2018 (11) TMI 1491 - AT - Income Tax

Addition u/s 68 - Bogus long term capital gain on sale of shares - assessee was not granted opportunity to cross examine to persons on whose basis addition is made - denial of natural justice - Held that - AO without providing any material evidence, report on which he was relying and not granting an opportunity to cross examine the persons on whose statement he arrived at certain presuppositions, made addition in the hands of assessee. Before Ld. CIT (A) assessee once again raised plea of crossexamination granted to assessee and materials not based upon which the submissions have been made has not been provided for examination. Even then opportunity was not granted to assessee, though Ld. CIT (A) had coterminous powers as that of Ld. AO. This amounts to gross violation of principles of natural Justice. - Decided against revenue

Summary

Issues:
1. Addition of long term capital gain under section 68 of the Income Tax Act.
2. Denial of opportunity to cross-examine witnesses.

Analysis:

Issue 1: Addition of long term capital gain under section 68 of the Income Tax Act:
The case involved an appeal filed by the assessee against the addition of ?1,39,32,231 under section 68 of the Income Tax Act related to long term capital gain on the sale of shares. The Assessing Officer (AO) raised concerns regarding the genuineness of the transaction, suspecting it to be a sham transaction for obtaining bogus long term capital gains. The AO relied on statements of individuals involved in managing various companies, acting as accommodation entry providers. The AO made the addition based on the test of human probabilities. The assessee contended that the AO violated principles of natural justice by not providing copies of the statements or granting an opportunity to cross-examine the individuals whose statements were relied upon. The CIT (A) upheld the AO's decision, leading to the appeal before the ITAT Delhi.

Analysis of Issue 1:
The ITAT Delhi observed that the AO and CIT (A) based their decisions on statements recorded by the Investigation Department without granting the assessee an opportunity to cross-examine the individuals. The failure to provide material evidence and the denial of cross-examination amounted to a violation of natural justice principles. Citing the decision of the Hon'ble Supreme Court in Andaman Timber Industries versus CCE, the ITAT Delhi allowed the appeal on legal grounds, quashing the assessment order due to the serious flaw in not allowing cross-examination, which affected the assessee adversely. The ITAT Delhi set aside the addition made by the AO, emphasizing the importance of adhering to principles of natural justice in such proceedings.

Issue 2: Denial of opportunity to cross-examine witnesses:
The second major issue in the case was the denial of the assessee's right to cross-examine the witnesses whose statements formed the basis of the addition made by the AO. The assessee argued that the denial of this opportunity violated principles of natural justice and impacted the assessment process adversely. The ITAT Delhi found merit in this argument and allowed the appeal on the legal ground raised by the assessee regarding the denial of the opportunity to cross-examine witnesses.

Analysis of Issue 2:
The ITAT Delhi highlighted the gross violation of principles of natural justice in denying the assessee the right to cross-examine witnesses, as it undermined the fairness and integrity of the assessment process. By citing the Andaman Timber Industries case, the ITAT Delhi emphasized the significance of allowing cross-examination when statements of witnesses are pivotal in making decisions that impact the assessee. This denial was considered a serious flaw leading to the nullity of the assessment order. Consequently, the ITAT Delhi set aside the assessment order, recognizing the adverse impact on the assessee due to the denial of this fundamental right.

In conclusion, the ITAT Delhi allowed the appeal of the assessee based on the legal ground of denial of the opportunity to cross-examine witnesses, thereby quashing the assessment order and emphasizing the importance of upholding principles of natural justice in tax proceedings.