2019 (3) TMI 1118 - AT - Income Tax

Addition of unexplained cash credit u/s 68 - return was selected for scrutiny under CASS - applicability of section 68 to share sale proceeds on mere basis of stated investigation wing inputs to AO and without books being available before AO and Ld CIT(A) qua share sale transaction - serious violation of principle of natural justice - HELD THAT - Credit in bank account simply or any other raw information available to AO can t be loosely called as books of account u/s 68 of the Act. After the detailed analysis of various ingredients of section 68 no hesitation to accept the jurisdictional plea raised that invocation of section 68 in extant facts sans valid and proper books of account of assessee is invalid and accordingly addition made by AO as sustained by Ld CIT(A) is held to be incorrect and reversed. Signification of correct assumption of jurisdiction is must. ITAT at this belated stage can t improve the order of AO and covert the addition from section 68 to section 69A etc. Even otherwise provisions of section 68 of the Act has been held can t be applicable to mere share sale which is not akin to receipt of gift, loan, share capital, advance etc AO directed to delete the additions made in captioned appeals in so far as it relates to share sale proceeds and alleged commission portion is concerned. Impact of cross examination - denial of natural justice - HELD THAT - We strongly rely on the following string of decisions of various courts to hold that when revenue strongly relies on statements of certain persons to implicate an assessee, principle of cross examination has to invariably followed if truth and justice needs to be found out. Thus on the issue of lack of cross examination and violation of principle of natural justice, we have no hesitation to accept the plea of Ld AR that lack of cross examination and violation of principle of natural justice results is total nullity of the entire addition, hence, the additions in dispute is hereby deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 68 of the Income Tax Act, 1961.
2. Violation of principles of natural justice, specifically the right to cross-examine.

Issue-wise Detailed Analysis:

1. Applicability of Section 68 of the Income Tax Act, 1961:
The primary issue in this case was whether the Assessing Officer (AO) correctly invoked Section 68 of the Income Tax Act, 1961, to treat the share sale proceeds as unexplained cash credit. Section 68 pertains to cash credits and requires that any sum credited in the books of an assessee for which no satisfactory explanation is provided can be charged to income-tax as the income of the assessee. The Tribunal highlighted that for Section 68 to be invoked, the existence of "books of account" is a prerequisite. The Tribunal referred to Section 2(12A) and Section 44AA of the Act, which define and mandate the maintenance of books of account. It was noted that mere bank statements do not qualify as "books of account" under these sections.

The Tribunal cited several judicial precedents, including the Bombay High Court decision in Sheraton Apparels (256 ITR 20), which clarified that books of account must be maintained for the purpose of recording all business transactions and should provide credible data for filing tax returns. The Tribunal concluded that the AO's reliance on bank statements without proper books of account was insufficient to invoke Section 68. Consequently, the addition made by the AO under Section 68 was held to be incorrect and reversed.

2. Violation of Principles of Natural Justice:
The second issue was whether the principles of natural justice were violated due to the denial of the right to cross-examine witnesses whose statements were used against the assessee. The Tribunal emphasized the importance of cross-examination as an integral part of the principles of natural justice. It was noted that the AO relied on statements from the investigation wing without providing the assessee an opportunity to cross-examine the witnesses or access the back material used against them.

The Tribunal referred to several judicial decisions, including the Supreme Court's ruling in Andaman Timber Industries (Civil Appeal No. 4228 of 2006), which held that the denial of the right to cross-examine witnesses whose statements form the basis of an adverse order constitutes a serious violation of natural justice. The Tribunal also cited other decisions, such as the Delhi High Court in CIT vs. Ashwani Gupta (322 ITR 396) and the Bombay High Court in H.R. Mehta vs. ACIT (387 ITR 561), which underscored the necessity of providing cross-examination to ensure a fair hearing.

The Tribunal concluded that the AO's failure to offer cross-examination and the lack of access to the back material relied upon rendered the assessment proceedings invalid. The Tribunal held that such procedural lapses amounted to a denial of the principles of natural justice, necessitating the deletion of the additions made by the AO.

Conclusion:
The Tribunal allowed the appeals filed by the assessee, holding that the invocation of Section 68 was incorrect in the absence of proper books of account and that the denial of the right to cross-examine violated the principles of natural justice. Consequently, the additions made by the AO were deleted, and the appeals were partly allowed.