ITAT: Sharp Rise in Price of Script Cannot be Sole Criterion to Conclude that Price was Rigged to Generate Short-Term Capital Gain

ITAT: Sharp Rise in Price of Script Cannot be Sole Criterion to Conclude that Price was Rigged to Generate Short-Term Capital Gain

The Income Tax Appellate Tribunal (ITAT), Ahmedabad, by its division member bench comprising of Madhumita Roy (Judicial Member) and Waseem Ahmed (Accountant Member) has observed that sharp rise in the price of script cannot be a sole criterion for reaching the conclusion that the price was rigged up to generate the short-term capital gain. Such observation during the assessment proceedings must provide reasons to investigate the matter in detail and the same cannot take the place of the evidence, stated the bench.

In the present case, the assessee claimed to be an individual who was deriving income from various sources. The assessee is a partner in several firms as well as a key person, promotor, or director of the Globe group of companies. There was a search proceeding under Section 132 carried out at the premises of the assessee on January 23, 2015. During the investigation and assessment, it was found that the four companies controlled or managed by the assessee received huge sums in the form of share capital and premiums during the financial years 2008–09 to 2014-15.

The Assessing Officer (AO) held that the claim of exempted capital gain by the assessee on account of the sale of impugned shares was fictitious and added it to the total income of the assessee as income from unexplained sources.

To this, the assessee submitted that he purchased 21000 shares of KGN Industries Ltd. during the month of December 2006 at Rs. 1 per share. The reason for the low price was that the script got delisted by the order of the BSE. The consideration was paid in cash out of a bank withdrawal, but bank statements could not be arranged due to a considerable lapse in time.

However, the genuineness of the purchase of shares was not doubted, as the purchase of shares was duly supported by the share certificate issued in in his name, which was furnished during the assessment proceedings.

The script of the company got re-listed with a new name and split into 10 shares for 1 share each; thereafter, he made a request to the company to issue a new share certificate, but the same was received by him only in January 2012. Therefore, it was not dematerialized earlier. The shares were sold in a hurry due to the fact that the price was regularly declining.

Thereafter, the Commissioner of Income Tax (Appeals) held that the AO was not justified in treating exempt long-term capital gains as income from unexplained sources. Accordingly, the AO was directed to treat the capital gain on the sale of shares of Rs. 58,08,455/- as long-term capital gain exempt under Section 10(38).

The ITAT at the outset pointed out that the concept of protective assessment is not defined in the provisions of the Act. However, the bench noted that the same was used by the revenue authority as a precautionary tool where there is some income accrued or arise, but the AO was not sure who was liable to pay tax on such income, the AO proceeded to assess such income on protective and substantive basis.

While relying on decision passed by the Supreme court in the case of Lalji Haridas vs. ITO (1961), the ITAT observed, “The objective of the protective assessment is that in case substantive assessment made in the hands of other person not sustained then tax shall be collected from the person in whose hand protective assessment has been made. However, the concept of protective or substantive assessment only be applied where it is established beyond doubt that some income has been accrued or arisen in a particular assessment year but there is some uncertainty about the person who is liable to tax.”

Therefore, the bench opined that this concept cannot be applied in cases where it cannot be established beyond that the income has accrued or arises.

Averting to the present case, the ITAT noted that the AO based on the statement recorded by the investigation wing of certain person held that the share capital and premium thereon credited in the books of private company managed/controlled/owned by the respondent assessee are not genuine and treated the same as unexplained credit under section 68 of the Act.

The bench observed that the provision of section 68 of the Act is a deeming provision wherein any sum credited in the books of the assessee can be treated deemed income of the concerned assessee if fails to explain the nature and source of such credit to the satisfaction of the AO. Thus, under the provision of section 68 of the Act, the bench held that the concept of protective assessment could not be applied in the present case.

Next, with respect to the issue of claim of exempted long-term capital the bench noted that the view of the AO was based on the price of the share of M/s SCIL which increased into manifolds in a short period of time which was not believed by the AO on the principles of preponderance of human probabilities in the given facts and circumstances.

In this regard, the ITAT held, “the rise in the price of the scripts of a company, having no financial base/business activity/profitability certainly gives rise to doubt about such an increase in the price. However, in our considered view, the sharp rise in the price of script cannot be a sole criterion for reaching the conclusion that the price was rigged up to generate the short-term capital gain. Such observation during the assessment proceedings provides reasons to investigate the matter in detail and the same cannot take the place of the evidence.”

Averting to the present case, the ITAT noted that there was no enquiry conducted either by the SEBI or the stock exchange with respect to rigging up of share price of M/s SCIL either by the assessee or his broker. Similarly, the AO had not conducted an enquiry from the SEBI or Stock Exchange about the assessee whether he was engaged in frivolous activities as alleged.

As such the bench noted that the AO had treated entire transaction as sham transaction and on the other hand, he had allowed the benefit of the cost of acquisition for the shares while determining the bogus short-term capital gain. The bench remarked that the stand of the revenue was found to be contrary in nature.

Therefore, the ITAT opined, “In our view, the income generated by the assessee cannot be held bogus only based on the modus operandi, generalization, and preponderance of human probabilities. In order to hold income earned by the assessee as bogus, specific evidence has to be brought on record by the Revenue to prove that the assessee was involved in the collusion with the entry operator/ stock brokers for such an arrangement.”

The bench concluded that that there cannot be any addition of regular items shown in the books of accounts until and unless certain materials of an incriminating nature are found during the search.

In view of the same, the appeal preferred by the revenue was dismissed.