LTCG on sale of shares: Addition based on mere generalized reports & conjectures not sustainable

Shashi Bala Bajaj Vs ITO (ITAT Kolkata)

LTCG on sale of shares: Addition based on mere generalized reports & conjectures not sustainable

The Income Tax Appellate Tribunal (ITAT), Kolkata, delivered a significant ruling in the case of Shashi Bala Bajaj vs Income Tax Officer (ITO) concerning the assessment year 2014-15. The case revolved around the assessee’s claim of Long-Term Capital Gains (LTCG) exemption under Section 10(38) of the Income Tax Act, 1961, arising from the sale of shares of M/s. Surabhi Chemical & Investments Ltd.

Background of the Case

The Assessing Officer (AO) contested the LTCG claim, alleging it was a bogus transaction. Relying on a generalized report and modus operandi purportedly followed in such cases, the AO rejected the assessee’s evidence, disallowed the exemption, and added the entire sale proceeds as income.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, citing circumstantial evidence, human probabilities, and “rules of suspicious transactions” as grounds for his conclusion.

Key Issues Before the ITAT

The primary issue for adjudication before ITAT was whether the rejection of the LTCG claim and the consequent addition were justified based on the evidence provided.

Observations and Ruling by ITAT Kolkata

The ITAT highlighted several critical aspects of the case:

1. Lack of Direct Evidence:
   The evidence submitted by the assessee, supporting the genuineness of the share transactions, remained unchallenged and uncontroverted. The authorities based their conclusions solely on a generalized investigation report, which did not specifically implicate the assessee.
2. Failure to Confront the Assessee:
   The assessee was neither provided with the investigation report nor confronted with any material or statement used against her.
3. Reliance on Generalized Observations:
   The ITAT emphasized that tax assessments must rely on direct evidence rather than generalized reports, suspicion, or conjectures.
4. Precedent Cases:
   The tribunal referred to several rulings, including:
   • CIT vs Bhagwati Prasad Agarwal (Calcutta High Court, 2009)
   • CIT vs Shri Mukesh Ratilal Marolia (Bombay High Court, 2011)
   • Pr. CIT vs Prem Pal Gandhi (Punjab & Haryana High Court, 2018)

   These precedents underscored that decisions in similar cases should be evidence-based and not rest on speculation or human probabilities.

ITAT’s Final Decision

Bound by the legal principles established in the above precedents, the ITAT ruled in favor of the assessee. It concluded that the addition made by the AO and upheld by the CIT(A) was not sustainable. The tribunal ordered the deletion of the disputed addition, allowing the assessee’s appeal.

Implications of the Ruling

The judgment reiterates the principle that tax authorities must base their conclusions on concrete evidence rather than generalizations or assumptions. It highlights the importance of adhering to procedural fairness, including the necessity of confronting taxpayers with evidence used against them.

Conclusion

The ITAT Kolkata’s decision in Shashi Bala Bajaj vs ITO provides clarity on the treatment of LTCG claims, reinforcing the importance of evidence-based assessments. This ruling serves as a reminder that tax assessments must remain transparent and fair, ensuring taxpayers are not penalized based on conjecture or suspicion.

Tax practitioners and taxpayers alike may find this case pivotal in addressing disputes involving LTCG claims under Section 10(38).

FULL TEXT OF THE ORDER OF ITAT KOLKATA

This appeal filed by the assessee is directed against the order of the Learned Commissioner of Income Tax (Appeals) – 10, Kolkata, (hereinafter the ‘Ld. CIT(A)’), dt. 27^th June, 2018, passed u/s 250 of the Income Tax Act, 1961 (hereinafter the ‘Act’), relating to Assessment Year 2014-15.

2. The sole issue that arises for my adjudication is whether the Assessing Officer was right in rejecting the claim of the assessee that he had earned Long Term Capital Gains on purchase and sale of the shares of M/s. Surabhi Chemical & Investments Ltd. The AO based on a general report and modus operandi adopted generally in these cases and on general observations has concluded that the assessee has claimed bogus long term capital gain. He made an addition of the entire sale proceeds of the shares as income and rejected the claim of exemption made u/s 10(38) of the Act. The evidence produced by the assessee in support of the genuineness of the transaction was rejected.

3. The assessee carried the matter in appeal and the ld. CIT(A), had upheld the addition. The ld. CIT(A) has in his order relied upon “circumstantial evidence” and “human probabilities” to uphold the findings of the AO. He also relied on the so called “rules of suspicious transaction”. No direct material was found to controvert the evidence filed by the assessee, in support of the genuineness of the transactions. In other words, the overwhelming evidence filed by the assessee remains unchallenged and uncontroverted. The entire conclusions drawn by the revenue authorities, are based on a common report of the Director of Investigation, Kolkata, which was general in nature and not specific to any assessee. The assessee was not confronted with any statement or material alleged to be the basis of the report of the Investigation Wing of the department and which were the basis on which conclusion were drawn against the assessee. Copy of the report was also not given.

4. Under the circumstances, in a number of cases this bench of the Tribunal has consistently held that decision in all such cases should be based on evidence and not on generalisation, human probabilities, suspicion, conjectures and surmises. We have in all cases deleted such additions. Some of the cases were detailed finding have been given on this issue are listed below:-

5. I am bound by the proposition of law laid down in these case law by the Jurisdictional High Court as well as by the ITAT Kolkata. They are squarely applicable to the facts of the case. The ld. Departmental Representative, though not leaving his ground, could not controvert the claim of the ld. Counsel for the assessee that the issue in question is covered by the above cited decisions of the Hon’ble High Courts and the ITAT.

6. In view of the above discussion the addition in question is deleted and the appeal of the assessee is allowed.

7. In the result the appeal of the assessee is allowed.

Kolkata, the 16^th day of November, 2018.