2018 (10) TMI 1912 - AT - Income Tax

Assessment u/s 153A - disallowance of trading loss on sale of shares as bogus - Addition based on statement recorded u/s 132(4) - assessee argued as retracted statements of third parties have been relied upon without giving any opportunity to the assessee to cross-examine such third parties - HELD THAT - We find that the ld AO had placed reliance on the investigation report of DDIT and finding of SEBI in respect of scrips traded by the assessee. There is absolutely no evidence brought on record linking the assessee with the alleged malafides. Hence the entire disallowance of trading loss was made only based on suspicion, surmises and conjectures without bringing on record with material evidences, the linkage of the assessee and by proving the connivance of the assessee with the stock brokers, stock exchange and the third parties from whom purchases were made and to whom sales were made. There is no evidence to prove that the assessee had received back the monies in cash from the concerned parties after making the purchases and similarly there is no evidence to prove that the assessee had passed on the cash to the concerned parties after receiving the sale proceeds of shares by cheque. As decided in BLB CABLES AND CONDUCTORS PVT. LTD. 2018 (8) TMI 525 - CALCUTTA HIGH COURT to hold a transaction as bogus, there has to be some concrete evidence where the transactions cannot be proved with the supportive evidence. Here in the case the transactions of the commodity exchanged have not only been explained but also substantiated from the confirmation of the party. Both the parties are confirming the transactions which have been duly supported with the books of accounts and bank transactions. We find that the statement recorded u/s 132(4) of the Act cannot be considered as an evidence or material found during the course of search - see BEST INFRASTRUCTURE (INDIA) PVT. LTD. 2017 (8) TMI 250 - DELHI HIGH COURT and BEST INFRASTRUCTURE (INDIA) PVT. LTD. 2017 (8) TMI 250 - DELHI HIGH COURT - Also M/S. CONSISTENT VYAPAAR PVT. LTD. VERSUS DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-3 (3) , KOLKATA 2018 (9) TMI 1745 - ITAT KOLKATA . - Decided in favour of assessee.

Summary

Issues Involved:
1. Justification of the disallowance of trading loss on sale of shares.
2. Relevance and validity of the statement recorded under Section 132(4) of the Income Tax Act.
3. Evidentiary value of retracted statements.
4. Procedural fairness and the right to cross-examine witnesses.
5. Chargeability of interest under Sections 234A and 234B of the Income Tax Act.

Detailed Analysis:

1. Justification of the Disallowance of Trading Loss on Sale of Shares:
The primary issue in this appeal was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in confirming the disallowance of the trading loss on the sale of shares of M/s First Financial Services Ltd and Comfort Fincap Ltd amounting to ?30,26,421/- as bogus for the Assessment Year 2014-15. The assessee, a company dealing in shares and loan transactions, had declared this loss as a business loss and set it off against other income. The Assessing Officer (AO) disallowed this loss, alleging that the transactions were pre-arranged to evade tax. The CIT(A) upheld this disallowance.

2. Relevance and Validity of the Statement Recorded Under Section 132(4) of the Income Tax Act:
During a search and seizure operation, a statement was recorded under Section 132(4) from the Director of the assessee company. The AO relied heavily on this statement to classify the shares as penny stocks and disallow the trading loss. However, the statement was subsequently retracted by the Director before a Magistrate, which the AO and CIT(A) ignored, considering it an afterthought with no evidentiary value. The Tribunal noted that without corroborative material, the retracted statement could not be the sole basis for making an addition.

3. Evidentiary Value of Retracted Statements:
The Tribunal highlighted that once a statement is retracted, it loses its evidentiary value unless supported by other corroborative evidence. The Tribunal referenced the instructions issued by the Central Board of Direct Taxes (CBDT) which advise against obtaining confessions of undisclosed income during search and seizure operations unless based on credible evidence. The Tribunal found that the AO had not provided any corroborative evidence to support the disallowance of the trading loss.

4. Procedural Fairness and the Right to Cross-Examine Witnesses:
The Tribunal found merit in the assessee's argument that retracted statements of third parties were relied upon without giving the assessee an opportunity to cross-examine such third parties. The Tribunal emphasized that procedural fairness requires that any evidence or statements relied upon by the AO must be put before the assessee, and the assessee should be given an opportunity to cross-examine the witnesses. The Tribunal cited several judicial precedents, including the Hon’ble Delhi High Court's decision in CIT vs. Harjeev Aggarwal, which held that retracted statements cannot form the sole basis for an addition without corroborative evidence.

5. Chargeability of Interest Under Sections 234A and 234B of the Income Tax Act:
The Tribunal found that the issue of chargeability of interest under Sections 234A and 234B was consequential in nature and did not require specific adjudication.

Conclusion:
The Tribunal concluded that the disallowance of the trading loss was based on suspicion, surmises, and conjectures without any material evidence linking the assessee to any malafides. The Tribunal directed the AO to delete the disallowance of the trading loss of ?30,26,421/- for the Assessment Year 2014-15. The appeal of the assessee was allowed, and the issues of chargeability of interest under Sections 234A and 234B were deemed consequential and not requiring specific adjudication. The Tribunal's order emphasized the importance of procedural fairness, the right to cross-examine witnesses, and the need for corroborative evidence to support any additions based on retracted statements.