed.

12. We find that in appeal for AY 2015-16, the revenue has raised similar grounds of appeal as raised in AY 2014-15 except variation in the figures of additions under section 68 & 69C. Considering the facts that we have dismissed the appeal of revenue in AY 2014-15, therefore following the principal of consistency, this appeal is also dismissed with similar directions. In the result, the appeal of AY 2015-16 is dismissed.

13. In the combined result, both the appeals of revenue are dismissed.