2019 (8) TMI 1520 - AT - Income Tax

Tribunal overturns AO's LTCG exemption denial, citing lack of natural justice.

Narayan Ramchandra Rathi Versus The ITO-3 (1), Thane

Narayan Ramchandra Rathi Versus The ITO-3 (1), Thane - TMI Issues Involved:1. Assessment under Section 143(3) and addition of Rs. 13,98,729 as unexplained credit.2. Denial of Long-Term Capital Gain (LTCG) exemption under Section 10(38).3. Allegation of bogus and sham transactions.4. Violation of principles of natural justice.Issue-wise Analysis:1. Assessment under Section 143(3) and Addition of Rs. 13,98,729 as Unexplained Credit:The Assessing Officer (AO) treated the long-term capital gain of Rs. 13,98,729 claimed by the assessee as a bogus transaction and added this amount to the income of the assessee as unexplained credit under Section 68 of the Income Tax Act. The AO determined the total income at Rs. 19,50,880 against the returned income of Rs. 5,52,150. The CIT(A) upheld the AO's decision, confirming the addition made.2. Denial of Long-Term Capital Gain (LTCG) Exemption under Section 10(38):The AO disallowed the LTCG exemption claimed by the assessee under Section 10(38) of the Act, which pertains to the sale of listed equity shares sold through a recognized stock exchange and subjected to securities transaction tax (STT). The AO's decision was based on the alleged bogus nature of the transactions, which was upheld by the CIT(A).3. Allegation of Bogus and Sham Transactions:The AO alleged that the transactions involving the sale of shares of M/s Sunrise Asian Ltd. were bogus and sham. This conclusion was based on statements from third parties and the outcome of an investigation by the Directorate of Investigation, Kolkata, which unearthed an organized racket facilitating bogus capital gains. However, the AO did not provide copies of these statements or an opportunity for the assessee to cross-examine the witnesses, leading to a violation of the principles of natural justice.4. Violation of Principles of Natural Justice:The assessee contended that the AO's decision was made without providing an opportunity to cross-examine the witnesses whose statements were relied upon. This was a violation of the principles of natural justice as upheld by the Honorable Supreme Court in cases like Andaman Timber Industries v. Commissioner of Central Excise and Kishanchand Chellaram v. CIT. The Tribunal noted that the AO neither provided the copies of the statements nor allowed cross-examination, which made the order legally infirm.Tribunal's Findings:The Tribunal observed that the AO's rejection of the assessee's claim was based on general reports and statements from the investigation wing without specific evidence against the assessee. The Tribunal noted that the AO did not doubt the documentary evidence provided by the assessee, such as bank statements, share certificates, demat account details, and balance sheets, which demonstrated the genuineness of the transactions.The Tribunal cited several cases, including CIT vs. Shyam R. Pawar, CIT vs. Shri Mukesh Ratilal Marolia, and others, where similar issues were decided in favor of the assessee. The Tribunal emphasized that the AO's reliance on third-party statements without allowing cross-examination violated the principles of natural justice. The Tribunal referred to the Supreme Court's judgment in M/s Andaman Timber Industries, which held that not allowing cross-examination of witnesses makes the order void.Conclusion:The Tribunal concluded that the CIT(A) wrongly confirmed the AO's order, which suffered from legal infirmity due to the violation of natural justice principles. The Tribunal set aside the impugned order and directed the AO to allow the assessee's claim for LTCG exemption under Section 10(38). The appeal filed by the assessee for the assessment year 2014-2015 was allowed.