2017 (3) TMI 434 - AT - Income Tax

Income from Short Term Capital Gain treated as undisclosed income under the head income from other sources - non opportunity to cross examine - Held that - The AO had relied upon the statement of MMC to make the addition. Thus, we had witness of the AO. It was his duty to provide the copy of the statement of MMC to the assessee and to afford the opportunity to cross examine him. AO on request of the assessee had issued a summon to MMC,but he did not appear. Therefore, we do not understand how the FAA has observed that the assessee did not make any specific request for cross examination of MMC. It is also very strange that the FAA,being a judicial authority, has held that non providing opportunity of cross examination would not vitiate the assessment proceedings. If the AO/assessee wants to rely upon the statements of someone it is their duty to prove the truthfulness of such statements. Filing of affidavits/cross examination of the person making assertion can be means of verifying the genuineness of the statements.There can be other means also.But,the basic principles remain the same-person relying upon statement of someone has to prove it and especially when it is challenged by another party. We have not come across the statement of MMC where he has included the name of the assessee to whom he or the group concerns had issue fictitious bills or bills for claiming non-genuine profit/ loss.MMC has given a general statement disclosing broader outline of the transactions entered into by him and the group entities. He had never stated that all the transactions entered into by group were non genuine. His statement was a good lead to take the investigation further and make specific queries. But it was not done. We are left with the general statement of MMC on side and on the other side are the facts like payment/receipt of share transaction value through banking channels, transfer of shares in and from the D-mat account, FAA s finding that the sale was not in doubt, non observation of principle of natural justice by not providing cross examination of MMC.If all these facts and circumstances are weighed in the scale of reasoning, it would tilt in favour of the assessee. We are of the opinion that there was no justification on part of the FAA to direct the AO to tax the entire sale proceed of shares in the hands of the assessee during the year under consideration. Similarly, the AO was not justified to hold the STCG as business transaction. The assessee was not dealing in the shares and securities and the shares of KCL were held by him as investment and not as stock in trade. - Decided in favour of assessee.

Summary

Issues Involved:
1. Reopening of assessment under Section 148 of the Income Tax Act.
2. Treatment of Short Term Capital Gain (STCG) as undisclosed income.
3. Denial of cross-examination of Mukesh M. Chokshi (MMC).

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 148 of the Income Tax Act:
The assessee challenged the reopening of the assessment, arguing that there was no tangible material to issue a notice under Section 148 of the Income Tax Act. The Tribunal noted that the notice under Section 148 was issued after four years, and the reasons recorded by the Assessing Officer (AO) did not mention how the failure on the part of the assessee to disclose fully and truly the material facts led to under-assessment and resultant escapement of income. This procedural lapse was significant enough to allow the appeal on this ground alone.

2. Treatment of Short Term Capital Gain (STCG) as Undisclosed Income:
The main issue was the AO treating the STCG of ?6.05 lakhs as undisclosed income under Section 68 of the Act. The AO based his decision on the general statement of MMC, who was involved in issuing fraudulent bills and providing bogus speculation profit/losses. The assessee argued that the transactions were genuine, conducted through D-mat accounts, and payments were made through banking channels. The First Appellate Authority (FAA) enhanced the addition, treating the entire sale proceeds of ?32.34 lakhs as unexplained cash credit. However, the Tribunal found that the AO and FAA did not provide sufficient evidence to prove the transactions were not genuine, especially given the documented D-mat transactions and banking records. The Tribunal concluded that the transactions were genuine and the STCG should not be treated as undisclosed income.

3. Denial of Cross-Examination of MMC:
The assessee requested the cross-examination of MMC, which was denied by the AO and FAA. The Tribunal emphasized that it was the duty of the AO to provide the copy of MMC's statement and afford the opportunity for cross-examination. The Tribunal found it strange that the FAA, being a judicial authority, held that non-provision of cross-examination would not vitiate the assessment proceedings. The Tribunal reiterated the principle that if a party relies on a statement, it must prove its truthfulness, especially when challenged. The denial of cross-examination was a significant procedural lapse that affected the fairness of the assessment process.

Conclusion:
The Tribunal reversed the FAA's order, deciding in favor of the assessee. The Tribunal found that the reopening of the assessment was procedurally flawed, the STCG was genuine and should not be treated as undisclosed income, and the denial of cross-examination of MMC was unjustified. The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 8th March 2017.