The Income Tax Appellate Tribunal, Mumbai Bench, adjudicated the Revenue’s appeal challenging the deletion of an addition made under Section 69A of the Income-tax Act, 1961, in respect of alleged bogus long-term capital gains arising from the sale of shares of M/s Banas Finance Ltd. The assessee had disclosed long-term capital gains from the sale of equity shares, which were claimed as exempt under Section 10(38) of the Act.

The assessment was reopened based on information received from the Investigation Wing alleging that the assessee had obtained accommodation entries in the guise of exempt long-term capital gains through penny stock transactions. The Assessing Officer relied upon general investigation reports, analysis of abnormal price movements, and statements of alleged entry operators and exit providers to conclude that the share price of M/s Banas Finance Ltd. was artificially rigged and that the gains earned by the assessee were not genuine. Accordingly, the entire sale consideration was treated as unexplained money under Section 69A of the Act.

Before the appellate authority, the assessee demonstrated that the shares were acquired through a valid preferential allotment, the consideration was paid through normal banking channels, the shares were duly dematerialised, and the sale transactions were executed through a recognised stock exchange via a SEBI-registered broker. It was further shown that Securities Transaction Tax was duly paid and that the sale proceeds were received through banking channels. The assessee also contended that no material was brought on record to establish any nexus between her and the alleged operators or exit providers, and that none of the statements relied upon by the Assessing Officer made any reference to the assessee.

The Commissioner of Income-tax (Appeals) accepted the assessee’s explanation and deleted the addition, holding that the Assessing Officer had merely applied a general modus operandi without establishing any direct evidence against the assessee. On further appeal by the Revenue, the Tribunal upheld the order of the CIT(A), observing that suspicion, however strong, cannot take the place of evidence. The Tribunal held that when the assessee has discharged the initial onus by producing cogent documentary evidence to substantiate the purchase and sale of shares, the addition cannot be sustained solely on the basis of third-party statements and price movement analysis, without affording cross-examination or establishing a live link with the alleged accommodation entry providers.

Accordingly, the Tribunal dismissed the Revenue’s appeal and affirmed the deletion of the addition, reiterating that genuine long-term capital gains supported by lawful transactions cannot be taxed as unexplained money merely on the basis of generalized allegations in penny stock cases.

Source Link - https://itat.gov.in/public/files/upload/1767960012-ubaUjJ-1-TO.pdf

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