Reopening beyond four years and denial of cross-examination invalidated additions based on share transactions and third-party statements.

Reopening beyond four years is invalid where the recorded reasons do not allege that the assessee failed to disclose fully and truly all material facts, because the jurisdictional condition for such reassessment is not met. An assessment based substantially on a third-party statement cannot stand if effective cross-examination is denied, as this breaches natural justice. Share transactions supported by demat records and banking trails were not shown to be bogus or accommodation entries, so the gains could not be taxed as unexplained income or treated as business income.

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Issues: (i) whether reassessment initiated beyond four years was valid in the absence of a recorded allegation that the assessee failed to disclose fully and truly all material facts; (ii) whether denial of cross-examination of the person whose statement was relied upon vitiated the assessment; (iii) whether the share transactions and resultant short-term capital gains could be treated as unexplained income or as business income.

Issue (i): whether reassessment initiated beyond four years was valid in the absence of a recorded allegation that the assessee failed to disclose fully and truly all material facts.

Analysis: The reassessment notice was issued after four years. The recorded reasons did not state how any failure on the part of the assessee to disclose material facts had led to escapement of income. In such circumstances, the jurisdictional precondition for reopening beyond four years was not satisfied.

Conclusion: Reassessment was invalid on this ground and the issue was decided in favour of the assessee.

Issue (ii): whether denial of cross-examination of the person whose statement was relied upon vitiated the assessment.

Analysis: The addition was substantially founded on the statement of the third party recorded by the investigation wing. The assessee sought an opportunity to cross-examine that person, but the opportunity was not effectively provided. A statement used against a party must be capable of verification when it is challenged, and denial of such opportunity offends the basic principles of natural justice.

Conclusion: The assessment could not be sustained on this basis and the issue was decided in favour of the assessee.

Issue (iii): whether the share transactions and resultant short-term capital gains could be treated as unexplained income or as business income.

Analysis: The shares were purchased and sold through demat accounts and the payments and sale proceeds moved through banking channels. The sale was not doubted, and the material on record did not establish that the transactions were bogus. The general statement relied upon by the Revenue did not displace the documentary evidence of purchase, holding and sale. The transactions were therefore not shown to be accommodation entries, and the shares were held as investments rather than stock-in-trade.

Conclusion: The addition as unexplained income and the treatment of the gains as business income were not justified, and the issue was decided in favour of the assessee.

Final Conclusion: The reassessment and the addition made on account of the share transactions were set aside, and the assessee succeeded in the appeal.

Ratio Decidendi: Where reopening beyond four years is made without alleging failure to disclose material facts, and an addition based on third-party statements is sustained without affording effective cross-examination despite contrary documentary evidence, the reassessment and consequent addition cannot survive.

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