2020 (1) TMI 293 - AT - Income Tax

Bogus LTCG - unexplained cash credit u/s. 68 - HELD THAT - Identical issue was considered by this Tribunal in the case of Shri Ramesh Kumar Shah 2018 (12) TMI 1761 - ITAT BANGALORE and the Tribunal remanded the issue to the AO for fresh consideration with a direction that the assessee should be provided with all the relevant evidence relied upon by the AO for making the addition and also allow opportunity of cross-examination of statements of persons which has been relied upon by the Investigation Agency. We also find that the Hon ble High Court of Karnataka has given similar directions in the case of Mrs. Chandra Devi Kothari 2015 (2) TMI 1313 - KARNATAKA HIGH COURT wherein also the issue was with regard to long term capital gain on sale of shares being treated as unexplained cash credit u/s. 68 of the Act by the revenue. In the light of the aforesaid directions, we set aside the order of the CIT(Appeals) and remand the question of treating the long term capital gain as unexplained cash credit to the AO for fresh consideration as directed by the Tribunal in the case of Shri Ramesh Kumar Shah (supra). We make it clear that all issues raised by the assessee in this appeal are also left open for consideration.

Issues Involved:

1. Whether the revenue authorities were justified in treating the long term capital gain (LTCG) on the sale of shares as unexplained cash credit under Section 68 of the Income-tax Act, 1961.
2. Whether the principles of natural justice were violated due to non-confrontation of investigation reports and statements relied upon by the revenue authorities.
3. The requirement for a fresh examination of the evidence and the opportunity for cross-examination of witnesses.

Detailed Analysis:

1. Justification of Treating LTCG as Unexplained Cash Credit:

The primary issue involved in these appeals was whether the revenue authorities were justified in treating the LTCG on the sale of shares declared by the assessee as unexplained cash credit under Section 68 of the Income-tax Act, 1961, and consequently adding the same to the total income of the assessee under the head 'income from other sources'. The revenue authorities based their conclusions on an investigation by the Directorate of Investigation, which revealed an organized racket generating bogus LTCG entries. The modus operandi involved buying shares at a low price, rigging the stock price to a high level, and selling the shares to declare LTCG, which was claimed as exempt under Section 10(38) of the Act. The AO, relying on this investigation, treated the LTCG as unexplained cash credit and added it to the total income of the assessee. The CIT(Appeals) confirmed this order.

2. Violation of Principles of Natural Justice:

The assessee contended that the conclusions drawn by the revenue authorities were based on an investigation report and statements of third parties, which were not confronted to the assessee, thus violating the principles of natural justice. The assessee argued that the claim was supported by valid documents and that there was no specific reference to the assessee in any investigation report or communication with the alleged entry operators. The assessee specifically challenged the non-furnishing of the investigation report and statements of persons relied upon by the AO. Despite these objections, the CIT(A) did not address the issue, leading to the assessee's claim that the entire addition made was liable to be set aside.

3. Requirement for Fresh Examination and Cross-Examination:

The Tribunal referred to previous cases, including Shri Ramesh Kumar Shah Vs. ACIT, where similar issues of violation of natural justice were raised. In these cases, the Tribunal restored the matter to the AO with directions to confront the assessee with the reports/documents/statements used against them, allow rebuttal, and provide an opportunity for cross-examination. The Tribunal also referred to the judgment of the Hon’ble Karnataka High Court in Mrs. Chandra Devi Kothari Vs. ITO, which emphasized the need to provide a fair and reasonable opportunity of hearing to the assessee after providing copies of statements relied upon by the revenue.

The Tribunal noted the revenue's argument that the AO had valid reasons for concluding that the LTCG declared by the assessee was bogus and that the conclusions were not without basis. However, the Tribunal found that the issue required reconsideration in light of the principles of natural justice. The Tribunal directed that the matter be remanded to the AO for fresh consideration, ensuring that all relevant evidence relied upon by the AO is provided to the assessee, and an opportunity for cross-examination is given.

Conclusion:

The Tribunal set aside the order of the CIT(Appeals) and remanded the question of treating the LTCG as unexplained cash credit to the AO for fresh consideration. The AO was directed to provide all relevant evidence to the assessee and allow cross-examination of statements relied upon. The Tribunal emphasized that all issues raised by the assessee remain open for consideration and that the AO should re-examine the case in light of the directions provided, ensuring proper opportunity for the assessee to represent their case. Consequently, all appeals were allowed for statistical purposes.

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