AO's Independent Inquiry Cannot be Biased Towards SEBI Restrictions: ITAT Upholds Deletion of Addition in Income [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, upheld the deletion of addition as had been done by the Commissioner of Income Tax (Appeals) [CIT(A)]. ITAT gave the rationale that AO’s independent inquiry cannot be biased towards SEBI’s former restrictions.

The main issue was in relation to the deletion of addition made of INR 80,23,019 being bogus Long Term Capital Gain (LTCG) added as per Section 68 of the Income Tax Act (IT Act) and addition of INR 80,230/- being commission paid by the assessee for arranging the accommodation entry of bogus LTCG.

The facts state that the assessee derived income from share transactions and for the Assessment Year 2016-17 she had filed her return of income on 16.10.2016 declaring INR 9,15,160/- as her income. Information was passed on from the Investigation Wing of the department to the Assessing Officer (AO) that the LTCG and the Short Term Capital Gain (STCG) offered by the assessee from the sale of shares from two sources were non-genuine as they are in nature of penny stock scrip which are utilized for providing accommodation entries.

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In the course of reassessment proceedings under Section 147, the AO asked why the capital gain amounting to INR 80,23,019/- should not be treated as unexplained income under Section 68 of theIT Act. In response, the assessee furnished supporting documentary evidence to prove her claim that the share transaction was genuine.

AO concluded that the exponential increase of the share price is a result of manipulation to generate artificial gain for providing accommodation entries to beneficiaries. An influence over the price derivation was noted from the high volume of trading done between specific groups of people during the close price computation period. Then treated the cash credit under Section 68 and added this back to the income of the assessee. Further, AO added 1% commission that the assessee who had been a beneficiary of the alleged accommodation entries which amounted to INR 80,213/-.

The matter was appealed to the first appellate authority, i.e., the CIT(A) who was convinced with the submissions of the assessee that the transactions were genuine and the sale of shares from the two sources cannot be treated as unexplained cash credit and thereby deleted the additions made by the AO.

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The counsel for the department or the departmental representative submitted the argument that the assessee, during the assessment proceedings, failed to give any valid reason for the astronomical increase in the price of shares. Further, he added that the AO was correctly suspicious of these transactions and that the additions made should be upheld.

The counsel for the assessee submitted that the assessee is a well-seasoned investor in shares and has a fair bit of experience and that the assessee had penny stock scrip in many other companies but the same were not called into question, rather only those whose prices had risen exponentially. The counsel further stated that the AO had failed to provide any evidence that supports their claim that accommodation entries were entertained by the assessee. Additionally, he submitted that the AO had based their inquiry on the order of SEBI who had once placed restrictions on these two companies but these restrictions were later removed.

The tribunal upheld the CIT(A)’s decision as INR 80,23,019/- was to be exempted under Section 10(38) of the IT Act as the AO had failed to produce any documentary evidence to further his claims regarding the increase in the price of shares.

The two member bench, comprising Makarand Vasant Mahadeokar (Accountant Member) and Saktijit Dey (Vice President), also observed that there had been no deficiencies in the justifications given by the assessee, taking into consideration the documentary evidence provided and that a selective approach cannot be applied by the AO in the assessment proceedings.

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