2018 (11) TMI 1976 - AT - Income Tax

Bogus LTCG - Addition u/s 68 - Referring to the investigation made by the Directorate of Investigation Kolkata AO formed a belief that the assessee is one of the beneficiaries of accommodation entries provided by the entry provider in the form of LTCG involving penny stock companies - no opportunity to cross-examine witnesses whose statements were used against the assessee - HELD THAT - As examined the transaction statement of the stock broker contract note for sale of shares transaction and holding statement statement of account from the broker certifying the sale of shares. The entire addition has been made by the AO only on the basis of presumptions and surmises without pointing out any specific defect in the documentary evidences filed by the assessee. Additions have been made by the AO on the basis of statement of one Shri Sanjay Vohra who in his statement has stated that he has indulged in bogus LTCG transactions in Kolkata Stock Exchange and M.P. Stock Exchange. AO completely ignored the fact that the assessee has done transactions with BSE. Though AO has given detailed explanation regarding the modus operandi of the bogus LTCG Scheme but has failed to bring anything on record to show that the facts of the case fell within the purview of the same. No hesitation to hold that the lower authorities grossly failed in bringing out any case in favour of the Revenue. Moreover not granting opportunity to cross examine Shri Sanjay Vohra in itself is gross violation of the principles of natural justice and against the ratio laid down by the Hon ble Supreme Court in the case of Andaman Timber 2015 (10) TMI 442 - SUPREME COURT . Appeal of assessee allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal question considered in this judgment was whether the addition of Rs. 18,85,274/- made by the Assessing Officer, treating the long-term capital gain (LTCG) declared by the assessee as bogus, was justified. The Tribunal examined whether the assessment was based on valid evidence or merely on presumptions and whether the principles of natural justice were adhered to, particularly regarding the opportunity to cross-examine witnesses whose statements were used against the assessee.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents: The legal framework involved the scrutiny of the assessee's claimed LTCG under the Income Tax Act. The Tribunal referred to the precedent set by the Supreme Court in the case of Andaman Timber Vs. CIT, which emphasized the necessity of allowing cross-examination of witnesses whose statements are used as evidence in adjudication.

Court's interpretation and reasoning: The Tribunal scrutinized the documentary evidence provided by the assessee, including share certificates, purchase and sale bills, bank statements, and demat statements. It noted that the transactions were conducted through recognized stock exchanges and were supported by relevant documentation. The Tribunal found that the Assessing Officer's reliance on the statement of Shri Sanjay Vohra, who admitted to engaging in bogus LTCG transactions, was misplaced because the transactions in question were conducted on the Bombay Stock Exchange (BSE), not the exchanges mentioned by Vohra.

Key evidence and findings: The Tribunal found that the documentary evidence provided by the assessee was comprehensive and did not exhibit any defects. The Tribunal also highlighted the lack of opportunity given to the assessee to cross-examine Shri Sanjay Vohra, whose statement was pivotal to the Revenue's case. This omission was deemed a violation of the principles of natural justice.

Application of law to facts: Applying the principles from the Andaman Timber case, the Tribunal concluded that the denial of cross-examination rights rendered the statements of Shri Sanjay Vohra inadmissible as evidence against the assessee. The Tribunal determined that the Assessing Officer's decision was based on assumptions rather than concrete evidence.

Treatment of competing arguments: The Tribunal considered the Revenue's argument that the LTCG was a result of accommodation entries in penny stock companies. However, it found the argument unsubstantiated due to the lack of direct evidence linking the assessee's transactions to the alleged scheme. The Tribunal favored the assessee's argument that the transactions were genuine, as supported by the documentary evidence.

Conclusions: The Tribunal concluded that the addition made by the Assessing Officer was unsustainable. It ordered the deletion of the addition, thereby allowing the appeal in favor of the assessee.

SIGNIFICANT HOLDINGS

The Tribunal emphasized the importance of adhering to the principles of natural justice, particularly the right to cross-examine witnesses whose statements are used as evidence. The Tribunal quoted the Supreme Court's ruling in Andaman Timber Vs. CIT: "Not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected."

The Tribunal established that mere presumptions and statements without corroborative evidence cannot justify additions in income tax assessments. It reinforced the principle that evidence must be direct and specific to the case at hand.

The final determination was that the addition made by the Assessing Officer was not justified, and the appeal by the assessee was allowed, resulting in the deletion of the impugned addition.