Smt. Anjli Pandit Vs ACIT (ITAT Mumbai)
In a significant ruling, the Income Tax Appellate Tribunal (ITAT) Mumbai bench has overturned additions made by the tax authorities regarding alleged bogus long-term capital gains and unexplained expenditure related to share transactions by assessee Smt. Anjli Pandit. The tribunal’s decision, stemming from a search action initiated in 2006, underscores the importance of documentary evidence and the principle that accepted positions in earlier assessments cannot be arbitrarily disregarded.
The case originated from a search conducted on January 24, 2006, based on information suggesting the assessee was involved in obtaining bogus purchase entries for penny stocks to generate fictitious long-term capital gains. Following a notice under Section 153A of the Income Tax Act, the assessee filed a return declaring income which included a long-term capital gain of Rs. 69,35,295 from the sale of shares in G Tech Soft Ltd and High Land Ltd. These shares had been purchased in the Financial Year 2002-03 for a cost of Rs. 1,58,299.
The assessee contended that the purchase of these shares in FY 2002-03 was funded by speculation gains of Rs. 1,49,916 from the sale of other shares, which had been declared in the return for Assessment Year (AY) 2003-04 and accepted by the Assessing Officer (AO) in an assessment order passed under Section 143(3) read with Section 153A. The balance of the purchase cost, Rs. 8,383, was met from cash. The investments were reflected in the assessee’s books and balance sheet for AY 2003-04.
Despite this, the AO rejected the long-term capital gain claim, treating it as income from other sources. The AO’s reasoning was based on the belief that the assessee had obtained bogus purchase and sale entries from brokers involved in providing such services, thus deeming the resulting capital gain fictitious.
The situation escalated at the first appellate stage, where the Commissioner of Income Tax (Appeals) [CIT(A)] not only upheld the disallowance but enhanced the assessment by treating the entire sale consideration of Rs. 70,93,594 as income from other sources under Section 68 of the Act. The CIT(A) reportedly relied on internet inquiries about the brokers while seemingly disregarding the documentary evidence provided by the assessee.
The assessee argued before the ITAT that all share transactions, including off-market purchases and physical delivery of shares which were subsequently transferred in the assessee’s name, were conducted through SEBI registered brokers and were supported by bills, vouchers, payment and receipt details, and broker confirmations. It was highlighted that the purchase of shares and their source of investment had been accepted by the AO in the AY 2003-04 assessment.
The ITAT found merit in the assessee’s arguments. The tribunal observed that the CIT(A)’s findings were contrary to the documentary evidence on record. Crucially, the tribunal noted that nothing incriminating was found during the search action to contradict the assessee’s claims.
The tribunal placed reliance on several judicial precedents, including decisions of the Bombay High Court and the Supreme Court, that have dealt with similar issues of share transaction genuineness.
The ITAT cited the Bombay High Court case of CIT Vs Mukesh Ratilal Marolia (ITA No. 456 of 2007, order dated 7.9.2011), which was also upheld by the Supreme Court (SLP (Civil) No(s). 20146/2012 dismissed on 27.01.2014). In that case, the Bombay High Court had upheld the tribunal’s decision that off-market share transactions, when supported by books of account and evidence, cannot be considered sham merely because they are not reflected in stock exchange records. The court in Mukesh Ratilal Marolia’s case had emphasized that if the assessee has received the sale proceeds and the shares are no longer with the assessee, and the documentation supports the transactions, the genuineness should not be doubted.
Another case referenced was CIT Vs Jamnadevi Agarwal, where the Bombay High Court held that merely purchasing and selling shares of similar companies through the same broker is not grounds to hold transactions bogus when documentary evidence is produced to establish genuineness. The court had distinguished the Supreme Court case of Sumati Dayal Vs CIT (1995) 214 ITR 801 (SC) by noting that in Jamnadevi Agarwal’s case, the share transactions were supported by documents, unlike the facts in Sumati Dayal where income from alleged horse race winnings was questioned due to lack of actual participation and introduction of unaccounted money.
The ITAT also referred to the decision in Mrs. Rasila N. Gada & Others, where the tribunal, following the Bombay High Court in Mukesh R. Marolia, held that off-market share transactions supported by evidence cannot be treated as illegal or sham. This case also highlighted that non-payment of STT alone should not be a basis for addition under Section 68.
Applying the principles from these judgments to the facts of Smt. Anjli Pandit’s case, the ITAT concluded that the assessee’s share purchase and sale transactions were genuine. The tribunal found that the revenue authorities failed to provide any evidence to counter the documentary proof furnished by the assessee.
Regarding the addition of Rs. 1,58,299 as unexplained expenditure under Section 69C, representing the cost of share purchase, the ITAT similarly found the addition unsustainable. The tribunal reiterated that the investment was made in AY 2003-04, the source of funds was explained and accepted in the earlier assessment, and the investment was reflected in the balance sheet. The tribunal noted that invoking Section 69C, which deals with unexplained expenditure, was also legally questionable as the amount represented an investment, not an expenditure in the current year.
Consequently, the ITAT set aside the order of the CIT(A) and directed the AO to delete both the addition of the entire sale consideration under Section 68 and the addition of the cost of purchase under Section 69C.
The ruling reinforces the judiciary’s stance that tax assessments must be based on concrete evidence and due process, and that past acceptances by the department carry weight unless specifically contradicted by incriminating material found during a search or other verifiable evidence.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
