Madras High Court Upholds Deletion Of ₹70.95 Cr. Tax Additions In Bogus Long Term Capital Gains Cases

The Madras High Court on 28 August upheld the Income Tax Appellate Tribunal's orders deleting tax additions of Rs. 32.90 crore and Rs. 38.05 crore in cases concerning Long Term Capital Gains claimed from the sale of shares in PFL Infotech Limited and Risa International Limited.

A Division Bench comprising Chief Justice Sushrut Arvind Dharmadhikari and Justice G. Arul Murugan dismissed the Revenue's appeals and the connected appeals concerning penalty under Section 271(1)(c) of the Income Tax Act, 1961 (penalty for concealment of income or furnishing inaccurate particulars of income).

The judges held that the “suspicion, however grave, cannot be equated with proof.”

The cases concerned the sale of shares in PFL Infotech Limited and Risa International Limited. The taxpayers had claimed the profits from the sale as Long Term Capital Gains exempt from tax.

The Assessing Officer, however, treated the gains as unexplained income, alleging that the share prices had been manipulated and that the transactions were accommodation entries.

The Court held that mere steep appreciation in share prices cannot, by itself, justify treating Long Term Capital Gains as bogus. It noted that the transactions were carried out through recognised stock exchanges, Securities Transaction Tax was paid and the sale consideration was received through banking channels.

It observed that the Revenue had not brought any positive material to show that either taxpayer had paid unaccounted cash to any operator or was involved in manipulating the share prices. It noted that the Department had relied mainly on circumstances creating suspicion about the transactions.

The Bench further held that the “test of human probabilities” relied upon by the Revenue cannot replace the requirement of evidence directly connecting the taxpayer with the alleged manipulation. It also noted that the Revenue had failed to complete its investigation into certain purchasers and alleged operators. It observed:

“The "test of human probabilities" enunciated in those decisions is undoubtedly a valid and useful tool of appreciation of evidence, but it does not dispense with the requirement that the Revenue must, at the very least, bring on record some positive material connecting the assessee with the alleged design, particularly where the primary documentary evidence of the transaction is not under challenge,”

The judges agreed with the Tribunal that mere steep appreciation in the price of a share does not, by itself, justify treating the resulting capital gain as bogus when the shares were traded on a recognised stock exchange, the consideration was received through banking channels and there was no clear finding that the taxpayer was involved in manipulating the share price.

Accordingly, the High Court dismissed the Revenue's appeals and upheld the Tribunal's orders deleting the additions. It also dismissed the connected appeals concerning penalty under Section 271(1)(c).

For Petitioner: Senior Standing Counsel T. Ravi Kumar

For Respondent: Senior Counsel Srinath Sridevan for Advocate Bhagawath Krishnan