Facts of the Case

  • The assessee declared Long-Term Capital Gains (LTCG) from sale of shares of M/s Goldline International Finvest Ltd..
  • The Assessing Officer (AO) treated the gains as bogus and made an addition of ₹1,60,18,923/- under Section 68.
  • The AO relied on:
    • Abnormal rise in share prices
    • Investigation Wing reports on penny stock manipulation
  • The ITAT deleted the addition holding that:
    • Transactions were genuine
    • Payments were through banking channels
    • Shares were dematerialized and sold through proper channels
  • The Revenue challenged the ITAT order before the Delhi High Court.

Issues Involved

  1. Whether LTCG arising from penny stock transactions can be treated as unexplained cash credit under Section 68 without direct evidence.
  2. Whether suspicion based on abnormal price rise and investigation reports is sufficient to sustain additions.
  3. Whether the assessee discharged the burden of proof under Section 68.

Petitioner’s Arguments (Revenue)

  • The ITAT erred in deleting additions made under Section 68.
  • The share price showed an astronomical and unjustified increase, indicating manipulation.
  • The transaction was part of a pre-arranged scheme to convert unaccounted money into exempt LTCG.
  • Reliance was placed on:
    • Suman Poddar v. ITO (423 ITR 480)
  • The AO’s findings based on investigation reports and financial data justified the addition.

Respondent’s Arguments (Assessee)

  • All transactions were genuine and duly supported by evidence:
    • Purchase and sale through banking channels
    • Shares held in demat form
  • No evidence was produced by the Revenue to prove:
    • Any accommodation entry
    • Flow of unaccounted money
  • The AO failed to conduct proper independent inquiry despite issuing notices.
  • The burden under Section 68 was duly discharged.

Court’s Findings / Order

  • The Delhi High Court upheld the ITAT order and dismissed the Revenue’s appeal.
  • Key findings:
    • No cogent evidence was produced to prove that transactions were bogus.
    • AO’s conclusion was based on assumptions and conjectures.
    • Mere reliance on investigation reports without corroboration is insufficient.
    • Suspicion, however strong, cannot replace legal proof.
    • The assessee had discharged the initial burden under Section 68 by providing documentary evidence.
  • The Court held that:

No substantial question of law arises in the present case.

Important Clarifications by Court

  • Abnormal rise in share price alone is not sufficient to conclude bogus transactions.
  • Investigation Wing reports must be supported by independent evidence.
  • The principle of preponderance of probabilities cannot override documentary evidence.
  • Distinction drawn from:
    • Suman Poddar v. ITO
    • Sumati Dayal v. CIT
      (held to be fact-specific and not universally applicable)

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/MMH23112022ITA4772022_203051.pdf

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