2024 (12) TMI 1173 - AT - Income Tax

Bogus long term capital gains - Application of the wrong section for the addition under the Income Tax Act - addition u/s 68 of the Act invoking the principle of human probabilities and suspicious surrounding only - AO has made the addition u/s 68 in the Assessment Order, whereas in the remand proceedings, he specifically asked CIT(A) to consider the additions u/s 69A. HELD THAT - We are of the considered view that there is no ambiguity which established the non-application of mind by the lower authorities and vitiates the additions made. Mentioning a wrong section by the AO is not fatal. In a case where income is chargeable under the deeming income provisions the transactions can be overlapping. There is no doubt that for alleged bogus LTCG, additions can be made u/s 68 of the Act, and for that reasons the order of CIT(A) requires no interference. Allegation of the assessee that the A.O has relied upon certain statements and documents while making the impugned additions in the assessment but they were not provided to the Assessee neither an opportunity of cross examination was afforded to the Assessee - It is a matter of record that the A.O. accepted that the relevant material was not provided to the Assessee during the Assessment and then the A.O. in his remand report has mentioned that he sent all the statement by post to the Assessee on the Address mentioned in the ITR for AY 2018-19. In this regard, it is submitted by the ld. AR that the address of the Assessee was changed and the same was updated in PAN records. Same is certainly established by copy of return available on Page 60-61 of the Paperbook and the said documents should have been sent on the address as per PAN records with NSDL. Then we find that AO forwarded these documents to CIT(A) along with Remand Report with the observations that these documents relied by AO could not be provided to the assessee yet CIT (A) failed to share these documents with the Assessee during appellate proccedings. Thus no doubt certain principle of natural law are violated but we have to examine the issue on merits and then consider that how far absence of this opportunity cross examination of witness or non provision of documents was prejudicial to the assessee. Bogus LTCG claims - AO has discredited the explanation of the assessee being general in nature. However, the findings and reasoning of the AO are patently very general. No doubt, the test of preponderance of probability would be applicable, but, that would be on the basis of some evidence indicating that some colorable device was used for introduction of unaccounted money through the LTCG Claim. The financials of the two scrips or the movement in the prices are indeed relevant, but, cannot alone be relied for considering the investment to be motivated for preparing false LTCG claim. When an assessee deposes on oath giving explanation of the reasons and circumstances for investment, the same cannot be brushed aside on the basis of general principles of the modus operandi of bogus LTCG claims. We are inclined to accept the grounds of appeal of the assessee holding that ld. tax authorities below have fallen in error in considering the LTCG claim of the assessee from the two disputed scrips as bogus claim. The appeal of the assessee is allowed with consequences to follow.

Summary

Issues Involved:

1. Alleged bogus long-term capital gains (LTCG) claimed by the assessee.
2. Application of the wrong section for the addition under the Income Tax Act.
3. Violation of natural justice due to lack of opportunity for cross-examination.
4. Reliance on external investigations and reports without independent verification.

Issue-wise Detailed Analysis:

1. Alleged Bogus Long-Term Capital Gains (LTCG):

The primary issue in this case was whether the LTCG claimed by the assessee from transactions in shares of HPC Biosciences Limited and Sunstar Realty Development Limited were genuine or bogus. The Assessing Officer (AO) had concluded that these transactions were sham, based on investigations by the Directorate of Investigation, Kolkata, and certain SEBI orders. The AO made additions under Section 68 of the Income Tax Act, treating the LTCG as accommodation entries. The CIT(A) upheld these findings, relying on the inferential approach adopted by the AO and the general principles of tainted transactions in penny stocks.

The tribunal found that the AO's conclusions were largely based on external reports and SEBI orders without independent investigation. The SEBI orders, particularly the one dated 06.09.2017, had revoked earlier directions against the assessee, indicating no observed violations in the investigation report. Furthermore, the tribunal noted that the financials of the companies involved or the price movements alone could not substantiate the claim of bogus LTCG without concrete evidence of a colorable device.

2. Application of the Wrong Section for Addition:

The assessee contended that the AO incorrectly applied Section 68 instead of Section 69A for the addition. The tribunal held that mentioning a wrong section by the AO is not fatal, as the transactions could be overlapping under deeming income provisions. The tribunal found no ambiguity or non-application of mind by the lower authorities that would vitiate the additions made under Section 68.

3. Violation of Natural Justice:

The assessee argued that the AO relied on statements and documents without providing them or offering an opportunity for cross-examination. The tribunal found that the AO accepted the failure to provide relevant material during the assessment and attempted to rectify this during remand proceedings. However, the CIT(A) did not ensure the assessee received these documents. The tribunal concluded that this violation of natural justice principles was significant but ultimately examined the issue on merits to determine the impact on the assessee.

4. Reliance on External Investigations and Reports:

The AO heavily relied on the Kolkata Investigation Report and SEBI orders, which were not specific to the assessee's transactions. The tribunal noted that the SEBI orders had exonerated the assessee from any manipulation allegations. Additionally, the tribunal emphasized that the AO's findings were general and lacked specific evidence against the assessee. The tribunal stressed that the burden of proof lies with the AO to establish that the assessee engaged in transactions solely for generating exempt LTCG.

Conclusion:

The tribunal allowed the assessee's appeal, holding that the tax authorities erred in treating the LTCG claims as bogus. The tribunal emphasized the lack of specific evidence against the assessee and the violation of natural justice principles. The appeal was allowed with the consequences to follow, indicating that the additions made by the AO were not justified based on the evidence presented.