2023 (4) TMI 1400 - AT - Income Tax

Addition u/s 68 - long-term capital gain as a bogus accommodation entry - onus to prove - HELD THAT - Observations and findings of the AO in the assessment order is based on generalized statement of third party recorded behind the back of the assessee recorded in some other case and not in the case of assessee cannot constitute tangible evidence to lead to the conclusion that transaction of sale of share shown by the assessee is bogus being an accommodation entry. AO has though referred to the statement of these two persons who have operated as entry providers but there is no reference in those statements about the assessee being one of the beneficiary nor any material has been brought on record otherwise also by the AO to prove the assessee being beneficiary through them. There is no doubt that if the assessee has claimed LTCG from purchase and sale of shares as exempt u/s 10(38) of I.T. Act 1961 the primary onus is on the assessee to substantiate his claim by producing supporting evidences. On perusal of the details so submitted by the ld. AR of the assessee it is seen by me that the assessee has furnished various documentary evidences in support of purchase and subsequent sale of the shares leading to earning of LTCG by the assessee as mentioned in brief just herein above and mentioned in detail in the submission of the ld. AR. The assessee has purchased 12500 shares for Rs. 1, 87, 500/- and made payment through banking channel which stood debited in the bank account of the assessee. These shares were dematerialized on 26.06.2013 12000 shares and 26.08.2013 500 shares and deposited in the DMAT account maintained by Alankit Assignment Ltd. the independent third party.Thus it is clear that 12500 shares were purchased by the assessee and same is quite evident not only from the books on accounts of the assessee but also D-MAT account of the assessee maintained by independent third party duly recognized by the concerned authorities. As coming to the sale of share it is seen that assessee has sold these shares through online transaction via recognized stock broker M/s KIFS Securities Ltd. Transaction of sale is supported by contract notes and as per the contract notes these shares were sold on three different dates. . As the sale of shares have been made through online system on stock exchange obviously same has been made at the prevailing market rate of the shares. Accordingly the sale rate so shown by the assessee cannot be doubted. Moreover security transaction tax has also been deducted and paid and the assessee has received the net sale consideration through banking channels. These evidences leave no doubt about the sale of shares made by the assessee at the prevailing market rate. Thus claim of long term capital gain of exemption u/s 10(38) of I.T. Act do not suffer from infirmities and cannot be held as bogus and accordingly addition so made by the AO and confirmed by the CIT(A) is hereby deleted. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment were:

• Whether the addition of Rs. 31,70,080/- under Section 68 of the Income Tax Act, 1961, treating the long-term capital gain as a bogus accommodation entry, was justified.
• Whether the addition of Rs. 63,402/- under Section 69C of the Income Tax Act, 1961, alleging payment of commission for obtaining the accommodation entry, was justified.
• Whether the principles of natural justice were violated by not allowing the assessee to cross-examine witnesses whose statements were used against him.
• Whether the reliance on generalized statements and third-party information without independent verification was legally tenable.
• Whether the CIT(A) erred in ignoring relevant judicial precedents from the jurisdictional High Court and Tribunal.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition under Section 68 for Alleged Bogus Long-Term Capital Gain

• Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act, 1961, deals with unexplained cash credits. The case relied on precedents such as NRA Iron & Steel and Suman Poddar, which discuss the burden of proof on the assessee to establish the genuineness of transactions.
• Court's Interpretation and Reasoning: The Tribunal noted that the assessee had provided substantial documentary evidence, including bank statements, D-MAT account details, and contract notes, to substantiate the genuineness of the transactions. The Tribunal emphasized that the AO's reliance on third-party statements without allowing cross-examination was a violation of natural justice principles.
• Key Evidence and Findings: The assessee provided evidence of purchase and sale of shares through recognized stock exchanges, payment through banking channels, and dematerialization of shares in a D-MAT account. The AO did not provide any direct evidence linking the assessee to the alleged accommodation entry.
• Application of Law to Facts: The Tribunal applied the principles from relevant case law, emphasizing the need for the AO to independently verify the information and provide the assessee an opportunity to cross-examine witnesses. The Tribunal found that the AO failed to do so, rendering the addition unsustainable.
• Treatment of Competing Arguments: The Tribunal considered the AO's reliance on generalized statements from third parties but found them insufficient to override the detailed documentary evidence provided by the assessee.
• Conclusions: The Tribunal concluded that the addition under Section 68 was not justified, as the assessee had adequately discharged the burden of proof, and the AO's approach violated principles of natural justice.

Issue 2: Addition under Section 69C for Alleged Commission Payment

• Relevant Legal Framework and Precedents: Section 69C deals with unexplained expenditure. The AO alleged that the assessee paid a commission for obtaining the accommodation entry.
• Court's Interpretation and Reasoning: The Tribunal found that the addition was based on assumptions without any corroborative evidence. As the primary transaction (LTCG) was held genuine, the consequential addition for commission was also deemed unsustainable.
• Key Evidence and Findings: No direct evidence was presented to prove that the assessee paid any commission. The allegation was based solely on presumptions derived from third-party statements.
• Application of Law to Facts: The Tribunal emphasized that assumptions and presumptions cannot replace direct evidence, especially when the primary transaction itself was found to be genuine.
• Treatment of Competing Arguments: The Tribunal rejected the AO's argument due to lack of evidence and reliance on presumptions.
• Conclusions: The Tribunal deleted the addition under Section 69C, as it was consequential to the primary transaction, which was held to be genuine.

3. SIGNIFICANT HOLDINGS

• The Tribunal held that the addition under Section 68 was unjustified as the assessee had provided sufficient evidence to substantiate the genuineness of the transaction. The reliance on third-party statements without allowing cross-examination violated principles of natural justice.
• On the issue of commission under Section 69C, the Tribunal held that the addition was based on assumptions without any evidence, and thus, unsustainable.
• The Tribunal emphasized the importance of adhering to principles of natural justice, specifically the right to cross-examine witnesses whose statements are used against an assessee.
• The Tribunal reiterated that generalized statements or third-party information, without independent verification and corroboration, cannot form the basis for additions under the Income Tax Act.
• The Tribunal's decision was guided by the principles laid down in various judicial precedents, including the need for the AO to conduct independent inquiries and provide the assessee an opportunity to rebut evidence used against them.