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Appeal to Commissioner of Income Tax (Appeals) [CIT(A)] and Income Tax Appellate Tribunal (ITAT)

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Tag: Appeal to Commissioner of Income Tax (Appeals) [CIT(A)] and Income Tax Appellate Tribunal (ITAT)

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Delhi HC deletes addition of LTCG on alleged ‘penny stocks’

Delhi HC deletes addition of LTCG on alleged ‘penny stocks’

Penny stocks are a form of market traded security which attracts minimal pricing. These securities are mostly offered by companies with lower market capitalisation rates. Therefore, these are also called nano-cap stocks, micro-cap stocks, and small-cap stocks, depending on the company’s market capitalisation. Capital gain is the profit one earns on the sale of an asset like stocks, bonds or real estate. It results in capital gain when the selling price of an asset exceeds its purchase price. It is the difference between the selling price (higher) and cost price (lower) of the asset. Capital loss arises when the cost price is higher than the selling price. Long-term capital gains (LTCG) are derived from assets that are held for more than one year before they are disposed of. 

Let us refer to the case of Principal Commissioner of Income Tax vs Smt Krishna Devi where the issue under consideration pertained to applicability of LTCG on penny stocks.

Facts of the Case

  • The Respondent-Assessee was an individual who had derived income from interest on loan, FDR, NSC and bank interest under the head of income from other sources.
  • During the scrutiny proceedings, the AO noticed that for the relevant year under consideration, the Respondent had claimed exempted income of Rs. 96,75,939 as receipts from Long Term Capital Gain [LTCG] under Section 10(38).
  • He concluded that the assessee had adopted a colourable device of LTCG to avoid tax and accordingly framed the assessment order under Section 143(3) at the total income of Rs. 1,09,12,060, making an addition of Rs. 96,75,939 under Section 68 read with 115BBE on account of bogus LTCG on sale of penny stocks of a company named M/s Gold Line International Finvest Limited.

Appeal to Commissioner of Income Tax (Appeals) [CIT(A)] and Income Tax Appellate Tribunal (ITAT)

  • The appeal before the CIT(A) was dismissed and additions were confirmed with the observation that the Respondent had introduced unaccounted money into the books without paying taxes.
  • Further appeal filed by the Respondent before the learned ITAT was allowed in her favour, and the additions were deleted vide the Impugned Order.
  • Aggrieved by the aforesaid findings, the Revenue filed the instant appeal before the High Court (HC)

Observations of the High Court (HC)

  • It was easily discernible that in the instant case, the AO had proceeded predominantly on the basis of the analysis of the financials of M/s Gold Line International Finvest Limited.
  • His conclusion and findings against the Respondent were chiefly on the strength of the astounding 4849.2% jump in share prices of the aforesaid company within a span of two years, which was not supported by the financials.
  • On an analysis of the data obtained from the websites, the AO observed that the quantum leap in the share price was not justified; the trade pattern of the aforesaid company did not move along with the sensex; and the financials of the company did not show any reason for the extraordinary performance of its stock.
  • HC had nothing adverse to comment on the above analysis, but were concerned with the conclusion drawn by the AO that the Respondent had entered into an agreement to convert unaccounted money by claiming fictitious LTCG, which was exempt under Section 10(38), in a pre-planned manner to evade taxes.
  • The AO extensively relied upon the search and survey operations conducted by the Investigation Wing of the Income Tax Department in Kolkata, Delhi, Mumbai and Ahmedabad on penny stocks, which sets out the modus operandi adopted in the business of providing entries of bogus LTCG.
  • However, the reliance placed on the report, without further corroboration on the basis of cogent material, did not justify his conclusion that the transaction was bogus, sham and nothing other than a racket of accommodation entries.
  • HC did notice that the AO made an attempt to delve into the question of infusion of Respondent’s unaccounted money, but he did not dig deeper.
  • Notices were issued to M/s Gold Line International Finvest Limited, but nothing emerged from this effort.
  • The payment for the shares in question was made by Sh. Salasar Trading Company. Notice was issued to this entity as well, but when the notices were returned unserved, the AO did not take the matter any further.
  • He thereafter simply proceeded on the basis of the financials of the company to come to the conclusion that the transactions were accommodation entries, and thus, fictitious.
  • The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking fictitious LTCG in a pre-planned manner, was therefore entirely unsupported by any material on record.
  • This finding was thus purely an assumption based on conjecture made by the AO.
  • This flawed approach formed the reason for the ITAT to interfere with the findings of the lower tax authorities.
  • The ITAT after considering the entire conspectus of case and the evidence brought on record, held that the Respondent had successfully discharged the initial onus cast upon it under the provisions of Section 68.
  • There was no dispute that the shares of the two companies were purchased online, the payments were made through banking channel, and the shares were dematerialized and the sales were routed from the demat account and the consideration was received through banking channels.
  • The above noted factors, including the deficient enquiry conducted by the AO and the lack of any independent source or evidence to show that there was an agreement between the Respondent and any other party, prevailed upon the ITAT to take a different view.
  • Appellant was not able to point out any evidence whatsoever to allege that money changed hands between the Respondent and the broker or any other person, or further that some person provided the entry to convert unaccounted money for getting benefit of LTCG, as alleged.
  • In the absence of any such material that could support the case put forth by the Appellant, the additions could not be sustained.
  • Appellant’s submissions relating to the startling spike in the share price and other factors was enough to show circumstances that might create suspicion.
  • However, HC decided an issue on the basis of evidence and proof, and not on suspicion alone.

According to the HC, the ITAT, being the last fact-finding authority, on the basis of the evidence brought on record, had rightly come to the conclusion that the lower tax authorities were not able to sustain the addition without any cogent material on record. HC found no perversity in the Impugned Order. Thus, the HC deleted the addition of LTCG on alleged ‘penny stocks’

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Normal jewellery collected by a woman in a married life of 25 years cannot be treated as Unexplained income – HC

Normal jewellery collected by a woman in a married life of 25 years cannot be treated as Unexplained income – HC

Unexplained income simply means any income for which assessee do not have valid explanation about the nature or source or the assessing officer is not satisfied with the explanation provided by the assessee. Under the provisions of Income-tax Act, 1961 broadly, the term ‘unexplained income’ is dealt with sections 68, 69, 69A, 69B, 69C and 69D.

According to Section 69A, where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.

Let us refer to the case of Ashok Chaddha Vs ITO (Delhi High Court), where the issue under consideration was whether the addition of the entire jewellery found at the time of search as undisclosed income without appreciating that the said jewellery was acquired at the time of marriage over a period of time was correct in law or not.

Facts of the Case:

  • A search and seizure operation under Section 132(1) of the Income-Tax Act, 1961 was conducted in the case of Dilbagh Rai Group.
  • This search covered the residential premises of the appellant as also his locker at the Union Bank of India.
  • During the search, apart from some cash and jewellery, loose papers/documents were also found seized.
  • An assessment order was framed by the Assessing officer (AO) assessing the income at Rs 2,64,02,210 making several additions under Section 69.

Appeal to Commissioner of Income Tax (Appeals) [CIT(A)] and Income Tax Appellate Tribunal (ITAT)

  • The assessee approached the CIT (A) by way of appeal against all the additions made by the AO.
  • The CIT (A) disposed of the appeals by consolidated order in respect of all these assessment years and deleted the all the additions except two namely addition of Rs 3,87,364 on account of jewellery found during the search and Rs 50,000 on account of receipt of booking at Tivoli Garden.
  • The assessee challenged the order of the CIT (A) by filing an appeal before the ITAT.
  • In the ITAT appeal the two additions sustained by the CIT (A) were affirmed by the ITAT as well.
  • Aggrieved with the order of the ITAT, assessee appealed before the High Court (HC)
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Submissions before the High Court (HC)

  • At the time of arguments, the appellant did not press about the addition of Rs 50,000 on account of receipt of Rs. 50,000 at Tivoli Garden. Therefore, the questions of law formulated pertained to addition of Rs 3,87,364 on account of jewellery.
  • During the course of search, jewellery weighing 906.900 grams of the value amounting to Rs 6,93,582 was found.
  • The appellant’s explanation was that he was married about 25 years back and the jewellery comprised “stree dhan” of his wife and other small items jewellery subsequently purchased and accumulated over the years.
  • However, the AO did not accept the above explanation on the ground that documentary evidence regarding family status and their financial position was not furnished by the appellant.
  • The AO accepted 400 grams of jewellery as explained and treated jewellery amounting to 506.900 grams as unexplained and made an adhoc addition of Rs 3,87,364 under Section 69A working on unexplained jewellery, by applying average rate (506/900 x 6,93,582) of the total jewellery found.
  • The CIT (A) confirmed this addition stating that the AO was fair in accepting the part of jewellery as unexplained. The ITAT has also endorsed the aforesaid view.
  • Appellant submitted that there was no basis for the AO to accept the ownership of the gold jewellery to the extent of 400 grams only as “reasonable allowance” and treat the remaining jewellery of Rs. 506.900 as unexplained.
  • Also, another fact ignored by the AO as well as other authorities was that as the department had conducted a search of all the financial dealings which were within his knowledge and no paper or document was found to indicate that this jewellery belonged to the appellant and that it was undisclosed income of the relevant assessment year.
  • In a search operation, no scope was left with the tax department to make addition on subjective guess work, conjectures and surmises.
  • It was also argued that jewellery was “stree dhan” of the assessee’s wife, evidenced in the form of declaration which was furnished by mother-in-law of the assessee stating that she had given the jewellery in question to her daughter.
  • It was a normal custom for a woman to receive jewellery in the form of marriage and other occasions such as birth of a child. The assessee had been married more than 25-30 years and acquisition of the jewellery of 906.900 grams could not be treated as excessive.
  • Respondent on the other hand relied upon the reasoning given by the authorities below.

Observations of the High Court (HC)

  • After considering the aforesaid submissions HC was of the view that addition made was totally arbitrary and was not founded on any cogent basis or evidence.
  • The jewellery in question is not very substantial considering the fact that the assessee was married for more than 25-30 years.
  • The assessee was correct in her submission that it was a normal custom for woman to receive jewellery in the form of “stree dhan” or on other occasions such as birth of a child etc.
  • Collecting jewellery of 906.900 grams by a woman in a married life of 25-30 years was normal.
  • Furthermore, there was no valid and/or proper yardstick adopted by the AO to treat only 400 grams as “reasonable allowance” and treat the other as “unexplained”.
  • Matter would have been different if the quantum and value of the jewellery found was substantial.
  • Therefore, the HC was of the opinion that the findings of the Tribunal were totally perverse and far from the realities of life.
  • Hence, the HC answered the question in favour of the assessee and against the revenue by deleting the addition of RS 3,87,364.

In conclusion, addition under Section 69A cannot be based on subjective guesswork. There should be a valid and substantial reasoning for the same. Normal jewellery collected by a woman in a married life of 25-30 years cannot be treated as Unexplained income to be added under Section 69A.

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