2020 (8) TMI 153 - HC - Income Tax

Bogus accommodation entry - burden of proof was on the revenue to sustain the addition by leading cogent evidence - Addition by the AO holding the same as part of accommodation entry business of providing bogus long-term/short-term capital loss - Penny Stocks - HELD THAT - AO asked the assessee to justify the rationale behind investment in these penny stock companies not having financial worth, however, the assessee failed to justify the same. AO provided as why the investment in the shares transacted by the assessee was not justified in view of the comparison of the other shares available. AO also pointed out the price fluctuation in the shares of the companies over a period, dividend history and other financial parameters to substantiate that there was no financial logic for investment in the company except for claim of bogus short-term capital loss against receipt of cash money. AO accordingly concluded that the addition was made on the basis of the material available on record, the surrounding circumstances, the human conduct and preponderance of probabilities. We find that in instant case addition in dispute is not solely on the basis of the statement of the persons and the Assessing Officer has relied on other materials. The statements of the persons who controlled the business of providing accommodation entry have been corroborated with the material, surround circumstances and preponderance of probability. We accordingly uphold the finding of the CIT(A) on that issue in dispute. The relevant grounds of the appeal of the assessee are accordingly rejected.

Issues Involved:
1. Legitimacy of Short-Term Capital Loss (STCL) claimed by the assessee.
2. Application of Section 68 and Section 69C of the Income Tax Act.
3. Admissibility of evidence and opportunity for cross-examination.
4. Assessment of transactions involving penny stocks and accommodation entries.
5. Jurisdiction and procedural aspects of the assessing officer’s actions.

Detailed Analysis:

1. Legitimacy of Short-Term Capital Loss (STCL) Claimed by the Assessee:
The assessee filed its income-tax return declaring a total income of ?3,12,59,350 for AY 2015-16 and claimed STCL of ?1,22,76,352 from the sale of shares in three listed companies. The Assessing Officer (AO) disallowed this STCL, deeming it bogus and part of an accommodation entry business. The AO relied on a report from the Deputy Director of Income-tax (Investigation), which explained the modus operandi of providing bogus capital gains/losses. The AO concluded that the assessee's transactions were sham, aimed at converting unaccounted money into accounted money through capital loss.

2. Application of Section 68 and Section 69C of the Income Tax Act:
The AO made additions of ?1,22,76,352 under Section 68 and ?3,06,908 under Section 69C, disallowing the STCL claimed. The CIT(A) upheld these additions. However, the ITAT observed that Section 68 was not applicable since it was a case of cash debit, not cash credit. Despite this, the ITAT sustained the additions, noting that the transactions were bogus and the AO had correctly acquired jurisdiction over the case.

3. Admissibility of Evidence and Opportunity for Cross-Examination:
The assessee argued that the AO did not provide an opportunity for cross-examination of the parties whose statements were relied upon. The ITAT and CIT(A) noted that the addition was not solely based on these statements but also on independent analysis and corroborative material. The Tribunal referenced various judgments, concluding that the right to cross-examine is not an invariable requirement of natural justice and that the AO's findings were based on material, surrounding circumstances, and preponderance of probabilities.

4. Assessment of Transactions Involving Penny Stocks and Accommodation Entries:
The AO highlighted that the companies involved were obscure with no significant business activities, identified as 'Penny Stocks'. The AO pointed out the unrealistic price movements and low trading volumes of these stocks, concluding that the transactions were pre-arranged to claim bogus STCL. The Tribunal referenced the case of Suman Poddar v. Income Tax Officer, where similar issues with penny stocks were discussed, and the transactions were deemed bogus. The Tribunal upheld the AO's findings, emphasizing that the transactions lacked financial logic and were part of a scheme to obtain accommodation entries.

5. Jurisdiction and Procedural Aspects of the Assessing Officer’s Actions:
The ITAT noted that the AO had correctly acquired jurisdiction and that mentioning the wrong section did not render the assessment null and void. The Tribunal and CIT(A) found that the AO's actions were supported by substantial evidence and independent analysis. The Tribunal also referenced multiple judgments to support the view that procedural irregularities, such as not providing cross-examination, do not invalidate the assessment if the findings are corroborated by other evidence.

Conclusion:
The High Court dismissed the appeal, concluding that no substantial question of law arose for consideration. The concurrent factual findings by the income-tax authorities were based on substantial evidence, and the assessee failed to provide tenable evidence to the contrary. The court upheld the disallowance of the STCL and the additions made by the AO, affirming that the transactions were part of a scheme involving bogus accommodation entries.

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