2009 (5) TMI 125 - AT - Income Tax

Cash Credits - bogus transactions - assessment challenged for not allowing cross-examination - Whether addition made u/s 68 on the basis of a statement not tested by cross examination is valid? - CA by profession reiterated the statements - contention of the assessee that he had already shown such credits as receipts on sale and purchase of shares in P L A/c and offered the resultant profit was not acceptable as the receipts were arranged through sham transition and can only be held as income from other sources - all the cheques received during the year under consideration and the addition u/s 68 has to be made in this year - computed speculation loss reducing the cheque amounts received from R.K. Aggarwal Co - Assessee requested for cross-examination of Shri Satish Chand Goel he is a CA by profession - assessee has declared the profit from sale and purchase of shares as his income for AY 1998-99 and 1999-2000 and the receipts were declared as income for the two years under consideration - CIT(A) upheld the validity of the reopening of assessment - also upheld the addition to the income of the assessee and treatment of the loss as speculation loss. HELD THAT - Not allowing cross examination is a defect of procedural in nature. It is to be allowed in order to make the assessment by using the principal statement, the examination in chief tested on cross examination. It is only a procedural requirement to be complied with before making the assessment under the Act in view of the decisions in the cases of Pooran Mall Sons 1974 (9) TMI 1 - SUPREME COURT . Not following the procedural provisions like allowing cross examination will not make an assessment null and void. At best it could be an irregularity liable to be cured and in such a case the assessments could be set aside, to be redone. An addition made does not cease to be an addition merely by reasons of want of cross examination. It will be a proceeding liable to be challenged and corrected. The statements of Shri H.S. Maheshwari, Shri Parveen Mittal, Shri Sanjay Hasija Shri Rajinder Gulati was used by the AO in initiating proceedings for reopening the case and making the assessment without affording an opportunity to cross examine the parties whose statement was used against it. The reopening on the basis of statement is to be upheld in view of the two decisions of the Supreme Court in the case of Tin Box Company 2001 (2) TMI 13 - SUPREME COURT and Phool Chand Bajrang Lal 1993 (7) TMI 1 - SUPREME COURT . It however held that in so far as making the addition on the basis of the said statement is concerned, the opportunity for cross-examination is to be allowed to the assessee instead of vacating the assessment passed on such an assessment in the light of the aforesaid discussion. It is evident that merely by reasons of want of cross examination the addition cannot be deleted. It will be an addition liable to be challenged and corrected. An omission to serve or any defect in the service of notices provided by procedural provisions does not efface or erase the liability to pay tax where such liability is created by distinct substantive provisions (charging sections). Any such omission or defect may render the order made irregular depending upon the nature of the provision not complied with but certainly not void or illegal. At the worst, they are defective proceedings or irregular proceedings liable to be cured. An addition made on the basis of a statement not tested by cross examination is invalid and it is vitiated, but the invalidity is not, however, of such a nature, which goes to the root of the proceedings. It could be set aside for being re-done de novo. The CIT(A) should not have upheld the addition on the basis of such a statement. The omission to allow cross examination merely prevents the ITO from making an addition and can be corrected by allowing the cross examination and the AO can be directed to proceed further to the examine the matter afresh on the basis of cross examined statement The power of setting aside the order of assessment, where it is illegal, is inherent in any appellate Court his order would be perfectly legal order in directing the ITO to issue notice to the assessee before making an assessment because he was not satisfied regarding the correctness of the assessee's return. The Tribunal/CIT(A) had ample jurisdiction to give directions to the ITO to comply with the requirements of law. It has inherent power to set aside illegal order of assessment and direct ITO to comply with requirements while making de novo assessment. In 1960 the Supreme Court in Guduthur Bros.' case 1960 (7) TMI 5 - SUPREME COURT almost in the same factual background, held that the ITO had jurisdiction to continue the proceedings from the stage at which the illegality had occurred. speculation loss - AO has computed the loss by excluding the receipts shown by the assessee from the profit of shares in the computation of income and that has resulted into a loss and since the loss has arisen to the assessee on account of purchase and sale of shares of another company, the same has to be treated as speculation loss in view of the clear provisions of Explanation to Section 73. No interference on this count is called for. The ground is accordingly rejected. The appeal of the assessee is allowed only for statistical purposes

Issues Involved:
1. Validity of the notice issued under Section 148.
2. Denial of cross-examination opportunity.
3. Determination of speculative loss under Explanation to Section 73.
4. Addition of unexplained entries under Section 68.

Issue-wise Detailed Analysis:

1. Validity of the notice issued under Section 148:
The assessee initially challenged the notice issued under Section 148 for reassessment but did not press this ground during the appeal. Consequently, this ground was dismissed as not pressed.

2. Denial of cross-examination opportunity:
The assessee argued that the assessment was based on statements and affidavits of third parties, particularly Shri Satish Chand Goel, without being allowed the opportunity to cross-examine these individuals. The assessee cited several decisions from the Delhi High Court to support the contention that the lack of cross-examination violated principles of natural justice. The Tribunal acknowledged that not allowing cross-examination is a procedural defect but held that such a defect does not render the assessment null and void. Instead, it necessitates setting aside the assessment to allow for proper cross-examination and re-evaluation of the evidence. The Tribunal referenced multiple Supreme Court decisions, including Guduthur Bros (1960) 40 ITR 298, which supported the view that procedural defects could be corrected by remanding the matter for proper compliance.

3. Determination of speculative loss under Explanation to Section 73:
The AO computed a speculative loss by excluding certain receipts from the profit of shares, resulting in a loss treated as speculative under Explanation to Section 73. The CIT(A) upheld this determination, and the Tribunal found no reason to interfere. The Tribunal noted that the assessee's business involved the purchase and sale of shares, and the resultant loss from these activities was correctly treated as speculative in nature.

4. Addition of unexplained entries under Section 68:
The AO added Rs. 12,41,298 to the assessee's income as unexplained cash credits under Section 68, based on the information that these amounts were received from a bogus firm, R.K. Aggarwal & Co., used for providing accommodation entries. The CIT(A) upheld this addition, stating that the assessee failed to prove the creditworthiness of the creditor and the genuineness of the transactions. The Tribunal noted that the assessee had shown these amounts as sale proceeds of shares in earlier assessments, and the addition under Section 68 would result in double taxation. The Tribunal directed the AO to allow cross-examination of Shri Satish Chand Goel and to re-evaluate the evidence before making a fresh determination.

Conclusion:
The Tribunal set aside the assessment order concerning the addition of Rs. 12,41,298 and directed the AO to allow cross-examination of Shri Satish Chand Goel and re-evaluate the evidence. The determination of speculative loss was upheld. The appeal was allowed for statistical purposes to the extent of the procedural defect related to cross-examination.

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