2018 (4) TMI 981 - AT - Income Tax

Long Term Capital Gains being earned on the sale of scrips disallowed - sale considered as a sham transaction and the LTCG was treated as income from undisclosed sources - Held that - It is an admitted fact that the brokers replied to the notices sent by the A.O. and confirmed the impugned transactions. Moreover, Pravin Kumar Agrawal of P.K. Agrawal & Co. (broker) in his affidavit dated 19.12.2006 has solemnly affirmed the transaction which are exhibited at pages 141 of the paper book. A.O. has not said anything adverse insofar as the affidavit of Shri P.K. Agrawal is concerned, nor the A.O. has made any specific enquiry in respect of the share transactions done by the assessee. The A.O. has simply relied on the survey report which was in context of survey u/s. 133A of the Act conducted in the case of Ahilya Commercial Pvt. Ltd. and P.K. Agrawal on 28.12.2004 by the revenue authorities of Kolkata. Assuming that the brokers may have done some manipulation but the assessee cannot be held liable for the Act of the brokers when the entire transactions have been done through banking channels duly recorded in the Demant accounts with a Government depository and traded on the stock exchange. The entire assessment is based upon the conclusion of the DDIT (Inv.) Kolkata and there is no application of mind by the A.O. Moreover, the A.O. had no access to the materials impounded by the Investigation Wing of Kolkata, the A.O. was simply carried away by the reports of the DDIT (Inv.), Kolkata without making any independent decision. There is also nothing on record which could suggest that the assessee gave cash and purchase cheque from the alleged brokers. The entire assessment is based on conjectures and surmises and therefore cannot stand on its own leg. - Decided against revenue

Issues Involved:
1. Legitimacy of Long Term Capital Gains (LTCG) declared by the assessee.
2. Treatment of LTCG as income from undisclosed sources.
3. Adequacy of enquiries conducted by the Assessing Officer (A.O.) and CIT(A).
4. Reliance on SEBI orders and brokers' statements.
5. Adherence to principles of natural justice and fair play.
6. Evaluation of direct evidence provided by the assessee.
7. Judicial precedents and their applicability to the case.

Issue-wise Detailed Analysis:

1. Legitimacy of Long Term Capital Gains (LTCG) Declared by the Assessee:
The primary issue was whether the LTCG declared by the assessee on the sale of scrips was genuine or a sham transaction. The A.O. initially treated these gains as income from undisclosed sources, suspecting the transactions to be bogus. However, the Tribunal found that the transactions were routed through Demat accounts and banking channels, with all relevant documentary evidence provided by the assessee, such as purchase contracts, sale contracts, and bank statements.

2. Treatment of LTCG as Income from Undisclosed Sources:
The A.O. presumed that the transactions were bogus based on a survey report and the statement of a broker, P.K. Agrawal, who admitted to manipulating share prices. Despite this, there was no direct evidence linking the assessee to such fraudulent activities. The Tribunal emphasized that the entire assessment was based on conjectures and surmises without substantial proof.

3. Adequacy of Enquiries Conducted by the A.O. and CIT(A):
The Tribunal noted that the CIT(A) had directed the A.O. to conduct specific enquiries from brokers and consider SEBI orders, which were not adequately followed. The A.O. failed to provide a timely remand report and merely reiterated previous observations without addressing the direct evidence provided by the assessee.

4. Reliance on SEBI Orders and Brokers' Statements:
The SEBI orders relied upon by the department were considered relevant but not conclusive. The Tribunal pointed out that the SEBI had vacated the suspension on trading of certain shares, including Nageshwar Investment Ltd., which was significant to the assessee's case. Moreover, the brokers confirmed the transactions, and the affidavit of P.K. Agrawal affirmed the genuineness of the transactions.

5. Adherence to Principles of Natural Justice and Fair Play:
The Tribunal highlighted the necessity of adhering to principles of natural justice, criticizing the A.O. for not considering the direct and clinching evidence provided by the assessee. The Tribunal also noted the lack of opportunity for cross-examination of witnesses, which was a serious flaw affecting the fairness of the assessment.

6. Evaluation of Direct Evidence Provided by the Assessee:
The Tribunal found that the A.O. ignored direct evidence such as Demat account statements, purchase and sale contracts, and banking records. These documents substantiated the genuineness of the transactions, showing that the shares were purchased and sold through legitimate channels.

7. Judicial Precedents and Their Applicability to the Case:
The Tribunal referred to several judicial decisions, including the Bombay High Court's ruling in the case of Smt. Jamnadevi Agrawal, which supported the assessee's position. The precedents established that documentary evidence of share transactions, even if some were off-market, could not be dismissed as sham without substantial proof. The Tribunal also cited the Supreme Court's decision in Andaman Timber Industries, emphasizing the importance of allowing cross-examination and the insufficiency of suspicion as a basis for assessment.

Conclusion:
The Tribunal concluded that the assessment by the A.O. was based on presumptions without substantial evidence. The direct evidence provided by the assessee was sufficient to prove the genuineness of the transactions. Consequently, the Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s decision in favor of the assessee, treating the gains as legitimate LTCG. The cross objections by the assessee were deemed unnecessary for separate adjudication.

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