2018 (12) TMI 1960 - AT - Income Tax

Bogus Long Term Capital Gains (LTCG) - unexplained cash credits u/s 68 - HELD THAT - The assessee's paper book comprising of all details of its LTCG, copy of its bill in connection with purchase of shares of M/s Surabhi Chemicals Investments Ltd. and Panchshul Marketing Ltd, bank statement. The said latter entities amalgamated regarding merger with M/s Kailash Auto Finance, contract notes in respect of sale of share of M/s Surabhi Chemicals Investments Ltd. Similar contract notes regarding M/s Kailash Auto shares sold, bank statement reflecting payment receipts alongwith corresponding demat statements stand perused. Mr. Choudhury relies on hon'ble apex court's decision in Sumati Dayal 1995 (3) TMI 3 - SUPREME COURT and Durga Prasad More 1971 (8) TMI 17 - SUPREME COURT that the assessee's explanation in the corresponding backdrop of facts pin-pointing suspicious circumstances has been rightly rejected in both the lower proceedings. It is vehemently argued that assessee has taken LTCG entry in collusion with dubious entry operators. We find no merit in any of these arguments. The fact that remains right from assessment till date is that no such entry operator has named the assessee in any of his such statement nor the Revenue has filed any such evidence to this effect. We adopt the above detailed reasoning mutatis mutandis to delete the impugned sec. 68 addition of bogus LTCG. - Appeal of assessee allowed.

Issues Involved:

1. Treatment of Long Term Capital Gains (LTCG) as unexplained cash credits under Section 68 of the Income Tax Act, 1961.
2. Validity and reliability of evidence and circumstantial evidence in tax proceedings.
3. Application of principles of human probability and preponderance of probabilities in assessing tax liability.
4. Role of stock market manipulations and SEBI investigations in determining the genuineness of LTCG claims.
5. Burden of proof and the necessity of cross-examination in tax assessments.

Issue-wise Detailed Analysis:

1. Treatment of Long Term Capital Gains (LTCG) as unexplained cash credits under Section 68 of the Income Tax Act, 1961:

The core issue was whether the LTCG of ?64,99,391/- claimed by the assessee should be treated as unexplained cash credits under Section 68 of the Income Tax Act, 1961. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] concluded that these gains were bogus, based on the information supplied by the Investigation Wing of the Department at Kolkata. The AO's findings were supported by circumstantial evidence suggesting that the transactions were accommodation entries aimed at generating fictitious LTCG. The CIT(A) upheld this view, emphasizing the suspicious nature of the transactions and the sharp rise in the share prices of Tuni Textile Mills, which lacked fundamental support.

2. Validity and reliability of evidence and circumstantial evidence in tax proceedings:

The judgment emphasized that the word "evidence" in Section 143(3) of the Act covers both direct and circumstantial evidence. The Hon'ble Supreme Court in CIT v. Durga Prasad More and Sumati Dayal v. CIT highlighted that the true nature of transactions must be ascertained in light of surrounding circumstances. The AO is not restricted by the technical rules of evidence and can rely on material that might not be admissible under the Indian Evidence Act. The CIT(A) noted that the AO meticulously considered the surrounding circumstances, human conduct, and preponderance of probabilities to conclude that the transactions were suspicious and dubious.

3. Application of principles of human probability and preponderance of probabilities in assessing tax liability:

The CIT(A) and the Tribunal relied heavily on the principles of human probability and preponderance of probabilities. The Hon'ble Delhi High Court in CIT Vs NR Portfolio Pvt Ltd emphasized that the AO must examine and verify facts when in doubt. The Tribunal noted that the AO's conclusions were based on a detailed investigation, considering the surrounding circumstances and human conduct, which indicated that the transactions were not genuine. The Tribunal upheld the AO's findings, stating that the transactions fell within the realm of suspicious and dubious transactions.

4. Role of stock market manipulations and SEBI investigations in determining the genuineness of LTCG claims:

The CIT(A) and the Tribunal considered the role of stock market manipulations and SEBI investigations in their assessment. The CIT(A) noted that the sharp rise in the share price of Tuni Textile Mills was not supported by its fundamentals or any genuine factors. The SEBI's investigation revealed that circular trading and price rigging by operators were responsible for the price rise, which was aimed at generating fictitious LTCG. The Tribunal also referred to the statement of the promoter of Tuni Textile Mills, who admitted that the shares were used to provide bogus LTCG through a scheme managed by an operator.

5. Burden of proof and the necessity of cross-examination in tax assessments:

The Tribunal highlighted the importance of the burden of proof and the necessity of cross-examination in tax assessments. The assessee's explanation and evidence were found to be insufficient to rebut the AO's findings. The Tribunal noted that the AO had the discretion to issue notices to third parties and gather information to verify the assessee's claims. The Tribunal also referred to the Hon'ble Supreme Court's decision in Andman Timber Industries vs. CCE, which emphasized that adverse material must be confronted with the assessee, and the assessee should be given an opportunity to explain or cross-examine the witnesses.

Conclusion:

The Tribunal upheld the findings of the lower authorities, concluding that the LTCG claimed by the assessee was indeed unexplained cash credits under Section 68 of the Act. The judgment emphasized the importance of considering circumstantial evidence, human probability, and the preponderance of probabilities in tax assessments. The Tribunal also highlighted the role of stock market manipulations and SEBI investigations in determining the genuineness of LTCG claims and the necessity of cross-examination and burden of proof in tax proceedings.

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