2019 (1) TMI 1198 - AT - Income Tax

Addition u/s 68 - bogus long-term capital gain from the sale of shares - non providing opportunity to cross examine parties relying g on whom addition is made - Held that - ssessee produced before the learned Assessing Officer that the documents submitted by him, namely, the contract note dated 18/08/2014 for sale of shares of M/s Unno industries Ltd in BSE through registered stock broker M/s Rudra Shares and Stockbrokers, Bank statement of the assessee from 01/08/2014 to 31/08/2014 and 01st December, 2014 to 31st December 2014 showing that the consideration of sale of shares was received. Confirmation by various trade links private limited on 27th March 2012 and the share bill dated 22nd June, 2011 - would prove the genuineness of the transaction. The identity of the parties is not under cloud and genuineness of the transaction is explained by way of above documents. Learned Assessing Officer never suspected the capacity of the assessee for purchase of the shares. As a matter of fact, the statement of transactions issued by M/s Religare Securities Ltd clearly establishes that the assessee was holding a sizeable portfolio and it is not the stray incident of purchasing one scrip for this purpose only. There is no allegation as to the incorrectness of the documents or manipulation by SEBI or BSE. Hon ble Apex Court in the case of M/s Andaman Timber Industries vs Commissioner of Central excise 2015 (10) TMI 442 - SUPREME COURT for the principle that the failure to provide the assessee the right to cross examine the witness whose statement are relied upon, results in breach of principles of natural Justice and is a serious flaw which renders the order a nullity. In this case also an opportunity for the cross examination of the persons, on whose statements the learned AO based his suspicion was not allowed to the assessee, so that the assessee could have defended himself from the allegations, if any, made against him. In these circumstances, mere suspicion of AO does not take the place of legal proof of any bogus transaction. It shall be kept in mind that the assessee held the shares quite for a long time between 22nd of June 2011 till 23re March, 2012 bonus shares were allotted and subsequently deposited them in the demat account on 10/09/2012. We find it difficult to sustain the impugned order. We, accordingly, while agreeing with the contentions of the assessee direct the learned Assessing Officer to delete the addition - Decided in favour of assessee.

Summary

Issues Involved:
1. Justification of addition under section 68 of the Income-tax Act, 1961.
2. Denial of exemption under section 10(38) of the Income-tax Act.
3. Right to cross-examine witnesses whose statements were relied upon by the Assessing Officer.

Issue-wise Detailed Analysis:

1. Justification of Addition under Section 68 of the Income-tax Act, 1961:
The assessee filed their return of income declaring a total income of ?20,060. During assessment, the Assessing Officer (AO) found that the assessee had shown a long-term capital gain (LTCG) of ?19,85,891 from the sale of shares, claiming exemption under section 10(38) of the Act. The AO deemed the transaction as a sham aimed at converting unaccounted money into exempted LTCG. The AO based this conclusion on statements from share broking entities and entry operators, including Mr. Pawan Dalmia, who admitted to providing accommodation entries. Consequently, the AO added ?21,85,891 to the assessee's income under section 68.

2. Denial of Exemption under Section 10(38) of the Income-tax Act:
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, concurring that the transactions were not genuine. The CIT(A) emphasized that the shares' value increased unrealistically in a short period, and the company was listed as an accommodation entry provider. The CIT(A) also cited the test of human probabilities, concluding that the transaction was a facade, thus denying the exemption under section 10(38).

3. Right to Cross-examine Witnesses:
The assessee argued that the AO's reliance on statements from Mr. Pawan Dalmia and Mr. Alok Harlalka without providing copies or an opportunity for cross-examination was unjustified. The AO dismissed this request, stating it was intended to delay proceedings and that the statements did not directly implicate the assessee. The assessee contended that transactions were conducted through a registered broker, payments were made through banking channels, and there was no manipulation by SEBI or BSE.

Tribunal’s Findings:
The Tribunal observed that the assessee provided substantial documentation, including contract notes, bank statements, transaction statements, and dematerialization request forms, proving the genuineness of the transactions. The Tribunal noted that the AO did not question the assessee's capacity to purchase shares or the authenticity of the documents. The Tribunal referenced several case laws supporting the assessee's position that genuine transactions should not be dismissed based on mere suspicion without concrete evidence.

Legal Precedents:
- Anjali Pandit vs. ACIT: Transactions supported by bills, vouchers, and confirmations should be considered genuine in the absence of contrary evidence.
- Ms. Ferreh Marker vs. ITO: Denial of cross-examination rights renders the assessment order null.
- PCIT vs. Rungta Properties Pvt. Ltd.: No disallowance if the AO does not doubt the genuineness of documents.
- PCIT vs. Prem Pal Gandhi: High appreciation in share value does not justify treating transactions as fictitious if conducted through stock exchange and banking channels.

Conclusion:
The Tribunal concluded that the AO's addition under section 68 was unsustainable due to the lack of opportunity for cross-examination and the substantial evidence provided by the assessee. The Tribunal directed the deletion of the addition of ?21,85,891. Consequently, the assessee's appeal was allowed, and the stay application was dismissed as infructuous.

Order Pronouncement:
The order was pronounced in the Open Court on 21st January, 2019.