2020 (4) TMI 894 - AT - Income Tax

Tribunal quashes assessment order for lack of natural justice, directs deletion of additions.

The tribunal found the assessment order unsustainable as it violated the principles of natural justice by not allowing cross-examination or disclosing the ... Unexplained cash credit - bogus LTCG - addition u/s 68 - Penny stock purchases - as argued assessee was not provided the cross examination of those parties who gave statements against the assessee and also that materials used against the assessee in framing the assessment order were not provided to the assessee - HELD THAT:- Assessee held these shares for more than 12 months and all these transactions were routed through the banking channels. Thereafter, the investigation wing of the department conducted the investigation and searches on various operators in Kolkata and elsewhere and a racket of shares manipulation came to notice of the department. In the said racket the shares were purchased at a very minimal price and after certain period sold at a very astronomical price which is manifold the purchase price. In the whole racket which was found that the various investors were indulged in these transactions in order to book the bogus long term capital gain/short term capital gain and routed their own money in order to convert the same into the long term capital gain - these penny stock companies were not having any financial strength or genuine business and the increase in the prices of the share was only through manipulation and connivance with the brokers. The assessee’s name was found to be in the list of beneficiary and accordingly the AO inquired upon these transactions by the assessee during the year. Assessee has duly disclosed these long term capital gains in his return of income filed for the year. We note that the AO has not supplied any material to the assessee before finalizing the assessment and has merely relied upon the investigation report received by the assessee that assessee is a beneficiary of this racket. The AO merely reproduced the report of the investigation wing in the assessment order and discussed the financial of Premier Capital Services Ltd. However, it was never confronted to the assessee or any cross examination was allowed to find out the truth behind it. We note that assessee has purchased the shares and subsequently sold on the stock exchange through online trading portal and where it is very difficult to note about the subsequent buyer Assessee has filed all the necessary evidences as stated above before the AO as well as before the Ld. CIT(A). However, no further enquiry was carried out by the AO or by Ld. CIT(A) but merely relied on the report of the investigation wing and statements of certain individuals recorded during the course of search who have stated that they were engaged in providing accommodation entries for LTCG/LTCL in various shares which are called penny stocks. However, these information were never provided to the assessee. Similarly, no cross examination was allowed by the AO to the assessee during the assessment proceedings - AO has merely relied on the investigation report and did not try to collect further evidences by conducting further investigation to prove that the assessee own funds have changed hands.. Under these circumstances, we are not in a position to subscribe to the conclusion by the authorities below - We direct the AO to delete the addition under section 68 - Decided in favour of assessee. Issues Involved:1. Legality of the assessment order under section 143(3) of the Income Tax Act.2. Addition of Rs. 3,43,62,880/- as unexplained cash credit under section 68 of the Income Tax Act.3. Addition of Rs. 6,87,257/- as unexplained expenditure under section 69C of the Income Tax Act.4. Charging of interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act.5. Initiation of penalty proceedings under section 274 read with section 271(1)(c) of the Income Tax Act.Detailed Analysis:1. Legality of the Assessment Order:The assessee argued that the assessment order under section 143(3) was illegal, ultra vires, and passed without providing an opportunity for cross-examination or copies of the material used against the assessee. The tribunal noted that the Assessing Officer (AO) had relied heavily on the investigation report without offering the assessee a chance to counter it or conduct cross-examinations. The tribunal emphasized that the principle of natural justice was violated as the information used against the assessee was not disclosed, and no cross-examination was allowed. Consequently, the tribunal found the assessment order unsustainable on these grounds.2. Addition as Unexplained Cash Credit:The AO added Rs. 3,43,62,880/- to the assessee's income as unexplained cash credit under section 68, rejecting the long-term capital gain (LTCG) claim of Rs. 3,32,77,358/- and the cost of acquisition of Rs. 9,30,375/-. The AO based this on the investigation report, which suggested that the shares of M/s Premier Capital Services Ltd. were part of a bogus LTCG scheme. The assessee provided extensive documentation, including Demat account statements, contract notes, and bank statements, to substantiate the purchase and sale of shares. The tribunal noted that the AO did not conduct further investigations or provide the assessee with the investigation report's details. The tribunal cited several precedents where similar additions were deleted due to lack of evidence and failure to provide cross-examination. Consequently, the tribunal directed the deletion of the Rs. 3,43,62,880/- addition under section 68.3. Addition as Unexplained Expenditure:The AO added Rs. 6,87,257/- as unexplained expenditure under section 69C, treating it as commission paid for accommodation entries. The tribunal found this addition consequential to the primary issue of unexplained cash credit. Since the addition under section 68 was deleted, the tribunal also directed the deletion of the Rs. 6,87,257/- addition under section 69C.4. Charging of Interest:The assessee contested the charging of interest under sections 234A, 234B, 234C, and 234D. Given that the primary additions were deleted, these grounds became infructuous and did not require further adjudication.5. Initiation of Penalty Proceedings:The initiation of penalty proceedings under section 274 read with section 271(1)(c) was also contested. As the primary additions were deleted, this ground became infructuous and did not require further adjudication.Conclusion:The tribunal allowed the appeal, directing the deletion of the additions under sections 68 and 69C and rendering the grounds related to interest and penalty proceedings infructuous. The tribunal emphasized the importance of adhering to the principles of natural justice, particularly the right to cross-examine and access the materials used against the assessee. The order was pronounced on 20.04.2020.