Rajasthan HC upheld deletion of Addition of LTCG on Sale of Share of Kappac Pharma

PCIT Vs Shri Arnav Goyal (Rajasthan High Court)

In a significant ruling, the Rajasthan High Court upheld the decision of the Income Tax Appellate Tribunal (ITAT), which deleted the additions made by the Assessing Officer (AO) concerning the capital gains from the sale of shares. The case, titled “Principal Commissioner of Income Tax (PCIT) Vs Shri Arnav Goyal,” revolves around the allegations of bogus long-term capital gains and the associated undisclosed expenditures. The Income Tax Department’s appeal against the ITAT’s decision was dismissed, reaffirming the tribunal’s findings.

Issues Raised:

1. Whether the Tribunal was justified in deleting the addition of Rs.31,70,080/- under Section 68 of the Income Tax Act, pertaining to alleged bogus long term capital gains.
2. Whether the Tribunal was justified in deleting the addition of Rs.63,402/- under Section 69C of the Income Tax Act, related to commission paid for acquiring accommodation entries.
3. Whether the Tribunal was justified in upholding the claim of long term capital gain exemption under Section 10(38) of the IT Act without finding it to be a manipulative or deceptive device.
4. Whether the Tribunal was justified in deleting the addition related to commission paid for acquiring accommodation entries despite the synchronized trading norms being violated.

Facts and Tribunal’s Decision:

• The respondent filed an income tax return declaring an income of Rs. 5,48,200/-. Subsequently, during scrutiny, the AO made additions totaling Rs. 31,70,080/- and Rs. 63,402/- for alleged bogus long term capital gains and commission paid for accommodation entries, respectively.
• The Commissioner of Income Tax (Appeals) upheld these additions, leading to an appeal before the ITAT.
• The ITAT, in its order dated 03.04.2023, considered the evidence presented by the respondent. It noted that the shares were purchased through account payee cheques and sold through a registered share broker via online transactions.
• The Tribunal found that there was no contradicting evidence from the department to challenge the genuineness of the transactions.
• Statements recorded by the department without allowing cross-examination were not considered as evidence in the eyes of the law by the Tribunal.
• The Tribunal concluded that the AO failed to prove that the transactions were accommodation entries or manipulative in nature.
• Based on the evidence presented and the lack of contradictory material from the department, the Tribunal deleted the additions made by the AO.

Court’s Decision:

• The High Court dismissed the appeal filed by the Principal Commissioner of Income Tax (PCIT), upholding the ITAT’s decision.
• It held that no substantial questions of law arose from the Tribunal’s order, as it was based on an appreciation of evidence and lacked any apparent perversity.
• The High Court emphasized that the AO did not substantiate claims of the transactions being bogus or manipulative adequately.

FULL TEXT OF THE JUDGMENT/ORDER OF RAJASTHAN HIGH COURT

1. This appeal under Section 260A of Income Tax Act is filed against the order dated 03.04.2023 passed by Income Tax Appellate Tribunal, Jaipur Bench, Jaipur (for short ‘Tribunal’) allowing the appeal of the respondent.

2. Following substantial questions of law have been proposed:-

“(i)Whether the Tribunal was justified in deleting the addition of Rs.31,70,080/- made by the AO u/s 68 of the I. T. Act, 1961 on account of bogus short Term Capital and the Tribunal has also in ignorance of report of SEBI and SIT?

(ii) Whether the Tribunal was justified in deleting the addition of Rs.63,402/- made by the Assessing Officer u/s 69C of the I.T. Act, on account of commission paid for acquiring accommodation entries?

(iii) Whether the Tribunal was justified in holding that the claim of long term capital gain of exemption u/s 10(38) of IT Act do not suffer from infirmities and cannot be held as bogus ignoring that the impugned transaction was manipulative/deceptive device to create profit/loss?

(iv) Whether the Tribunal was justified in deleting the addition made by the A. O. on account of commission paid for acquiring accommodation entry ignoring that such type of synchronized trading is violation of transparent norms of trading in securities?”

3. The brief facts of the case are that the respondent for assessment year 2015-2016 filed an income tax return declaring income of Rs.5,48,200/-. The case was taken up in scrutiny and vide order dated 21.12.2017 an addition of Rs.31,70,080/- was made on account of bogus long term capital gain on sale of shares of M/s. Kappac Pharma Limited (for short ‘company’). Further addition of Rs.63,ww402/- was made on account of undisclosed expenditure towards payment of commission for sale of the shares of company. The respondent was unsuccessful in appeal filed before the Commissioner Income Tax (Appeals). The Tribunal vide order dated 03.04.2023 allowed the appeal of the respondent and deleted the additions. Hence the p321`resent appeal.

4. Learned counsel for the appellant submits that the Tribunal erred in allowing the appeal. The department had a material in shape of the statements recorded of Sh. Jai Kishan Poddar and Sh. Anil Kumar Khemka stating that accommodating entries in guise of long terms capital gains was being provided by the company. It is further argued that the steep rise in shares prices within a short period creates a doubt on the transaction which was not supported by any document.

5. The Tribunal while allowing the appeal took into consideration that 12500 shares of the company were purchased by the respondent in financial year 2012-2013 for an amount of Rs.1,87,500/-. After more than one year, on sale of the shares, respondent had a capital gain of Rs.29,75,725/-. The payment for purchase was through account payee cheque. The purchase and sale was through a Demat Account maintained by an independent agency. The shares were sold through registered share broker by an online transaction and as per the share prices prevalent on that day. The Assessing Officer failed to contradict the evidence adduced by the respondent to support the claim of long term capital gain.

6. It was considered that the statements recorded at the back of the respondent, without affording an opportunity of cross-examination was no evidence in eyes of law. Further the statements nowhere stated that the transactions of the respondent with regard to sale and purchase of the shares of the company was an accommodating entry. It would be appropriate to note that second addition on account of undisclosed expenditure of commission paid was consequent upon addition made of long term capital gain.

7. The Tribunal allowed the appeal on appreciation of evidence adduced by respondent and considering that no contrary material produced by the department. No case is made out for interference. Moreso, when there is no case pleaded of perversity. No questions of law much less the substantial questions of law
arises.

8. The appeal is dismissed.