Facts of the Case

The Respondent-Assessees, including Smt. Krishna Devi, had declared income from various sources and claimed exemption of Long-Term Capital Gains (LTCG) under Section 10(38) arising from sale of shares of a company.

The Assessing Officer (AO), during scrutiny assessment, concluded that the LTCG was bogus and merely a device to convert unaccounted income into exempt gains through penny stock transactions. Accordingly, additions were made under Section 68 read with Section 115BBE.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the additions. However, the Income Tax Appellate Tribunal (ITAT) deleted the additions, holding that the AO failed to conduct proper independent enquiry.

The Revenue filed appeals before the Delhi High Court under Section 260A 

Issues Involved

  1. Whether additions under Section 68 can be sustained solely on the basis of Investigation Wing reports alleging bogus LTCG in penny stock transactions.
  2. Whether absence of independent enquiry by the Assessing Officer vitiates the assessment.
  3. Whether suspicion and abnormal price rise in shares can substitute legal proof.
  4. Whether ITAT erred in deleting additions made by AO and confirmed by CIT(A) 

Petitioner’s Arguments (Revenue)

  • The ITAT erred in deleting additions despite strong circumstantial evidence indicating bogus LTCG transactions.
  • The AO had conducted enquiry, including issuing notices under Section 133(6).
  • Penny stock transactions inherently indicate accommodation entries and tax evasion.
  • The principle of human probability should be applied, as no prudent investor would invest in such companies.
  • Reliance was placed on:
    • Suman Poddar v. ITO
    • Sumati Dayal v. CIT

Respondent’s Arguments (Assessee)

  • Transactions were genuine and supported by documentary evidence:
    • Purchase and sale through banking channels
    • Shares held in demat accounts
    • Proper documentation of transactions
  • AO relied solely on third-party reports without independent verification.
  • No direct evidence existed to prove that the transactions were bogus or accommodation entries.
  • The burden under Section 68 had been discharged 

Court’s Findings / Order

  • The High Court upheld the ITAT’s decision and dismissed the Revenue’s appeals.
  • The AO failed to conduct independent and meaningful enquiry and relied primarily on Investigation Wing reports.
  • No material evidence was produced to prove that the transactions were sham or that unaccounted money was introduced.
  • Mere suspicion arising from abnormal rise in share prices cannot replace proof and evidence.
  • The assessee successfully discharged the burden under Section 68 by providing proper documentation.
  • Findings of ITAT, being a fact-finding authority, were based on evidence and did not suffer from perversity.

Final Order:

  • No substantial question of law arose.
  • Appeals filed by Revenue were dismissed 

Important Clarifications

  • Suspicion, however strong, cannot substitute legal evidence in taxation matters.
  • Investigation Wing reports must be corroborated through independent enquiry by the AO.
  • Proper documentation (banking channels, demat records, etc.) strengthens the assessee’s case under Section 68.
  • The principle of human probability cannot override documentary evidence without supporting material.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:188-DB/SVN15012021ITA1252020_115829.pdf

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