2019 (8) TMI 1520 - AT - Income Tax

Bogus LTCG - Unexplained credit u/s 68 - CIT (A) has wrongly confirmed the action of the AO in rejecting the claim of long term capital gain holding the transaction as bogus - AO has rejected the claim of the assessee on the basis of the outcome of investigation carried out by the investigation wing of the department which unearthed the organized racket which used to provide bogus entries to the beneficiaries to facilitate them in claiming exempt income u/s 10(38) - HELD THAT - We notice that the authorities below have not referred any witness, who has deposed during investigation that the assessee obtained accommodation entries in the present case from the bogus operators. We further notice that AO has not doubted the sale and purchase of the shares in question - The authorities below have not pointed out any cogent and convincing evidence to hold that the transaction is bogus. AO has not doubted the genuineness of the bank statement showing payment of ₹ 60,000/- made for purchase of shares of Conart Traders Ltd. AO has not doubted the sale of the shares in question. AO has held the transaction as bogus on the basis of the general report of the investigation wing of the department without affording an opportunity to confront or cross examine the witnesses whose statements were relied upon by the AO. In the case of Smt. Shikha Dhawan vs. ITO 2018 (6) TMI 1451 - ITAT DELHI has held that where the AO fails to afford an opportunity to the assessee to cross examine the witnesses whose statements were relied upon, such evidence cannot be used against the assessee. Authorities below have not pointed out any evidence on record to hold that the assessee has obtained bogus entries in connivance with entry operators and brokers etc. in order to claim bogus LTCG. As pointed out the assessee was not given an opportunity to cross examine the witnesses whose statements were relied upon and on the basis of their statements it was concluded that the transaction in question was a part of penny stock scam. As relying in the case of M/s Andaman Timber Industries 2015 (10) TMI 442 - SUPREME COURT we are of the considered view that the CIT (A) has wrongly confirmed the assessment order passed by the AO in violation of the principles of natural justice. Hence, the impugned order passed by the Ld CIT(A) suffers from legal infirmity. - Decided in favour of assessee.

Issues Involved:
1. Assessment under Section 143(3) and addition of ?13,98,729 as unexplained credit.
2. Denial of Long-Term Capital Gain (LTCG) exemption under Section 10(38).
3. Allegation of bogus and sham transactions.
4. Violation of principles of natural justice.

Issue-wise Analysis:

1. Assessment under Section 143(3) and Addition of ?13,98,729 as Unexplained Credit:
The Assessing Officer (AO) treated the long-term capital gain of ?13,98,729 claimed by the assessee as a bogus transaction and added this amount to the income of the assessee as unexplained credit under Section 68 of the Income Tax Act. The AO determined the total income at ?19,50,880 against the returned income of ?5,52,150. The CIT(A) upheld the AO's decision, confirming the addition made.

2. Denial of Long-Term Capital Gain (LTCG) Exemption under Section 10(38):
The AO disallowed the LTCG exemption claimed by the assessee under Section 10(38) of the Act, which pertains to the sale of listed equity shares sold through a recognized stock exchange and subjected to securities transaction tax (STT). The AO's decision was based on the alleged bogus nature of the transactions, which was upheld by the CIT(A).

3. Allegation of Bogus and Sham Transactions:
The AO alleged that the transactions involving the sale of shares of M/s Sunrise Asian Ltd. were bogus and sham. This conclusion was based on statements from third parties and the outcome of an investigation by the Directorate of Investigation, Kolkata, which unearthed an organized racket facilitating bogus capital gains. However, the AO did not provide copies of these statements or an opportunity for the assessee to cross-examine the witnesses, leading to a violation of the principles of natural justice.

4. Violation of Principles of Natural Justice:
The assessee contended that the AO's decision was made without providing an opportunity to cross-examine the witnesses whose statements were relied upon. This was a violation of the principles of natural justice as upheld by the Honorable Supreme Court in cases like Andaman Timber Industries v. Commissioner of Central Excise and Kishanchand Chellaram v. CIT. The Tribunal noted that the AO neither provided the copies of the statements nor allowed cross-examination, which made the order legally infirm.

Tribunal's Findings:
The Tribunal observed that the AO's rejection of the assessee's claim was based on general reports and statements from the investigation wing without specific evidence against the assessee. The Tribunal noted that the AO did not doubt the documentary evidence provided by the assessee, such as bank statements, share certificates, demat account details, and balance sheets, which demonstrated the genuineness of the transactions.

The Tribunal cited several cases, including CIT vs. Shyam R. Pawar, CIT vs. Shri Mukesh Ratilal Marolia, and others, where similar issues were decided in favor of the assessee. The Tribunal emphasized that the AO's reliance on third-party statements without allowing cross-examination violated the principles of natural justice. The Tribunal referred to the Supreme Court's judgment in M/s Andaman Timber Industries, which held that not allowing cross-examination of witnesses makes the order void.

Conclusion:
The Tribunal concluded that the CIT(A) wrongly confirmed the AO's order, which suffered from legal infirmity due to the violation of natural justice principles. The Tribunal set aside the impugned order and directed the AO to allow the assessee's claim for LTCG exemption under Section 10(38). The appeal filed by the assessee for the assessment year 2014-2015 was allowed.

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