ITAT Deletes Addition of Bogus Capital Gain by Sale of Shares, as Assessee, Not a Beneficiary

ITAT Deletes Addition of Bogus Capital Gain by Sale of Shares, as Assessee, Not a Beneficiary

States that the assessing officer had no proof to support his claim of collusion between the entities

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has deleted the addition on account of bogus capital gain by the sale of shares of a penny stock company in the absence of incriminating material.

The Bench of Siddhartha Nautiyal (Judicial Member) and Waseem Ahmed (Accountant Member) held that no material suggested that the assessee was involved in price rigging and its case was not mentioned in the list of beneficiaries by the persons whose statements were recorded.

The assessee is an individual engaged in the activities of investment and sale of shares and mutual funds, portfolio management schemes, and dealing in futures and options.

During 2012, the assessee submitted his Income Tax Return (ITR), declaring total income at Rs.1,16,46,980. The case was selected for scrutiny, and a survey under Section 133A was conducted on 18 June 2015 on its group cases.

Subsequently, the assessing officer (AO) observed that the assessee sold shares of Asianlak Capital and Finance Ltd (later named Global Infratech Finance Ltd). The assessee sold 15,33,500 shares for Rs.9,67,73,500. On deducting the purchase cost of Rs.23,00,250, it claimed long-term capital gains (LTCG) of Rs.9,44,73,350 as exempt.

The AO contended that Global Infratech was involved in providing bogus LTCG entries through listed penny stocks on the Bombay Stock Exchange.

He stated that the assessee purchased 1,75,000 shares of Asianlak Capital at a rate of Rs.15 per share during the 2012. Subsequently, when the company’s name changed to Global Infratech, the face value of the shares was split from Rs.10 to Rs.1 on 14 December, and the assessee received 17,50,000 shares. He sold 15,33,500 shares of Global Infratech.

The AO noted that the price of the company’s shares rose from Rs.7.99 to Rs.57.20 within 80 trading days between 25.06.2012 to 12.12.2012. On splitting the shares in the ratio of 1:10, the market price fell to Rs.5.80 on 13.12.2012 and rose to Rs.75.85 on 05.06.2013 within 117 trading days. Thus, the huge price rise and returns on investment provided by Global Infratech were without any financial basis and were manipulated to provide bogus LTCG entries to various beneficiaries.

The statements of the accommodation entry provider, the close associate of an accommodation entry provided, and the share brokers were recorded on various dates. They admitted involvement in the business of providing accommodation entries on LTCG by using Global Infratech.

Meanwhile, the statement of the assessee was also recorded. Justifying the reason for a huge investment in a penny stock company earning meagre profits, he stated having invested in the stock on the advice of his late father and took the risk despite being aware that the financial status of Global Infratech was not up to par. However, the AO added a sum of Rs.9,44,73,250 to his total income as bogus LTCG.

The assessee’s appeal was allowed by the Commissioner of Income Tax (Appeals) on the ground that he invested in the shares on the advice of his late father. The Commissioner held that the AO did not bring any evidence of the assessee’s involvement in share rigging. Also, he purchased the shares through banking channels, and the purchase and sale were duly noted.

The revenue department contended that the assessee earned LTCG on the sale of shares, and the AO denied the claim and made additions under Section 68 on the ground that he invested in shares of penny stock companies, which provided bogus LTCG. Since the assessee failed to establish the genuineness of the rise in the price of shares within a short period, the additions made under Section 68 were justified.

On the other hand, the assessee contended that the department had no proof of his involvement in price rigging of the instant share or that any form of cash had flown back to the assessee, which could be treated as LTCG.

The tribunal observed that the AO had no material to support his claim of collusion or connivance between the broker and the assessee for his own unaccounted money. Moreover, despite the assessee’s request, no opportunity was provided to him for cross-examination of persons on whose statements reliance was placed to hold that the sale of shares was fake.