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Facts
The assessee, an individual, failed to file her income tax return for AY 2016-17. The AO received information about investments in penny stocks and bogus long-term capital gains. The AO treated the profit from sale of shares as bogus cash credit u/s 68 and commission as unexplained money u/s 69A.
Held
The Tribunal held that the assessee had a history of trading in shares and declaring business income, and the purchases were made through banking channels with sufficient funds. The disallowance u/s 68 and 69A was not justified, and the grounds raised by the assessee were allowed.
Key Issues
Whether the profit from the sale of shares, treated as bogus long-term capital gains by the AO, should be considered as business income given the assessee's past trading activities and the method of purchase.
Sections Cited
143(3), 147, 68, 131, 133(6), 234A, 234B, 234C, 271(1)(c), 139(1), 148, 142(1), 143(2), 69A, 28
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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
Before: SMT. BEENA PILLAI
Per: Smt. Beena Pillai, J.M.: The present appeal filed by the assessee arises out of order passed by NFAC, Delhi for assessment year 2016-17 vide order dated 14/08/2024 on following grounds of appeal:
“1) In the facts and the circumstances of the case and in law, the Assessing Officer erred in passing order u/s 143(3) r.w.s. 147 merely on the basis of borrowed satisfaction, presumption and surmises. 2) In the facts and the circumstances of the case and in law, the learned Assessing Officer erred in disallowing Rs. 4,40,35,037/-being alleged cash credit u/s 68 from sale of shares a) On the basis of suspicion and presumption b) Without affording cross-examination of parties
2 ITA 4698/Mum/2024 A.Y. 2016-17 c) Without issuing summons u/s 131 and notices u/s 133(6) d) Based on third party statements e) Without any proof of refund of cash f) By wrongly correlating general data of listed company with the Appellant g) Without any name of the Appellant appearing in the statements recorded of the third parties. 3) In the facts and the circumstances of the case and in law, the learned Assessing Officer erred in adding a further sum of RS. 58,048/-being 2% alleged commission paid on cash credit u/s 68 amounting to Rs. 29,02,400/- on an ad hoc basis. 4) In the facts and the circumstances of the case and in law, the learned CIT(Appeal) NFAC erred in confirming all the addition and dismissed all the grounds of appeal including reopening without granting personal hearing through video conferencing even though a specific request made by the appellant. 5) The AO wrongly charged interest u/s 234A, B and C and also initiated penalty u/s 271(1) (c).” Brief facts of the case are as under:
The assessee is an individual and is regularly assessee to tax. For the year under consideration, assessee could not file the return of income. On a query being raised by the bench the Ld.AR submitted that, the head of the family who was in control of the financial matters of the family was travelling and therefore necessary papers to file return could not be handed over to the authorised representative. It is submitted by the Ld.AR that, the entire family during the relevant year could not file the return of income within the period prescribed under section 139(1) of the Act. The Ld.AO received information that the assessee had invested in penny stock and obtained accommodation entry in the form of bogus long term capital gain to the tune of Rs. 28,40,320/-
3 ITA 4698/Mum/2024 A.Y. 2016-17 2.1.Subsequently notice u/s. 148 of the Act was issued on 22/072020 and the assessee filed the return of income declaringgross total 33,40,047/- which included income from business and professionamounting to Rs. 27,66,095/ short- termcapital gains of Rs. 3,53,529/-, and incomefrom other sources at Rs. 2,20,423/-.Assessee was thus issued notice u/s. 142(1) and 143(2) of the Act in response to which the representatives of the assessee filed various details.
2.2.Assessee submittedthat assessee hasneverclaimedlong termcapital gainin the return of incomethat wasfiled lieu of notice issued u/s. 148 of the Act. It was submittedby the assessee that, she always treated sale of shares to be Income from businessand always maintained the account with the broker J.M.FinanceLtd. The Ld.AO however did not accept the contention of the assessee. The Ld.AO made addition in the hands of the assessee by categorically observing as under:
“It is pertinent to mention here that assessee filed ITR for AY 2016-17 which is the year under assessment, Prior to this AY four ITRs were filed by the assessee. These ITRs were for the AY 2012-13 to AY 2015- 16. In AY 2012-13, assessee filed ITR 2 and thus no business income was declared by the assessee.. In AY AY 2013-14, ITR 2 was filed and thus no business income was declared by the assessee. In AY 2015-16, immediately preceeding the relevant assessment year, ITR 2 was filed and thus no business income was declared by the assessee. Only in ITR filed for AY 2014-15 that the assessee has declared business income as profit on sale of investments being unlisted securities. Therefore, given the past history of the ITRs filed by the assessee and given the fact that no business has been declared by the assessee in previous years except one AY and also no ITR was filed for any assessment year subsequent to the relevant assessment year, the claim 4 ITA 4698/Mum/2024 A.Y. 2016-17 of the assessee that income earned as bogus long term capital gains is business income cannot be considered as a valid claim. 4.6 Conclusion drawn As per the paste ITRs filed by the assessee for AY 2012-13 to AY 2015-16, assessee has not declared any business income except for one A.Y, Therefore, the claim of business income in the present year cannot be considered a valid claim. Further, assessee has accepted the income earned from sale of shares as bogus and non genuine transaction and offered the same as business income in her ITR filed for the relevant assessment year.”
Aggrieved by the order of Ld.AO assessee preferred appeal before the Ld.CIT(A). The Ld.CIT(A) after considering the submissions of the assessee observed as held as under: “4.4 I have carefully considered the facts of the case, the submission of the appellant and evidences on record, it is seen that the profit earned from sale and purchase of shares was admitted by the appellant as a Business Income in the return filed in response to notice u/s 148 of Act. the AO did not accept it as business income as appellant had not declared business income in the earlier years i.e, from AY 2012-13 to AY 2015-16 except in A.Y 2014-15. It may be noted that the AO added it as unexplained cash credits u/s 68 of the Act, not as LTCG. I find that the appellant has not disputed that the finding of the AO that gain on Sales and Purchases of specified listed shares was bogus. only the AO rejecting it as business income is disputed. Even if for the sake of argument it is accepted that the appellant is having business, the fact that the appellant has declared the same as a Business Income does not make it automatically a genuine business income. The nature of business was not proved and the profit through transaction in penny script has been established by the AO to be bogus and manipulated and thus the source of Income is not proved or satisfactorily explained. It is an admitted fact that the appellant did not file her return of income u/ 139 though there was a taxable income and it is immaterial that the appellant never claimed the long term capital gain in the return of income filed in response to notice u/s 148 of the Act, as the appellant filed the return only after the issue of notice u/s 148 and thus had ample time to submit a well-planned afterthought return to show the same as business income in order to avoid tax and penal proceedings under the Act. In A.Y 2012-13, 2013-14 and 2015-16, the appellant has not declared any business income. Only in A.Y 2014-15, the appellant
5 ITA 4698/Mum/2024 A.Y. 2016-17 had declared business income as profit on sale of investments being unlisted securities. It is seen that the appellant has claimed to have dealt in the equity shares as a Trader and declared that income as a Business Income for the first time in A.Y 2016-17 only after notice u/s 148 of the Act was issued by the AO. No explanation has also been given by the appellant as to why the return was not filed in time. Therefore, the genuineness of such business of the appellant is not established. In view of the above facts and discussion, I am of the considered view that the AO was correct in making the addition of Rs 28,40,320 as unexplained cash credits u/ 68 of the Act for A.Y 2016-17 and also commission paid for bogus LTCG of Rs 28,403 91% of Rs 28,40,320) as unexplained money u/s 69A of the Act. the same is sustainable and the appeal on Ground Nos 1 to 3 are thus treated as dismissed.”
Aggrieved by the order of Ld.CIT(A) assessee is in appeal before this Tribunal.
The ld. AR filed paper book consisting of 60 pages. It is submitted that page 22-60 of paper book are filed before this Tribunalfor the first time.The Ld.AR submitted that, these pages consists of contractnotes, bank statement, brokerledger account, holding statements showing the activities of purchase and sale of sharesof GoenkaBusiness & Finance Ltd. and other companies. The assessee filed an application dated 29/01/2025 underRule 29 of Income Tax Appellate Tribunal Rules for admission of this additional evidence. 4.1. The Ld.AR submittedthat, thesedocuments are crucial to considerthe claim of assessee.It is submitted that thesedocuments were missed out to be filed before the authorities below as the entire premise of reopening proceeded on the issue of whether assesseewas carrying out purchase and sale of share as her business activity. The Ld.AR submitted that, assessing officer as well as the first appellate authority confirmed the 6 ITA 4698/Mum/2024 A.Y. 2016-17 addition only on the basis of assessee was not caring out trading activity and was not earningany income under the head business or profession from equity share transactions in the presiding assessment years relevant to the assessment year under consideration. 4.2. The Ld.AR thus submitted that, the assessee did not get any opportunity to file these documents beforethe authorities below. He thus prayed for the admissions of the additional evidences filed in the paper book at pages 22-60 5. On the contrary, the Ld.DR though oppose the admission of additional evidence, could not controvert the submissions of the Ld.AR that the basis of addition by the authorities below wasnot due to the transactions is not genuine. But it was only on the premise that the assessee for the first timeinthe year under considerationhad declared the incomefrom the sale of equity sharesas business income and that there was no explanation advance by the assessee as to why the return of incomewas not filed intime. I have perused the submissions advance by both sides in the light of record placed before us.
In the present facts, it is noted that the authorities below proceeded on the footing that the assessee was not showing any income under the head Business Income, and all responses furnished by the assessee only concerned to the issue. Therefore it cannot be said that the assessee failed to furnish these details before the authorities. 6.1 At this stage, it is observed that judicial propriety demands that a fair opportunity should be given to the assessee to enable 7 ITA 4698/Mum/2024 A.Y. 2016-17 it to explain its case. In the present circumstances, evidence filed by the assessee has a critical bearing on the issue's merits and ought to be admitted. To reinforce the overriding cause of substantial justice vis-a-vis technical considerations, a breach of sacrosanct principles of natural justice is fundamental. Accordingly the additional evidence filed by the assessee stands admitted.
The Ld.AR submitted that during financial year 2014-15, the assessee purchased 6,250shares of Goenka Business & Finance Ltd. on 19/05/2014.It is submitted that assessee has always been trading in equity shares. The Ld.AR submittedthat, page 7of the paper bookis the computation of income for assessment year 2014-15, where assessee declaredincome under the head profitgains of business and profession. He also relied on page 10 of the paper book being the balance sheet wherein, assessee has invested in shares and IPO. 7.1. Referring to Page 12 of the paper book Ld.AR submitted that in computation for income for A.Y. 2014-15, the assessee declaredlongterm capital gains from sale of shares. He submitted that during the A.Y. 2015-16, the assessee purchased share of Goenka Business and Finance Ltd. at a cost of Rs. 62,500/- and during the year under consideration the said share were sold by the assessee and the sale proceeds were declared under the head, incomefrombusiness. He submitted that the assessee offeredthe gains to tax u/s. 28 of the Act. 7.2. The Ld.AR submitted that as and when the assessee sold shares held with intentionas investment, such income was declaredunder the head incomefromcapital gain. Whereas the 8 ITA 4698/Mum/2024 A.Y. 2016-17 shares thosewere held for the purposes of trading were sold, such incomewas declaredunder head incomefrom business. He thus submitted that, this is not the first year in which the assessee trade in shares and declared income under the head business income. The Ld.AR referred to page 2 of the paper book being the computation of income for A.Y. 2009-10, wherein the assessee had income from speculation business. He thus submitted that the basis on which the disallowance is made by the authorities below is not well founded. 7.3. The Ld.AR submitted that, in any event, even if GoenkaBusinesses is considered to be alleged penny stock, the assessee cannot be burdened with the addition by invoking section 68 and 69A of the Act, as the assessee has made the purchase of the share of Goenka business through banking channels and had offered the profits to tax u/s. 28 of the Act. The Ld.AR thus submittedthat, the assessee cannot be held to be beneficiary of the bogus capital gain under such circumstances. 7.4. On the contrary, the Ld.DR submitted that, assessee had not filed her return of incomeyear under consideration within the period of limitation prescribed u/s. 139(1) of the Act. He submitted that, declaringthe profits earnedfromsaleof shares of the alleged penny stock as business income is an after though. He thus vehemently supported the orders passed by the authorities below.
I have perused the submission advanced by both sides in light of records placed before this Tribunal.
9 ITA 4698/Mum/2024 A.Y. 2016-17 8. Admittedly, assessee was trading in derivatives and has declared income from speculation business in the A.Y. 2009-10. Even during A.Y. 2014-15 assessee earned income under the head business by caring out intraday trade.Therefore,the observations of the Ld.AO that the assessee has never declared the income under head business cannot be accepted. 8.1. It is pertinent to note that, for the year under consideration,the assessee sold shares of Goenka business and declared the under the head business income,on which she paid 30% tax. It is not a case that assessee declared the sale proceeds as short-termcapital gain on which she would have only paid tax at the rate of 10%. Assuming that Goenka business was a penny stock, under such circumstances, assessee cannot be imputed with any tax evasion and therefore the observation of the authorities that the assessee earned bogus capital gains does not hold the testof law.
8.2. The documents filed by the assessee by way of additional evidence clearly reveal that assessee purchased share of GoenkaBusiness through proper banking channel. The Ld.AR referring to page 25 of the paper book submitted that the said share of Goenka Business was purchased by the assessee through banking channel and through a registered broker, as it is clear from the contract note placed at page 23 of the paper book. It is also noted that,assessee had sufficient funds to make such payment which is clear from the bank statement placed at page 26 of the paper book.
10 ITA 4698/Mum/2024 A.Y. 2016-17 8.3. I therefore donot find any reason to uphold the disallowance made u/s. 68 of the Act as there was no amount credited in cash into account of the assessee before purchase of share of Goenka business. Applicability of the section69A of the Act is also rules as assessee had made investment in Goenkabusiness out of her own funds through proper banking channels. Based on the above discussions, the assessing officer is directed to delete the addition made in the hands of the assessee.
Accordingly the grounds raised by the assessee is allowed.
In the result the appeal filed by the assessee is allowed. Order pronounced in the open court on 20/02/2025