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Facts
The assessee claimed long-term capital gains (LTCG) of Rs. 1,52,38,899/- as exempt under Section 10(38) on the sale of shares of M/s. Grandma Trading and Agencies Limited. The Assessing Officer (AO) disallowed this claim and added the entire sale value, along with a sum for unexplained commission expenses, based on a report from the Investigation Wing alleging the company was a penny stock.
Held
The Tribunal held that the AO could not disallow LTCG merely based on a generic investigation report without conducting independent inquiries. The transactions were routed through banking channels and evidenced by contract notes and bank statements. The Tribunal noted that the AO's additions were based on conjectures and surmises, with no supporting evidence.
Key Issues
Whether LTCG from share transactions can be disallowed solely on the basis of an investigation report without independent verification by the AO, and if additions for unexplained expenditure are justified without evidence.
Sections Cited
10(38), 143(3), 143(2)
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Income Tax Appellate Tribunal, DELHI BENCH “F”: NEW DELHI
Before: SHRI ANUBHAV SHARMA
O R D E R PER AMITABH SHUKLA, A.M: This appeal, preferred by the assessee for assessment year 2015-16, is directed against the order of Commissioner of Income-tax (Appeals)-28, New Delhi dated 05.02.2019 in appeal No. 165/18-19/1193 against the order dated 30.12.2017 passed by the ACIT, Circle-70(1), New Delhi u/s 143(3) of the Income-tax Act (hereinafter referred to as the “Act”).
The principal issue contested by the assessee through ground of appeal No.2 is against the action of the Ld.CIT(A) confirming the action of the Ld. AO by disallowing the claim of ‘Long Term Capital Gains’ (hereinafter in short "LTCG") u/s.10(38) of the Income Tax Act, 1961 (hereinafter in short "the Act”) amounting to Rs.1,58,43,122/- and the amount of Rs.4,75,293/- on account of deemed unaccounted commission charges aggregating to Rs.1,63,18,416/-. The assessee has through ground of appeal No.1 contested the order of the Ld.AO dated 30.12.2017 on jurisdictional ground.
The jurisdictional contest made by the assessee through ground of appeal no.1 rests on the premise that the assessment order dated 30.12.2017 is based upon a mechanical notice issued u/s 143(2) which in turn rests upon pre fed CASS criteria. The challenge raised by the assessee has been found to be general in nature and hence dismissed.
Adverting to the ground of appeal no.2 whereby the order of Ld.CIT(A) and of Ld.AO has been assailed on merits of the case we deem it appropriate to briefly recapitulate the factual matrix of the case. The assessee had filed his return of income for AY 2015-16 on 28.08.2015 admitting total income of Rs. 43,89,587/- and later, the case was selected for scrutiny under CASS. The Ld.AO noted that the assessee had sold Page 2 of 8 58300 shares of M/s.Grandma Trading and Agencies Limited for Rs.1,58,43,122/- and claimed LTCG of Rs.1,52,38,899/- as exempt u/s.10(38) of the Act. The assessee had purchased 58300 shares on in Feb-2012, at a value of Rs.10 per share for total purchase consideration of Rs.5,83,000/-. It was submitted that the shares were purchased on the floor of stock exchange after paying security transaction tax (STT) and consideration was passed through banking channel. Relevant Contract Notes, Bank statement extractsetc were filed. It was claimed by the assessee that the LTCG in this transaction to the tune of Rs.1,52,39,899/- was exempt u/s.10(38) of the Act. However, the Ld.AO taking note of the report from the Investigation Wing of the Department (Kolkata) that the shares of M/s.Grandma Trading and Agencies Limited was a penny stock company, and hence he proceeded to hold that the LTCG was nothing but bogus gain, and chose to add the entire sale value of Rs.1,58,43,122/- as income of the assessee under the head ‘income from other sources’ and added the same to the total income of the assessee. The Ld.AO also made a presumption that typically such transactions are carried through commission agents and brokers. Consequently, relying upon the report of Investigating Wing of Kolkata, it calculated a undisclosed commission payment of Rs.4,75,293/- being 3 % of Rs.1,58,43,122/- as unexplained
Page 3 of 8 expenditure incurred by the assessee. Thus, total addition of Rs.1,63,18,416/- was made. The impugned addition was confirmed by the Ld.CIT(A) by concurring with the findings of the Ld.AO as well as placing reliance upon certain judicial precedents. Aggrieved, the assessee is in appeal before this Tribunal.
4.1 Per contra, the Ld.DR placed upon the order of lower authorities. It was contended that the case of Revenue is covered by the ratio laid down in the case of PCIT Vs Swati Bajaj reported in (2022) 139 taxmann.com 353 of Hon’ble Kolkata High Court..
We have heard both the parties and perused the material available on record. The Ld.Counsel has placed on record a detailed paper book comprising contract notes, bank statements etc to allude the genuineness of its transactions. The Ld.Counsel for the assessee submitted that the assessee is a regular Investor in shares. We find that the assessee being an Investor has purchased the 58300 shares of M/s.Grandma Trading and Agencies Limited (GTAL)inFebruary-2012@ Rs.10 per share. The said shares were purchased through a broker Multiplex Capital Limited with whom the assessee had Demat account. Subsequently the 58300 shares were sold in the present year @ Rs.271.40 aggregating to Rs.1,58,22,829. Pertinently, the assessee had bought two lakh shares of GTAL in February Page 4 of 8 2012, of which 77738 and 58300 shares were sold respectively in AY- 2014-15 and AY-2015-16. The appellant assessee has placed on records umpteen evidences to indicate that the shares were purchased on the floor of the stock exchange, credited to the Demat account, Sale / purchase transactions routed through banking channels. This crucial fact shows that assessee has purchased the shares of GTAL in regular course, and has sold the shares when the price was high; and in that process, has made LTCG of Rs.1,52,39,899/- which was claimed as exempt income.The impugned transaction can’t be disallowed merely on the basis of report of investigation report, which is a general report. From the assessment order we have noted that the Ld.AO has merely narrated and relied upon the modus operandi indicated in the report of the Investigation Directorate of Kolkata in the affairs of Penny Stock Companies. There is nothing on record to suggest that the Ld.AO conducted any independent enquiries of his own before drawing adverse conclusions qua the income of the assessee. We have further noted that it is not the case of Ld.AO that in the report it has been alleged that assessee had a role in the wrong deeds stated therein while buying & selling of shares of GTAL. Mere reliance on the report of Investigation Directorate of Kolkata which is largely generic in nature , without conducting any independent enquiries into affairs of the Page 5 of 8 assessee, would not entitle the Revenue to make disturbance to the income of the assessee of such a such a magnitude. The allegation raised in the report of Investigation Directorate of Kolkata have to be proved to the hilt, as existing in assessee’s case, before drawing any adverse conclusions. of.Therefore, we are of the view that in the facts and circumstance of the case, the AO ought to have allowed the claim of LTCG arising from sale of shares of GTAL as held by the Hon’ble Bombay High Court in the case of PCIT v. Indravadan Jain, HUF in ITA 454 of 2018 and also the Hon’ble Delhi High Court in the case of PCIT & Ors. V. Krishna Devi & Ors in dated 15.01.2021. Therefore, we don’t countenance the action of the AO making entire addition of sale consideration of Rs.1,58,43,122/- under the head ‘income from other sources’. Further, we have noted that the addition made by the Ld.AO on account of unexplained expenditure of Rs.4,75,293/- is based upon mere conjecture and surmises. There is not even an iota of evidence brought on records by the Ld.AO to support his hypothesis. Besides, we have held above that the transaction of sale purchase of shares entered by the assessee did not suffer from any dubious credentials. The transaction of the assessee cannot be deemed to be of the type indicated by Investigation Directorate of Kolkata in its report qua affairs of Penny Stock Companies.
Page 6 of 8 Consequently, there cannot be any case for making any deeming addition on the basis of any hypothetical unexplained expenditure. Therefore, in the light of the discussion (supra), we direct the Ld.AO to delete Rs.1,58,43,122/- and of Rs.4,75,293/- contested through the ground of appeal no.2. Before parting, we note that the decision of the Hon’ble Calcutta High Court in the case of PCIT v. Swati Bajaj reported in [2022] 139 taxmann.com 352 relied by Ld DR, is distinguishable on facts and can’t come to the aid of the Revenue. Accordingly, ground of appeal no.2 raised by the assessee is allowed.
In the result, appeal filed by the assessee is partly allowed.