2023 (7) TMI 743 - AT - Income Tax

Bogus LTCL - Addition u/s 68 - cross-examination not provided - whether principles of natural justice have been complied with or not? - HELD THAT - As alleged loss has been incurred by the assessee in the regular course of its business. We also note that the statement of various persons recorded by the AO/investigation wing/search team in the course of other proceedings as well as the report of the Kolkata investigation wing, there is no reference to a direct evidence indicating that the transactions in question is in the nature of accommodation entry or for arranging bogus loss. Thus, the addition/disallowance made by the assessee is merely on the basis of preponderance of probabilities. Therefore, in the present case, when the statements and investigation report relied upon by the AO has not been given to the assessee for the purpose of cross-examination as well as rebuttal, we in view of the above decision are inclined to hold that the alleged loss being genuine loss from share trading incurred by the assessee in regular course of business, deserves to be allowed. Thus, impugned disallowance is uncalled for. Long term capital gain exempt u/s 10(38) from sale of the scrip - As principles of natural justice have been violated while carrying out the assessment proceedings in the case of the assessee(s) since no opportunity for cross-examination was provided for those persons whose statements have been relied upon by the assessing officer for making the alleged additions. Secondly, there is no direct evidence referred to by the assessing officer or in the report of the investigation Wing that the assessee(s) have made arrangements with the entry operators/company owners for carrying out the alleged transactions. Thirdly, additions made by the assessing officer are merely based on a theory called preponderance of probability that in same type of cases prices are rigged up and down by the entry operators in order to provide accommodation entry to various persons in the form of Long term capital gain and though, the assessing authority can apply preponderance of probabilities in some cases on account of surrounding circumstances but so far as the cases on hand are concerned, we notice that firstly some observations were made by the SEBI regarding some fishy transactions carried out in case of few companies. Based on such primary information, the income tax department has carried out extensive enquiries and search and surveys in the case of various entry operators and alleged companies and based on such statements, a theory was established regarding such accommodation/bogus entries in the form of capital gains. Since in the case of the assessee, SEBI at a later stage has intensively carried out the investigation on the facts of the assessee(s) along with other persons as referred in the order of the SEBI (extracted supra), and after a detailed investigation and examination of records exonerated, the assessee(s) from the charges levelled in the show cause notice issued to them. Therefore, when the assessee(s) have been exonerated and the charges against them have been waived and the transactions of purchase and sale of equity shares carried out by them have been found to be genuine, the theory of preponderance of probabilities is ruled out in the case of the present assessee(s). Thus, when the transactions giving rise to the long term capital gain have been found to be genuine, and as per rules and regulation of SEBI, the finding of the ld. CIT(A) deserves to be set aside and the impugned additions in case of assessee(s) in appeal before us are uncalled for. Assessee appeal allowed.

Summary

Issues Involved:
1. Bogus Loss Claim
2. Violation of Principles of Natural Justice
3. Genuineness of Transactions

Summary:

1. Bogus Loss Claim:
The assessee, M/s. Gateway Financial Services Ltd., declared a short-term capital loss from the sale of shares of Blue Circle Services Ltd. The Assessing Officer (AO) disallowed this loss, alleging it was bogus and arranged through price manipulation. The AO relied on statements from various individuals and a SEBI order restraining Blue Circle Services Ltd. from dealing in the securities market.

2. Violation of Principles of Natural Justice:
The assessee argued that the AO violated principles of natural justice by not providing an opportunity to cross-examine the individuals whose statements were used against them. The Tribunal agreed, noting that the AO should have allowed cross-examination, as mandated by several judicial precedents, including the Supreme Court's decision in Andaman Timber Industries v. CCE.

3. Genuineness of Transactions:
For the remaining three assessees (M/s. Nishit Agarwal Beneficiary Trust, Pinky Agarwal, and Pratik Agarwal Beneficiary Trust), the AO disallowed long-term capital gain exemptions, alleging the gains were bogus. The Tribunal noted that SEBI had conducted a detailed investigation into the trading of Radford Global Ltd. shares and found no evidence of price manipulation or pre-arranged trades. The Tribunal distinguished the facts from the case of Swati Bajaj, where the High Court upheld additions based on preponderance of probabilities.

Conclusion:
The Tribunal held that the AO's actions violated principles of natural justice and that the transactions were genuine, as confirmed by SEBI's final order. The Tribunal allowed the appeals, setting aside the additions made by the AO.