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Facts
The assessee claimed exemption for Long Term Capital Gains (LTCG) on sale of shares from two companies, amounting to Rs. 31,87,048. The Assessing Officer (AO) disallowed this exemption, treating the transactions as sham and for introducing unaccounted money. The CIT(A) upheld the AO's order.
Held
The Tribunal held that the assessee had provided sufficient documentary evidence to prove the genuineness of the transactions and the claim for exemption. The AO's denial based solely on an investigation report and the principle of preponderance of probability was not sustainable.
Key Issues
Whether the denial of Long Term Capital Gains exemption under Section 10(38) was justified without disproving the documentary evidence provided by the assessee, and whether an investigation report not shared with the assessee can form the sole basis for assessment.
Sections Cited
10(38), 68, 143(2), 142, 133(6)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, SMC BENCH, LUCKNOW
Before: SHRI. SUDHANSHU SRIVASTAVA
IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, LUCKNOW BEFORE SHRI. SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER Assessment Year: 2015-16 Smt. Shilpa Khandelwal v. The Dy. CIT-2 330, Kalibari Bareilly Bareilly (U.P) TAN/PAN:ARYPK5700A (Appellant) (Respondent) Appellant by: Shri P. K. Kapoor, C.A. Respondent by: Shri Sanjeev Krishna Sharma, D.R. Date of hearing: 27 02 2025 Date of pronouncement: 24 04 2025 O R D E R
This appeal has been preferred by the Assessee against the order dated 11.08.2023, passed by the ld. Commissioner of Income Tax (Appeal), National Faceless Appeal Centre (NFAC), Delhi for Assessment Year 2015-16.
The brief facts of the case are that the assessee is an individual and deriving income from Salary, House Property and Other sources. The assessee filed her return of income for the year under consideration on 17.03.2016, declaring a total income of Rs.10,76,040/-. The case of the assessee was selected for scrutiny under CASS for the reason of suspicious sale transactions in shares and exempt Long Term Capital Gains shown in the return of income. During the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had claimed income exempt under section 10(38) of the Income Tax Act, 1961 (hereinafter called “the Act’) to the tune of Rs.31,87,048/-. From the documents furnished by the assessee, the AO noticed that during the year under consideration, the assessee had sold 5000 shares of Gold Line International Finvest Ltd. @ Rs.490/- and 3000 shares of Kappac Pharma @ Rs.270/- and had earned Long Term Capital Gains to the tune of Rs.31,87,048/-. After considering the detailed reply furnished by the assessee, and relying upon various case laws (as reproduced by the AO at pages 4 to 10 of his order), and other materials placed on record, the AO held that the transactions entered into by the assessee were sham transactions and aimed only to bring in unaccounted money in the guise of exempted Long Term Capital Gains and that the paper work was managed merely to give a colour of authenticity to the transactions and by creating a façade of legitimate transactions. He, accordingly, disallowed the exemption claimed by the assessee and added the same to the income of the assessee under section 68 of the Act.
3. Aggrieved by the order passed by the AO, the Assessee preferred an appeal before NFAC. However, the appeal before the NFAC came to be dismissed without providing any relief to the assessee.
Now, the Assessee has approached this Tribunal challenging the impugned order of the NFAC by raising the following grounds of appeal:
1. BECAUSE notice under section 143(2) dated 16.08.2016 as has been referred to in the opening paragraph of the assessment order dated 28.12.2017, is "no notice" in the eyes of law, as the requisites of sub-section (2) of section 143 have not been satisfied and consequently the assessment order dated 28.12.2017 was liable to be held as null and void. WITHOUT PREJUDICE TO THE AFORESAID 2. BECAUSE the authorities below have erred in law and on facts in denying/ upholding the denial of "appellant's claim for exemption under section 10(38) of the Act in relation to Long Term Capital Gain accruing to her on sale of shares in Gold Line International Finvest Ltd. (Rs.24,09,657/-) and Kappac Pharma Ltd. (Rs.7,77,391/-) and in adding the aggregate sum of Rs.31,87,048/- to the income of the "appellant" as unexplained credit under section 68 of the "Act".
BECAUSE looking to the facts and circumstances of the case and evidences placed on record, the provisions of section 68 of the Act are not attracted to the amount of Rs.31,87,048/- representing Long Term Capital Gain on sale of shares claimed as exempt u/s 10(38) of the Act.
4. BECAUSE the report of investigation carried out by the Directorate of Investigation as has been made the basis for drawing adverse inference for denying/upholding the denial of claim for exemption under section 10(38) was not admissible even as material/ information relevant for the purposes of assessment, as no such report has been brought on record/confronted with the "appellant".
5. BECAUSE the authorities below not having disputed the fact that the "appellant" had purchased 10,000 shares of Gold Line International Finvest Ltd. on 28.01.2014 and 3000 shares of Kappac Pharma Ltd. on 25.06.2012 could not have denied the appellant's version of sale of said shares and resultant claim of exemption under section 10(38) of the "Act" either on facts or in law.
6. BECAUSE in any case the assessing officer having made the addition only of the amount of surplus of sale proceeds over cost of purchase of shares clearly demonstrates that the genuineness of purchase of shares of Gold Line International Finvest Ltd. and Kappac Pharma Ltd. was nowhere in dispute or in debate, and consequently the Ld. "CIT(A)" should have deleted the addition of Rs. 31,87,048/- as had been erroneously made by the Assessing Officer.
BECAUSE on a due consideration of facts and circumstances of the case, particularly that- a) the shares purchased by the assessee in earlier years were held in D-mat account; b) the shares so held in demat account were sold during the year under consideration through demat account; c) actual sale price was supported by sales bills/contract notes issued by the brokers and the corresponding movement in demat account referred to above; d) the price at which consideration had been realised were in conformity with the price ruling at the relevant time at the Stock Exchange; e) security transaction tax was paid on sale of such shares; f) the consideration realized by the appellant had originated from the bank account of the broker, which found way into the regular bank account of the "appellant"; and g) other relevant material and information as had been placed on record, the claim of exemption u/s 10(38) of the Act as has been made in the return of income deserved to be allowed.
BECAUSE on the facts of the case, as are undisputed and as are available on record, the consideration realised on sale of shares of Gold Line International Finvest Ltd. and Kappac Pharma Ltd. was liable to be treated as simply accruing on transaction of sale of shares which were subjected to security transaction tax (STT) and accordingly surplus derived on transfer of shares qualified for exemption under section 10(38) of the "Act".
9. BECAUSE the "appellants" claim of exemption under section 10(38) stood supported by large number of direct case laws, which are squarely applicable on the facts of the present case and view taken by the authorities below is judicially improper and wholly erroneous and untenable, both on facts as well as in law.
10. BECAUSE various case authorities as have been relied upon by the authorities below are clearly distinguishable on facts and as such, the said decisions are not applicable on the facts of the present case.
BECAUSE the addition made by the assessing officer and sustained by the "CIT(A)" is on presumption of bad faith as no specific discrepancy/shortcoming has been brought on record to prove that the assessee was involved in any scam involving bogus transactions of purchase and sale of shares. 12. BECAUSE the order appealed against is contrary to facts, law and principles of natural justice. 5. The Ld. A.R., appearing on behalf of the assessee, submitted that the authorities below have erred, both in law as well as on facts in denying the assessee’s claim for exemption under section 10(38) of the Act in respect of Long Term Capital Gain accruing on sale of shares in the two companies, namely M/s Goldline International Finvest Ltd. and Kappac Pharma Ltd. and treating the same as unexplained credit under section 68 of the Act. The Ld. A.R. argued that the assessee had placed voluminous evidences in support of her contention before the AO and that the transactions had been duly explained and, therefore, by no stretch of imagination could it be said that there was any unexplained income, which was liable to be taxed in the hands of the assessee under section 68 of the Act. It was argued that both the authorities below have not disputed the fact that the assessee had purchased 10000 shares of M/s Goldline International Finvest Ltd. on 28.01.2014 and 3000 shares of Kappac Pharma Ltd. on 25.06.2012 and, therefore, once the purchases had been accepted, the sale and the assessee’s claim of resultant Long Term Capital Gain on such sale could not be denied without there being any evidence brought on record to negate the claim. The Ld. A.R. further submitted that the Department had relied on the report of the investigation carried by the Investigation Wing of the Income Tax Department while denying the claim of exemption under section 10(38) of the Act, but such report was never brought to the notice of the assessee during the course of assessment proceedings and, therefore, reliance on any such document or report behind the back of the assessee, without the assessee being given an opportunity to refute the same, was bad in law.
5.1 The Ld. A.R. further submitted that the facts which were completely ignored by the lower authorities are that (1) the shares in question were purchased by the assessee in earlier years and were held in Demat account; (2) even the sales of these shares were made through Demat account; (3) the actual sale price was supported by Sale Bills/Contract Notes issued by the brokers and the same was again duly reflected in the Demat account; (4) the price at which the shares were sold was in conformity with the existing price at that point of time in the Stock Exchange; (5) Security Transaction Tax had been duly paid on such sale of shares; and (6) the sale consideration had been received in the bank account of the assessee and proceeds had emanated from the bank account of the broker.
5.2 The Ld. A.R. vehemently argued that on the facts of the case, the denial of exemption under section 10(38) of the Act was only based on suspicion, surmises and conjectures and the evidence filed by the assessee in support of her claim was completely ignored.
5.3 The Ld. A.R. placed reliance on numerous case laws of the Hon'ble High Courts and various Benches of the Tribunal, which are placed in the paper book and have been taken on record. Placing reliance on the judgments, the Ld. A.R. prayed that the appeal of the assessee deserved to be allowed.
In response to the arguments of the Ld. A.R., the Ld. Sr. D.R. placed heavy reliance on the orders of the authorities below and submitted that the ld. CIT(A) had decided the issue in a very judicious manner and had taken into consideration the submissions made on behalf of the assessee in this regard. The Ld. Sr. D.R. submitted that the impugned transactions were in fact a colourable device for avoidance of tax and, therefore, even if these transactions were technically complete, they were very much against the spirit of the law. The Ld. Sr. D.R. submitted that the impugned transactions were in fact a means of obtaining accommodation entry and converting the undisclosed money to duly disclosed money exempt from tax. The Ld. Sr. D.R. filed written submissions running into 12 pages in support of his arguments and relying on the same, he argued that as per facts on record, the assessee was a lady who did not have any expertise in trading of Stock and had not declared any capital gains on shares in either immediately preceding previous year nor immediately succeeding previous year and, therefore, it was very much apparent that the Long Term Capital Gain, as being claimed by the assessee, were in fact sham transactions which had been used as a device to introduce unaccounted money in the books of the assessee as exempt income.
6.1 The Ld. Sr. D.R. also placed heavy reliance on numerous judicial precedents, which have been duly produced in the written submissions filed by him and while placing reliance on the same, it was submitted that tax planning can be legitimate only if it is provided within the framework of law and that colourable devices can never be a part of tax planning. The Ld. Sr. D.R. submitted that the appeal of the assessee deserved to be dismissed.
7. I have heard the rival submissions and have also perused the material on record. The facts are not in dispute. The reason for selection for scrutiny of assessee’s case under CASS guidelines was suspicious sale transactions in shares and exempt Long Term Capital Gain. The assessee had claimed income exempt under section 10(38) of the Act to the tune of Rs.31,87,048/- and the assessee was required to justify the claim of exemption. The assessee filed detailed replies and evidences, but the same did not find favour with the AO and he went on to hold that the transactions entered into by the assessee were sham in nature and that the assessee was trying to introduce unaccounted money in the guise of exempted Long Term Capital Gain. The AO, thereafter, completed the assessment by invoking the provisions of section 68 of the Act. The ld. CIT(A), on appeal, also upheld the findings of the AO. While dismissing the assessee’s appeal, the ld. CIT(A) relied on the order of the ITAT Chandigarh Bench in the case of Abhimanyu Soin vs. ACIT in ITA No.951/CHD/2016. The ld. CIT(A) also placed reliance in the reported case of Smt. M.K. Rajeshwari vs. ITO [2018] 99 taxmann.com 339 and another reported case of Pooja Ajmani vs. ITO [2019] 106 taxmann.com 65. The main premise of the Ld. First Appellate Authority was that the assessee had failed to discharge her burden of proof that Long Term Capital Gain arising from sale of shares was genuine. However, a perusal of record before me shows that the assessee had placed voluminous documents regarding the impugned transactions. These documents have been also filed in the paper book filed before this Tribunal. These evidences which were filed before the lower authorities included:
(1) Share Certificate No. 34502 issued in name of M/s All Time Buildtech Private Limited and which has subsequently been endorsed vide entry dated 28.01.2014 in the name of the assessee at Folio No. 1632.
(2) Copy of shareholders list of M/s Gold Line International Finvest Limited at Sl. No. 2028 vide client ID 20142487. (3) Contract Note-cum-Bill dated 13.03.2015 regarding sale of shares of M/s Goldline International Finvest Ltd. (4) Sale consideration of Rs.24,59,657/- credited on 18.03.2015 in the bank account of the assessee. (5) Share Transfer Form dated 10.10.2012 from M/s Shailbhadra Steel Pvt. Ltd. to the assessee for 3000 shares of M/s Kapрас Pharma Ltd. (6) Debit Note dated 25.06.2012 issued by M/s Shalibhadra Steel Pvt. Ltd. in the name of the assessee. (7) Share Certificate dated 20.11.2010 of M/s Kapрас Pharma Ltd. issued in the name of M/s Shailbhadra Pvt. Ltd., vide Share Certificate No. 0009858 and Folio No. S000016. (8) Confirmation of shares transferred to assessee given by M/s Shalibhadra Steel Pvt. Ltd. in response to notice issued under section 133(6) of the Act. (9) Dematerialisation request Form dated 27.05.2014 for dematerializing 3000 shares of M/s Kapрас Pharma Ltd. (10) Contract Note-cum-Bill dated 12.11.2014 for sale of 3000 shares of M/s Kapрас Pharma Ltd.
(11) Sale consideration of Rs.8,13,391/- credited in the bank account of the assessee on 13.11.2014.
8. Apparently, the authorities below have not considered the above evidences filed by the assessee in the right perspective and have proceeded to deny the claim of exemption entirely on the basis of one investigation report of the Department, which was never even shown to the assessee nor was she ever allowed any opportunity to refute the same. It is also a case in point that the entire foundation for denial of exemption is the report of the Investigation Wing and the claim in such report that tax evaders claim Long Term Capital Gain through existing entry providers, because in all probability the price of shares do not rise in that proportion, as is claimed by the tax evaders. It is also to be seen that the lower authorities have placed heavy reliance in the case of Sumati Dayal vs. CIT reported in 214 ITR 801 (SC) which underlines the principles of preponderance of probability. It will not be out of place to mention here that the Hon'ble High Court of Delhi in the case of PCIT vs. Smt. Krishna Devi reported in [2021] 126 taxmann.com 80 (Delhi) has downplayed the principle of preponderance of probability and has held that evidence produced by the assessee overpowers the principle of preponderance of probability. The Hon'ble Delhi High Court, in this case, upheld the relief allowed by the Tribunal to the assessee on Long Term Capital Gain on the scrip of M/s Goldline International Finvest Ltd. which appeared at Sl. No. 24 of the Investigation Report of the Department. The findings of the Hon'ble Delhi High Court are reproduced hereunder:
“12. Mr. Hossain's submissions relating to the startling spike in the share price and other factors may be enough to show circumstances that might create suspicion; however the Court has to decide an issue on the basis of evidence and proof, and not on suspicion alone. The theory of human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the Respondent. With regard to the claim that observations made by the CIT(A) were in conflict with the Impugned Order, we may only note that the said observations are general in nature and later in the order, the CIT(A) itself notes that the broker did not respond to the notices. Be that as it may, the CIT(A) has only approved the order of the AO, following the same reasoning, and relying upon the report of the Investigation Wing. Lastly, reliance placed by the Revenue on Suman Poddar case (supra) and Sumati Dayal case (supra) is of no assistance. Upon examining the judgment of Suman Poddar case (supra) at length, we find that the decision therein was arrived at in light of the peculiar facts and circumstances demonstrated before the ITAT and the Court, such as, inter alia, lack of evidence produced by the Assessee therein to show actual sale of shares in that case. On such basis, the ITAT had returned the finding of fact against the Assessee, holding that the genuineness of share transaction was not established by him. However, this is quite different from the factual matrix at hand. Similarly, the case of Sumati Dayal (supra) too turns on its own specific facts. The above-stated cases, thus, are of no assistance to the case sought to be canvassed by the Revenue.
The learned ITAT, being the last fact-finding authority, on the basis of the evidence brought on record, has rightly come to the conclusion that the lower tax authorities are not able to sustain the addition without any cogent material on record. We thus find no perversity in the Impugned Order.”
Respectfully following the above observations of the Hon'ble Delhi High Court, I also have no hesitation in holding that where the assessee has provided ample documentary evidences, his/her claim cannot be denied only on the basis of preponderance of probability. In the present case, there is no dispute that the shares of the two companies were purchased with full disclosures and the payments were made through banking channels, the shares were dematerialized and the sales were also routed through Demat account and sale consideration had also been received through banking channels. Disregarding all these evidences, the AO got carried away by the report of the Investigation Wing of the Department and the entire assessment was framed by the AO without conducting any enquiry from the relevant parties or independent source or collecting evidences to negate the claim of the assessee. In fact, the information requisitioned under section 133(6) of the Act from M/s Shalibhadra Steel Private Limited, confirmed transfer of 3000 shares of Kappac Pharma Ltd. However, this was ignored by the AO.
9.1 It is also to be noted that section 142 of the Act requires the AO to make enquiries before completing an assessment. Provisions of section 142(2) of the Act provide that for the purpose of obtaining full information in respect of income or loss of any person, the AO may make such enquiry as he considers necessary, but in the present case, it is amply clear that the AO has not made any enquiry and the entire assessment order is only based on the report of the Investigation Wing of the Department. There is no dispute that the report, which was relied on by the AO and was also referred to by the Ld. First Appellate Authority, was not recorded by the AO, but was a pre-existing Investigation Report and, therefore, the same cannot be the sole basis for making any assessment without proper enquiry and examination during the course of assessment proceedings. The AO has not brought on record any clinching evidence to disprove the evidences produced by the assessee. Therefore, duly considering various evidences furnished by the assessee, I am of the considered opinion that the assessee has successfully discharged the onus cast upon her with respect to Long Term Capital Gain earned by her and such discharge being a pure question of fact would not come to the aid of the Department by applying the principle of preponderance of probability. Accordingly, I allow all the grounds raised by the assessee except ground No.1 which is dismissed as not pressed and direct the AO to allow the assessee’s claim of exemption under section 10(38) of the Act.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 24/04/2024.