Facts of the Case

The present appeals were filed by the Revenue under Section 260A of the Income Tax Act, 1961 against a common order passed by the Income Tax Appellate Tribunal (ITAT).

The Respondent-Assessee, an individual, declared income from interest and claimed exemption of Long Term Capital Gains (LTCG) under Section 10(38) arising from sale of shares.

During scrutiny assessment, the Assessing Officer (AO) observed that the assessee had earned substantial exempt LTCG allegedly through penny stock transactions of M/s Gold Line International Finvest Limited. The AO treated the transaction as a colorable device to introduce unaccounted income and made additions under Section 68 read with Section 115BBE.

The CIT(A) upheld the additions. However, the ITAT deleted the additions on the ground of lack of proper enquiry and evidence.

Aggrieved, the Revenue filed appeals before the Delhi High Court 

Issues Involved

  1. Whether LTCG claimed by the assessee on sale of penny stocks can be treated as unexplained cash credit under Section 68?
  2. Whether additions can be sustained solely on the basis of Investigation Wing reports without independent enquiry by the AO?
  3. Whether the ITAT erred in deleting additions despite abnormal rise in share prices 

Petitioner’s Arguments (Revenue)

  • The ITAT erred in deleting additions despite strong circumstantial evidence indicating bogus LTCG.
  • The AO had conducted enquiry, including issuing notices under Section 133(6).
  • Penny stock transactions showing extraordinary price rise are inherently suspicious and should be tested on the principle of human probabilities.
  • The transactions were part of an accommodation entry racket.
  • Reliance was placed on judicial precedents including:
    • Suman Poddar v. ITO
    • Sumati Dayal v. CI 

Respondent’s Arguments (Assessee)

  • All transactions were genuine and supported by documentary evidence:
    • Purchase and sale through recognized stock exchange
    • Payments made via banking channels
    • Shares held in demat account
  • No evidence was produced by the Revenue to prove that the transactions were bogus.
  • The AO relied solely on Investigation Wing reports without conducting independent enquiry.
  • The burden under Section 68 was duly discharged by the assessee 

Court’s Findings / Order

The Delhi High Court upheld the ITAT’s order and dismissed the Revenue’s appeals.

Key Findings:

  • The AO failed to conduct independent and meaningful enquiry and relied heavily on Investigation Wing reports.
  • No cogent material or evidence was brought on record to establish that the transactions were bogus.
  • The conclusion of the AO was based on assumptions and conjectures, not evidence.
  • Suspicion, however strong, cannot replace proof.
  • The assessee had successfully discharged the burden under Section 68 by producing relevant documents.
  • The ITAT, being the final fact-finding authority, had rightly appreciated the evidence.

Final Order:

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

Important Clarifications

  • Mere reliance on Investigation Wing reports is insufficient without corroboration.
  • Abnormal rise in share prices alone does not justify addition under Section 68.
  • The principle of human probability cannot override documentary evidence.
  • Proper enquiry by the AO is mandatory before making additions.

Sections Involved

  • Section 68 – Unexplained Cash Credits
  • Section 115BBE – Tax on Unexplained Income
  • Section 10(38) – Exemption on LTCG (applicable at the relevant time)
  • Section 133(6) – Power to call for information
  • Section 260A – Appeal to High Court
  • Section 143(3) – Assessment

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

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