The Hon'ble Income Tax Appellate Tribunal Delhi in Shobhit Gupta v. ACIT [2024] TA Nos. 2626 & 2627 (DEL.) OF 2022 held that reopening of assessment alleging bogus Long Term Capital Gains was unjustified when transactions were supported by proper documentation and conducted through recognized channels.
Facts of the Case:
The matter concerns an assessee who invested in shares and claimed Long Term Capital Gains (LTCG) across two assessment years. On November 25, 2010, the assessee purchased 1,50,000 shares of M/s Agarwal Purchasing Ltd. (later renamed as M/s Wagend Infra Venture Ltd.) at Rs. 12 per share, totaling an investment of Rs. 18,00,000. These shares were initially received in physical form with a mandatory 12-month lock-in period before being converted to dematerialized form.
During Assessment Year 2012-13, the assessee sold 42,750 shares through M/s K.K. Securities Ltd. via online mode on the recognized stock exchange, generating LTCG of Rs. 80,79,788. In the subsequent Assessment Year 2013-14, the remaining shares were sold for Rs. 2,86,25,434, with the assessee claiming exemption under section 10(38) for Rs. 2,71,88,988, as Securities Transaction Tax (STT) was duly paid on these transactions.
The case took a turn when the Investigation Wing conducted a search operation under section 132 on M/s Radford Global Group on April 9, 2015. The search allegedly revealed that shares of Wagend Infra Ventures Ltd. were being used for accommodation entries. Based on this information, the Assessing Officer reopened assessments under section 147 for both years, questioning the legitimacy of the claimed LTCG.
Throughout the assessment proceedings, the assessee maintained complete transparency by providing comprehensive documentation including bank statements showing payment trails, contract notes from the registered broker, and detailed transaction statements. The assessee demonstrated that all payments were routed through proper banking channels, transactions were executed on recognized stock exchanges, and share movements were properly recorded through physical certificates and demat accounts.
Held by the Tribunal:
The Hon'ble ITAT Delhi in ITA Nos. 2626 & 2627 (DEL.) OF 2022 held that:
· The Tribunal fundamentally observed that the entire case built by the Assessing Officer rested solely on investigation reports without any independent corroboration. The Court emphasized that the assessee had meticulously maintained and provided all relevant documentation proving transaction legitimacy, with no defects identified by the Assessing Officer in any submitted document. It was explicitly noted that all monetary transactions were conducted through banking channels, with no evidence of cash recycling or unofficial payments.
· In a significant observation regarding procedural fairness, the Tribunal severely criticized the Assessing Officer's conduct in denying the assessee's specific request for cross-examination of persons whose statements were relied upon. The Tribunal opined that this denial constituted a grave violation of natural justice, rejecting the Assessing Officer's explanation that cross-examination was impractical due to the large network of entry operators.
· The Tribunal, drawing from established precedents, held that mere classification of a stock as "penny stock" by the tax department cannot automatically render all related transactions bogus. They observed that many legitimate investors enter the capital market seeking profits from price movements, and without specific evidence of wrongdoing, such transactions cannot be invalidated based on mere suspicion.
· Elaborating on the evidentiary requirements, the Tribunal emphasized that the Assessing Officer should have conducted independent inquiries rather than relying solely on Investigation Wing reports. They held that information from investigation wings must be corroborated during assessment by examining concerned persons who can affirm previously recorded statements.
Relevant Sections:
- Section 10(38) of Income Tax Act, 1961
- Section 147 of Income Tax Act, 1961
- Section 68 of Income Tax Act, 1961
Cases Referred:
Pr. CIT v. Karuna Garg (Delhi High Court ITA No. 477/Del/2022):
Established that astronomical share price increase alone cannot justify treating LTCG as accommodation entry
Emphasized need for concrete evidence beyond market behavior
Pr. CIT v. Smt. Krishna Devi (ITA 125/2022):
Highlighted that suspicion, however strong, cannot substitute for legal evidence
Established principle that assessment must be based on evidence, not merely circumstances
M/s Alpine Investments (Calcutta High Court ITA No.620 of 2008):
Affirmed that transactions supported by proper documentation cannot be dismissed on mere suspicion
Established importance of considering legitimate market behavior
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