2017 (2) TMI 463 - AT - Income Tax

Treatment of Long Term Capital Gains as undisclosed income - exemptions of Long Term Capital Gains on sale of shares denied - Held that - There is no denying that consideration was paid when the shares were purchased. The shares were thereafter sent to the company for the transfer of name. The company transferred the shares in the name of the assessee. There is nothing on record which could suggest that the shares were never transferred in the name of the assessee. There is also nothing on record to suggest that the shares were never with the assessee. On the contrary, the shares were thereafter transferred to demat account. The demat account was in the name of the assessee, from where the shares were sold. In our understanding of the facts, if the shares were of some fictitious company which was not listed in the Bombay Stock Exchange/National Stock Exchange, the shares could never have been transferred to demat account. Shri Mukesh Choksi may have been providing accommodation entries to various persons but so far as the facts of the case in hand suggest that the transactions were genuine and therefore, no adverse inference should be drawn. In the light of the decisions in the case of Andaman Timber Industries (2015 (10) TMI 442 - SUPREME COURT) and considering the facts in totality, the claim of the assessee cannot be denied on the basis of presumption and surmises in respect of penny stock by disregarding the direct evidences on record relating to the sale/purchase transactions in shares supported by broker s contract notes, confirmation of receipt of sale proceeds through regular banking channels and the demat account. The Assessing Officer is directed to treat the surplus as Long Term Capital Gains and allow the exemption as claimed by the assessees. - Decided in favour of assessee

Summary

Issues Involved:
1. Treatment of Long Term Capital Gains as undisclosed income.
2. Denial of exemptions on Long Term Capital Gains on the sale of shares.
3. Validity of assessment orders based on third-party statements without cross-examination.
4. The genuineness of transactions involving purchase and sale of shares.

Detailed Analysis:

1. Treatment of Long Term Capital Gains as Undisclosed Income:
The core issue in these appeals is the treatment of Long Term Capital Gains (LTCG) as undisclosed income. The Assessing Officer (AO) reopened the assessments based on information from a search and seizure operation involving M/s. Mahasagar Securities Pvt Ltd, controlled by Shri Mukesh M. Choksi. Choksi admitted that his companies provided fraudulent entries for profit/loss on shares and securities transactions. The AO concluded that the appellants were beneficiaries of such accommodation entries, leading to the reopening of their assessments and treating the LTCG as undisclosed income.

2. Denial of Exemptions on Long Term Capital Gains:
The AO denied the exemptions on LTCG claimed by the assessees, treating the sale consideration as deemed income. The AO's findings were based on the statement of Shri Mukesh Choksi, who admitted to fraudulent activities. The AO dismissed the request for cross-examination of Choksi and relied on the fact that the transactions were not executed on the stock exchange, thus deeming them illegal and fraudulent.

3. Validity of Assessment Orders Based on Third-Party Statements Without Cross-Examination:
The assessees argued that the assessment orders were invalid as they were based on the statement of a third party (Choksi) without providing an opportunity for cross-examination. The Hon'ble Supreme Court's decision in the case of Andaman Timber Industries was cited, which held that not allowing cross-examination of witnesses whose statements form the basis of an order is a violation of natural justice, rendering the order null and void. The Tribunal agreed, stating that the AO's failure to provide cross-examination and reliance on Choksi's statement without confronting the assessees vitiated the assessment orders.

4. Genuineness of Transactions Involving Purchase and Sale of Shares:
The Tribunal examined the facts and found that the assessees had purchased shares through legitimate channels, paid consideration, and transferred shares to their demat accounts before selling them. There was no evidence suggesting that the shares were still with the assessees or that the sale consideration was returned in cash. The Tribunal concluded that the transactions were genuine, supported by broker’s contract notes, confirmation of receipt of sale proceeds through banking channels, and demat account records. The Tribunal emphasized that adverse inferences should not be drawn based on presumption and surmises.

Conclusion:
The Tribunal quashed the assessment orders, holding that the denial of cross-examination and reliance on Choksi's statement without confronting the assessees violated principles of natural justice. The Tribunal directed the AO to treat the surplus as LTCG and allow the exemptions claimed by the assessees. Consequently, all the appeals filed by the assessees were allowed.

Order Pronouncement:
The order was pronounced in the Court on 21st October, 2016, at Ahmedabad.