2019 (1) TMI 2041 - AT - Income Tax

Addition u/s 68 - bogus LTCG - penny stock transaction - HELD THAT - As we find that there is absolutely no adverse material to implicate the assessee to the entire gamut of unfounded/unwarranted allegations leveled by the AO against the assessee which in our considered opinion has no legs to stand and therefore has to fall. We take note that the ld. DR could not controvert the facts which are supported with material evidences furnished by the assessee which are on record and could only rely on the orders of the AO/CIT(A). The allegations that the assessee/brokers got involved in price rigging/manipulation of shares must therefore consequently fail. Assessee had furnished all relevant evidence in the form of bills contract notes demat statement and bank account to prove the genuineness of the transactions relevant to the purchase and sale of shares resulting in long term capital gain. Neither these evidences were found by the AO nor by the ld. CIT(A) to be false or fictitious or bogus nor the AO had issued any notice to the brokers for confirmation. The facts of the case and the evidence in support of the evidence clearly support the claim of the assessee that the transactions of the assessee were genuine and the authorities below was not justified in rejecting the claim of the assessee exempted u/s 10(38) of the Act on the basis of suspicion surmises and conjectures. It is to be kept in mind that suspicion how so ever strong cannot partake the character of legal evidence. Thus we hold that the ld. CIT(A) was not justified in upholding the addition of sale proceeds of the shares as undisclosed income of the assessee u/s 68 of the Act. We therefore direct the AO to delete the addition. Commission @ 5% disallowed as unexplained expenses of commission u/s. 69C - As we after having held the purchase and sale of shares of LDPL is genuine the question of disallowance of commission expenses does not arise and therefore directed to be deleted. Assessee appeal allowed.

Summary

Issues Involved:
1. Legality of additions made under Section 153A without incriminating material.
2. Denial of cross-examination of witnesses.
3. Validity of Long Term Capital Gains (LTCG) claims and related transactions.
4. Treatment of commission expenses related to LTCG transactions.

Issue-wise Detailed Analysis:

1. Legality of Additions Made Under Section 153A Without Incriminating Material:
The Tribunal noted that the assessments for the years under appeal were not pending on the date of the search. According to the legal position established in CIT Vs. Kabul Chawla (2016) 380 ITR 573 (Del.), and upheld by the Hon’ble Supreme Court in Kurele Paper Mills, no addition can be made without incriminating material found during the search. The Tribunal observed that there was no incriminating material against the assessee for the relevant assessment years, and thus, the additions made by the AO were not legally tenable.

2. Denial of Cross-Examination of Witnesses:
The AO denied the assessee's request for cross-examination of Shri Devesh Upadhyay and the brokers involved in the transactions. The Tribunal held that denying cross-examination violated the principles of natural justice, as established by the Hon’ble Supreme Court in Andaman Timber Industries. The Tribunal emphasized that the AO cannot rely on third-party statements to draw adverse inferences without allowing cross-examination.

3. Validity of Long Term Capital Gains (LTCG) Claims and Related Transactions:
The Tribunal examined the evidence provided by the assessees, including contract notes, demat statements, and bank statements, which substantiated the genuineness of the LTCG claims. The Tribunal found that the transactions were conducted through recognized stock exchanges and brokers, and the payments were made through banking channels. The AO's reliance on general reports and statements without specific incriminating evidence against the assessees was deemed insufficient to disallow the LTCG claims. The Tribunal cited several judicial precedents supporting the genuineness of such transactions and concluded that the LTCG claims were valid.

4. Treatment of Commission Expenses Related to LTCG Transactions:
Since the Tribunal upheld the genuineness of the LTCG claims, it also directed the deletion of the additions made on account of commission expenses. The Tribunal reasoned that if the LTCG transactions were genuine, the related commission expenses could not be disallowed.

Conclusion:
The Tribunal allowed the appeals of the assessees, holding that the additions made by the AO were not justified in the absence of incriminating material and without allowing cross-examination of witnesses. The Tribunal upheld the genuineness of the LTCG claims and directed the deletion of related commission expenses.