2016 (6) TMI 786 - AT - Income Tax

Addition u/s 68 - AO presumed that the purchases of the said shares of M/s. Shukun Constructions Ltd. were not made on the date as disclosed by the assessee but was backdated and an arranged transaction - LTCG income shown as exempt under section 10(38) - Held that - The authorities below i.e. AO/CIT(A) have made the addition under section 68 of the Act merely on presumptions suspicions and surmises in respect of penny stocks; disregarding the direct evidences placed on record and furnished by the assessee in the form of brokers contract notes for purchases and sales of the said shares of M/s. Shukun Constructions Ltd. copies of the physical share certificates and her D-MAT account statement establishing the holding of the shares in her name prior to the sale thereof; confirmation of the transactions of buying and selling of the said shares by the respective stock brokers receipt of sale proceeds through banking channels etc. The statement recorded from Shri Niraj Sanghvi on 31.12.2007 the day the order of assessment was passed would have no evidentiary or corroborative value to be the basis for coming to an adverse view in the case on hand since it was recorded behind the assessee s back from a person who was not involved in the purchase of the said shares and also since the assessee was not afforded opportunity for rebuttal of the same and to cross-examine the said person. Since no adverse finding has been rendered in respect of the direct material evidence placed on record in respect of her transactions of purchase and sale of the said shares of M/s. Shukun Constructions Ltd. which stand duly disclosed in her audited Balance Sheets filed with the return of income of assessment years 2004-05 and the current year under consideration. In this factual and legal matrix of the case as discussed above we find that the addition of 95, 12, 812/- under section 68 of the Act made and confirmed by the authorities below to be unsustainable and therefore direct the AO to delete the said addition and accept the LTCG income of 93, 00, 012/- shown as exempt under section 10(38) of the Act. - Decided in favour of assessee

Issues Involved:

1. Addition under section 68 of the Income Tax Act, 1961.
2. Claim of exemption under section 10(38) of the Income Tax Act, 1961.
3. Legal validity of the assessment based on presumptions and without proper investigation.
4. Denial of the right to cross-examine a witness.

Issue-wise Detailed Analysis:

1. Addition under section 68 of the Income Tax Act, 1961:

The assessee filed her return for A.Y. 2005-06 declaring income after claiming exemption on LTCG from the sale of listed equity shares. The AO treated the sale proceeds of the shares as unexplained cash credit under section 68, suspecting the transactions as fabricated and backdated. The CIT(A) upheld this addition. The Tribunal found that the assessee had provided sufficient documentary evidence, including broker's contract notes, share certificates, D-MAT statements, and bank statements, to substantiate the genuineness of the transactions. The AO's reliance on a statement recorded from a third party, without allowing the assessee to cross-examine, was deemed flawed. The Tribunal concluded that the addition under section 68 was based on presumptions and not on any material fact, thus directing the AO to delete the addition.

2. Claim of exemption under section 10(38) of the Income Tax Act, 1961:

The assessee claimed exemption under section 10(38) for LTCG on the sale of shares. The AO denied this exemption, suspecting the transactions were backdated and arranged. The Tribunal found that the assessee had duly disclosed the purchase of shares in her audited balance sheet for the previous year and had provided all necessary documents to substantiate the genuineness of the transactions. The Tribunal directed the AO to accept the LTCG as exempt under section 10(38).

3. Legal validity of the assessment based on presumptions and without proper investigation:

The Tribunal noted that the AO's assessment was based on presumptions and suspicions without proper investigation. The AO ignored the documentary evidence provided by the assessee and relied on a statement recorded from a third party without giving the assessee an opportunity for rebuttal. The Tribunal emphasized that the assessment should be based on material facts and proper investigation, not on presumptions.

4. Denial of the right to cross-examine a witness:

The AO relied on a statement from Shri Niraj Sanghvi, recorded on the day the assessment order was passed, without allowing the assessee to cross-examine him. The Tribunal held that this denial of the right to cross-examine violated the principles of natural justice. The Tribunal cited the Supreme Court's decision in Andaman Timber Industries, which held that denial of the right to cross-examine renders the order a nullity.

Conclusion:

The Tribunal allowed the assessee's appeal, directing the AO to delete the addition under section 68 and accept the LTCG as exempt under section 10(38). The Tribunal did not find it necessary to address the legal and alternate issues raised by the assessee in other grounds, as the primary issue was decided in her favor. The assessee's appeal for A.Y. 2005-06 was allowed.

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