Payment from Sale of Shares Deposited in Bank Account: ITAT rules No Reason to add Capital Gains Unexplained Cash Credit u/s 68 of Income Tax Act [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) ruled that there is no reason to add capital gains as unexplained cash credit under Section 68 of the Income Tax Act, 1961 as the payment from the sale of shares was duly deposited in the bank account.

The Assessee initially reported an income of Rs.15,53,430/- in its 2012 return, processed under section 143(1) of the Act. However, a subsequent investigation by the AO, prompted by information from DDIT Mumbai, unveiled the Assessee's involvement in trading the alleged manipulated penny stock, M/s Nivya Infrastructure & Telecom Services Ltd, during the A.Y. 2012-13, amounting to Rs.33,68,750/-. This revealed a scheme to generate fake capital gains and business losses, enabling tax evasion.

During the course of search, sworn statements of key persons were recorded, modus operandi was revealed wherein it was admitted that they were in the business of providing accommodation entries only." formed the reason to believe that income to the extent of Rs.33,68,750/- chargeable to tax has escaped assessment within the meaning of section 147 of the Act and consequently issued the notice u/s 148 of the Income Tax Act, 1961

The Assessing Officer also made the addition of Rs.1,68,437/- being 5% of Rs.33,68,750/- as commission allegedly paid to the penny stock holder / provider as long term capital gain under section 69C of the Income Tax Act, 1961

The A.O. did not accept respondent's claim of long term capital gain and added the same in respondent's income under Section 68 of the Act. While allowing the appeal filed by respondent, the CIT[A] deleted the addition made under Section 68 of the Income Tax Act, 1961

The CIT[A] has observed that the A.O. himself has stated that SEBI had conducted independent enquiry in the case of the said broker and in the scrip of RFL through whom respondent had made the said transaction and it was conclusively proved that it was the said broker who had inflated the price of the said scrip in RFL.

The CIT[A] also did not find anything wrong in the respondent doing only one transaction with the said broker in the scrip of RFL. The CIT[A] came to the conclusion thsat respondent brought 3000 shares of RFL, on the floor of Kolkata Stock Exchange through a registered share broker.

In pursuance of purchase of shares the said broker had raised invoice and purchase price was paid by cheque and respondent's bank account has been debited. The shares were also transferred into the respondent's Demit account where it remained for more than one year. After a period of one year the shares were sold by the said broker on various dates in the Kolkata Stock Exchange. Pursuant to sale of shares the said broker had also issued contract notes cum bill for sale and these contract notes and bills were made available during the course of appellate proceedings.

On the sale of shares respondent effected delivery of shares by way of demit instructions slip and also received payment from Kolkata Stock Exchange. The cheque received was deposited in the respondent's bank account. In view thereof, the CIT[A] found there was no reason to add the capital gains as unexplained cash credit under Section 68 of the Act..

The two member bench of the tribunal comprising S Rifaur Rahman ( Account member) and Narendar Kumar Choudhari ( Judicial member) concluded that  the Assessee was a regular investor in shares and transacted the transactions of sale and purchase through stock exchange and share were dematerialized and subsequently sold after a year on 25/05/2011 and it is also not a case of the Assessing Officer or the Revenue Department that the Assessee or the brokers from whom the Assessee had purchased and sold the shares, were involved in the rigging / price shooting, therefore respectfully following the judgment of  High Court in the case referred to above, we are inclined to delete the addition, hence the same is deleted.

To Read the full text of the Order CLICK HERE

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