Annu Anil Agrawal Vs ACIT (ITAT Mumbai)
No addition u/s 68 on account of alleged bogus LTCG without AO’s independent verification or a rational connection to income escapement
Conclusion: AO could not rely solely on borrowed information without independent verification or a rational connection to income escapement. Long-term capital gains on sale of “penny” stocks could not be treated as bogus & unexplained cash credit if the documentation was in order & there was no allegation of manipulation by SEBI or the BSE. Therefore, addition under section 68 on account of alleged bogus LTCG and u/s 69 on account of alleged commission paid by the assessee to the brokers.
Held: Assessee had sold 11,80,000 shares of M/s. JMD Telefilms Ltd. and 368 shares of Adani Power Ltd., and as a result of which assessee earned long-term capital gain (LTCG) of Rs. 6,59,65,834/-, which have been claimed as exempt income u/s 10(38) in her return of income. However, disregarding the submissions and documents placed on record by assessee, the AO proceeded to make additions u/s 68 on account of alleged bogus LTCG and consequently made additions u/s 68 and also u/s 69 on account of alleged commission paid by the assessee to the brokers. It was held that Long-term capital gains on sale of “penny” stocks could not be treated as bogus & unexplained cash credit if the documentation was in order & there was no allegation of manipulation by SEBI or the BSE. Denial of right of cross-examination was a fatal flaw which rendered the assessment order a nullity. AO could not rely solely on borrowed information (from DGIT, Kolkata) without independent verification or a rational connection to income escapement. Reliance in this regard was placed on the decision of the Hon’ble Bombay High Court in the case of Hindustan Lever Ltd. v. R.B. Wadkar (2004) 190 CTR (BOM) 275 and PCIT 5. Mumbai vs. Shodiam Investment Private Limited ITA 1297 of 2015. Moreover, SEBI’s Internal investigation report on JMD Telefilms did not name the assessee or her broker, and no notices were issued to her even once.
