Krishna Devi, New Delhi vs ITO, Ward-38(3), New Delhi – ITA 6356/DEL/2019: Assessing the Legitimacy of Long Term Capital Gains under Section 68

Case Overview: Krishna Devi vs ITO, Ward-38(3), New Delhi

Case Number: ITA 6356/DEL/2019

Appellant: Krishna Devi, New Delhi

Respondent: ITO, Ward-38(3), New Delhi

Assessment Year: 2014-15

Date of Filing: 2019-07-29

Order Type: Final Tribunal Order

Date of Order: 2022-01-04

Pronounced On: 2022-01-04

Background

Krishna Devi, a resident of New Delhi, filed an appeal against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] which sustained the addition made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961. The addition pertained to the alleged bogus Long Term Capital Gains (LTCG) arising from the sale of shares, claimed by the appellant as exempt under Section 10(38) of the Act.

Grounds of Appeal

The appellant raised several grounds challenging the validity of the reopening of the assessment under Section 147/148 and the subsequent additions made by the AO. Key among these were:

• The jurisdictional error in sustaining the order passed under Section 147/143(3) without proper jurisdictional satisfaction.
• Alleged failure in independent application of mind by the AO, resulting in a “rubber stamp” action based on borrowed satisfaction.
• Challenges to the substantive additions of Rs. 24,69,636 made under Section 68, comprising Rs. 23,52,034 as unexplained cash credits (bogus LTCG) and Rs. 1,17,602 as unexplained expenditure.

Examination of the Case by the Tribunal

The Income Tax Appellate Tribunal (ITAT) Delhi Bench, presided over by Dr. B.R.R. Kumar, Accountant Member, and Sh. Amit Shukla, Judicial Member, heard the case. The tribunal meticulously examined the evidence presented, including the appellant’s purchase and sale transactions of shares in M/s Esteem Bio Organic Food Processing Ltd. (EBFL).

Scrutiny of Share Transactions

The AO had scrutinized the purchase of 6000 shares of EBFL at Rs. 26.55 per share on 11.02.2013 and their subsequent sale at substantially higher prices during February and March 2014. The AO suspected that the LTCG claimed by the appellant was part of a pre-arranged scheme to convert unaccounted money into tax-exempt income through the manipulation of share prices, a practice commonly referred to as “penny stock” scams.

The AO’s investigation highlighted the suspicious price movement of EBFL shares, which saw an exponential increase in value within a short period, defying normal market behavior and financial fundamentals. The AO concluded that the transactions were not genuine investments but rather a colorable device for tax evasion.

Findings of the CIT(A)

The CIT(A) upheld the AO’s findings, emphasizing the application of the principle of “preponderance of probability” over “beyond reasonable doubt” in tax matters. The CIT(A) referenced the investigation reports, the financials of EBFL, and the patterns of share price movements as corroborating evidence that the transactions were pre-arranged and lacked economic substance.

Tribunal’s Analysis and Judgment

The tribunal reviewed the entire gamut of evidence, including the financial statements of EBFL, the circumstances surrounding the purchase and sale of shares, and the broader context of the alleged penny stock scheme. The tribunal observed that while the AO and CIT(A) relied heavily on the investigation reports and the suspicious nature of the transactions, the appellant had provided substantial documentation, including contract notes, bank statements, and broker records, to support the legitimacy of the transactions.

The tribunal also considered precedents where similar transactions were scrutinized, and the courts emphasized the need for concrete evidence to establish that the apparent transactions were indeed shams. The tribunal concluded that the AO had not adequately discharged the burden of proof to demonstrate that the LTCG claimed by the appellant was fictitious.

Final Judgment

Based on the detailed examination of the facts and the evidence on record, the tribunal ruled in favor of the appellant. The addition of Rs. 24,69,636 made by the AO under Section 68 was deleted. The tribunal held that the reopening of the assessment under Section 147/148 was not justified, as it was primarily based on assumptions and did not meet the requisite standards of reasonableness and sufficiency of evidence.

The final judgment underscored the importance of a thorough and fair examination in cases involving allegations of tax evasion through manipulated share transactions. The tribunal’s decision to quash the addition serves as a reminder of the need for robust evidence before concluding that transactions are not genuine.

Conclusion

The ITAT’s ruling in Krishna Devi vs ITO, Ward-38(3), New Delhi (ITA 6356/DEL/2019) reaffirms the necessity of following due process and relying on substantive evidence in tax assessments, particularly in cases involving allegations of bogus LTCG. The tribunal’s decision to delete the addition of Rs. 24,69,636 highlights the need for tax authorities to meticulously establish the grounds for their actions, ensuring that taxpayers are not unjustly penalized based on speculative assumptions.

Krishna Devi, New Delhi vs ITO, Ward-38(3), New Delhi – ITA 6356/DEL/2019: Assessing the Legitimacy of Long Term Capital Gains under Section 68