2019 (5) TMI 1670 - AT - Income Tax

Bogus LTCG - denial of exemption u/s 10(38) - unexplained cash credit u/s 68 - as per assessee transaction was done through the Registered Stock Exchange Broker only and payment was made through proper banking channel - HELD THAT - SEBI has given a clean chit to the company and has freed it from the allegation of market rigging. Therefore, the allegation of the AO itself becomes infructuous - assessee had also requested for an opportunity to cross examine Sri Sunil Dokania, whose statement has been relied on by the AO for making the addition. AO did not provide any opportunity for cross examine, the so-called operators. It is well established law that no adverse view can be taken against an assessee, on the basis of statement recorded by department of any person without providing copy of the statement to the assessee and also without providing opportunity for cross examination of the said person. Assessee had never entered into any transaction with Sri Sunil Dokania, against whom investigation wing had allegedly made inquiry. We also note that in the extracts of the statement of Sri Sunil Dokania given in the Show Cause notice, it is nowhere mentioned that the alleged person has provided any entry to the assessee directly. When the transactions were as per norms prescribed by SEBI and concerned stock exchange and suffered STT,brokerage, service tax, and cess. There is no iota of evidence over thetransactions as it were reflected in demat account. AO did not doubt the genuineness of the documents submitted by assessee. Theld AO failed to bring on record any evidence to suggestthat the sale of shares by the Assessee were not genuine. The assessee produced the contract notes, details of demataccounts and produced documents showing all payments were received bythe assessee through banks. In these circumstances, the long term capital gain (LTCG) earned by the assessee should not be treated as bogus - Decided in favour of assessee Unexplained expenditure towards commission charges of sale of such shares by the operator - HELD THAT - As already held that the transactions relating to LTCG were genuine and not the accommodation entries as alleged by the AO. Consequently, the addition is hereby directed to be deleted. We accordingly hold that the issue is allowed in favour of the assessee.

Issues Involved:
1. Disallowance of Long Term Capital Gains (LTCG) under Section 10(38) of the Income Tax Act.
2. Addition as unexplained cash credit under Section 68 of the Income Tax Act.
3. Denial of natural justice due to the non-provision of cross-examination opportunities.
4. Reliance on statements from unrelated persons and information from the Investigation Wing.

Issue-wise Detailed Analysis:

1. Disallowance of Long Term Capital Gains (LTCG) under Section 10(38) of the Income Tax Act:
The assessee claimed LTCG exemption on the sale of shares of Kailash Auto Finance Ltd., Lifeline Drugs & Pharma Ltd., and ENIS Edutech Ltd. The Assessing Officer (AO) disallowed this claim, asserting that the gains were artificially arranged. The AO based this conclusion on an investigation by the Directorate of Investigation, Kolkata, which alleged a nationwide racket of generating bogus LTCG entries. The AO noted that the share prices were rigged and manipulated, and the transactions were pre-arranged to book gains in the hands of pre-fixed beneficiaries.

2. Addition as unexplained cash credit under Section 68 of the Income Tax Act:
The AO treated the LTCG of ?7,12,89,467/- as unexplained cash credit under Section 68, citing that the source of the capital introduced was not satisfactorily explained. The AO dismissed the evidences provided by the assessee, such as purchase bills, bank statements, and broker notes, considering them pre-planned. Consequently, the AO added the entire amount as unexplained cash credit.

3. Denial of natural justice due to the non-provision of cross-examination opportunities:
The AO relied on statements from unrelated persons and information from the Investigation Wing without providing the assessee an opportunity to cross-examine these individuals. This was deemed a denial of natural justice. The Tribunal noted that cross-examination is a sine qua non of due process of taking evidence, and no adverse inference can be drawn without it.

4. Reliance on statements from unrelated persons and information from the Investigation Wing:
The AO's reliance on statements from individuals like Sri Sunil Dokania, an alleged entry operator, was criticized because the assessee was not allowed to cross-examine these witnesses. The Tribunal emphasized that the AO failed to bring any corroborative evidence on record to substantiate the statements relied upon. The Tribunal found that the AO's conclusions were based on generalized allegations and suspicion rather than concrete evidence.

Judgment:
The Tribunal found that the assessee had provided substantial evidence to support the genuineness of the transactions, including contract notes, demat statements, and bank statements. The SEBI had also cleared the assessee from allegations of market manipulation. The Tribunal held that the AO's addition based on suspicion and generalized allegations was not sustainable. The Tribunal directed the AO to delete the addition of ?7,12,89,467/- and allowed the appeals in favor of the assessee. Additionally, the Tribunal emphasized the importance of providing an opportunity for cross-examination and criticized the AO's reliance on unverified statements.

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