2022 (11) TMI 468 - AT - Income Tax

Addition u/s 68 - bogus LTCG - penny stock purchases - denial of cross examination of persons giving credit - HELD THAT - As noted that the assessee requested the AO for cross examination of all such persons but the assessee was not provided opportunity of cross examination holding that at this juncture of time, it is an attempt to delay/ halt the proceedings by assuming the instrument of cross examination as a right. It is understandable that for the sake of natural justice, the assessee can exercise his power to cross examine the evidences gathered against her. Hence, the assessee was deprived off to cross examine the persons whose statements / evidences were obtained against her. Equity market is under control and supervision of SEBI, price of scrip is not in control of the assessee or any individual person. The stock market is completely based on probabilities of market political scenario, trend of market, fiscal policy, stability of government speculation, global trend of market etc. - Theory of probability of gain or loss is always there but it may not be pre-arranged as the market is based completely on electronic system. The SEBI suspended only trading of 26 scrips out of the above said 58 scrips and only 11 scrips prices were found rigged. Sunrise Asian Ltd. (Scrip Code 506615) was not included in these scrips whose shares assessee had purchased on 01-04- 2012. As also noted that no cogent evidence against the assessee has been found by the lower authorities and all the payments were routed through banking channel by using cheque. In this case, it is found that the enquiries were conducted by the DCIT at Kolkata and the statements were recorded at the back of the assessee. Assessee was deprived off to cross examine the witnesses. It is also noted that no any cogent material to show that the assessee has brought back his own unaccounted income in cash. In view of the above deliberations, facts and circumstances of the case, the Bench finds that the ld. CIT(A) is not justified in dismissing the appeal of the assessee by confirming the above additions hence, the Bench delete the additions made by the lower authorities by allowing the appeal of the assessee.

Issues Involved:
1. Addition of Rs. 23,23,696/- under Section 68 of the Income Tax Act.
2. Addition of Rs. 1,45,421/- under Section 69C of the Income Tax Act.

Detailed Analysis:

1. Addition of Rs. 23,23,696/- under Section 68 of the Income Tax Act:
The assessee filed an e-return of income declaring a total income of Rs. 520/-. The case was selected for scrutiny to examine suspicious transactions related to Long Term Capital Gains (LTCG). The assessee claimed an exemption of Rs. 23,23,696/- under Section 10(38) of the Act, which was derived from the sale of shares of Sunrise Asian Ltd. The Assessing Officer (AO) observed that the shares were initially purchased from Santoshimaa Tradelinks Ltd., which later merged with Sunrise Asian Ltd. The AO noted discrepancies such as overwriting on the purchase bill and the dematerialization of shares after 12 months. The AO relied on investigation reports indicating that certain share transactions in penny stock companies were fabricated to launder unaccounted money. The AO concluded that the LTCG was bogus and represented unaccounted money routed back to the assessee, leading to the addition under Section 68.

The assessee argued that the transactions were genuine, conducted through banking channels, and supported by documentary evidence. The AO, however, rejected these arguments, citing the lack of explanation for the dematerialization delay and the failure to identify the person recommending the investment. The AO also dismissed the assessee's request for cross-examination of witnesses, considering it an attempt to delay proceedings.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing the manipulation of share prices and the lack of business fundamentals in the company whose shares were traded. The CIT(A) relied on the Supreme Court's decision in Suman Poddar vs ITO, which supported the treatment of such transactions as bogus.

The assessee contended that the CIT(A) erred in applying the Suman Poddar case and other judgments, arguing that the principles of natural justice were violated by denying the opportunity for cross-examination. The assessee also highlighted that the SEBI had not taken action against Sunrise Asian Ltd., and the transactions were conducted through registered brokers and banking channels.

The Tribunal found merit in the assessee's arguments, noting the lack of cogent evidence against the assessee and the denial of cross-examination. The Tribunal concluded that the lower authorities erred in confirming the addition under Section 68 and deleted the addition.

2. Addition of Rs. 1,45,421/- under Section 69C of the Income Tax Act:
The AO added Rs. 1,45,421/- as unexplained expenditure under Section 69C, estimating it as commission paid for arranging bogus LTCG entries. The AO relied on statements from individuals admitting to paying commission for such entries.

The assessee argued that the addition was based on presumptions and conjectures, without any direct evidence linking the assessee to the payment of commission. The CIT(A) upheld the AO's decision, citing the systematic generation of bogus capital gains and the involvement of the assessee in such transactions.

The Tribunal, however, found that the lower authorities failed to provide concrete evidence of commission payment by the assessee. The Tribunal noted that the statements relied upon were recorded behind the assessee's back, without providing an opportunity for cross-examination. Consequently, the Tribunal deleted the addition under Section 69C.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, deleting the additions of Rs. 23,23,696/- under Section 68 and Rs. 1,45,421/- under Section 69C, citing the principles of natural justice and the lack of cogent evidence against the assessee.

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