2018 (4) TMI 453 - AT - Income Tax

ITAT deletes bogus capital gains addition under section 10(38) citing lack of evidence beyond suspicion

The ITAT Jaipur ruled in favor of the assessee regarding alleged bogus long term capital gains claimed as exempt under section 10(38). The AO had treated ... Long term capital gains exempt u/s 10(38) - genuineness of share transactions - accommodation entries and bogus entries - dematerialisation and contract notes as proof of ownership - reliance on third party statement without cross examination violates principles of natural justice - addition based on suspicion and surmise not sustainableLong term capital gains exempt u/s 10(38) - genuineness of share transactions - dematerialisation and contract notes as proof of ownership - addition based on suspicion and surmise not sustainable - Addition treating claimed long term capital gain as undisclosed income was not sustainable and was deleted. - HELD THAT: - The Tribunal examined the material produced by the assessee - share application, bank payment by cheque to the company, allotment letter, share certificate, dematerialisation entries and contract notes showing sale through the stock exchange - and held that these records established acquisition, holding and disposal of the shares. The Bench relied on a Coordinate Bench decision dealing with identical facts and concluded that mere short time intervals or apprehensions of modus operandi do not render transactions bogus when contemporaneous documentary evidence of payment, allotment, demat credit and exchange trades is on record. In the absence of any independent material showing that unaccounted money was introduced or that amounts in excess of the documented consideration were routed back to the assessee, the addition based on suspicion and the statement relied upon by the Assessing Officer could not withstand scrutiny. Consequently the addition was deleted. [Paras 4]Addition treating long term capital gains as undisclosed income deleted; claim of exemption accepted.Reliance on third party statement without cross examination violates principles of natural justice - addition based on suspicion and surmise not sustainable - Assessment based primarily on the statement of a third party without granting opportunity to cross examine was held to be invalid and not a proper basis for addition. - HELD THAT: - The Tribunal noted that the Assessing Officer relied on the statement of Shri Deepak Patwari recorded by the Investigation Wing but did not afford the assessee an opportunity to cross examine that witness. Applying settled precedent, the Bench observed that making a witness statement the sole or decisive basis for an adverse order without permitting cross examination constitutes a violation of principles of natural justice and renders the addition unsustainable. The AO also failed to produce independent evidence to controvert the contemporaneous documentary proof furnished by the assessee. For these reasons the addition founded on such untested statement was rejected. [Paras 4]Addition based on untested third party statement set aside; failure to grant opportunity for cross examination contributed to deletion of the addition.Final Conclusion: The Tribunal allowed the assessee's appeal for Assessment Year 2013-14, holding the claimed long term capital gains as genuine and deleting the addition made by the Assessing Officer which was founded on suspicion and an untested third party statement. Issues Involved:1. Addition of Rs. 4,78,38,157/- on account of long-term capital gain as undisclosed income.2. Denial of opportunity for cross-examination and rebuttal of material collected at the back of the assessee.3. Treatment of the sale of shares as a non-genuine transaction based on human probabilities.Detailed Analysis:1. Addition of Rs. 4,78,38,157/- on account of long-term capital gain as undisclosed income:The assessee declared a long-term capital gain of Rs. 4,78,38,157/- as exempt under section 10(38) of the Income Tax Act, 1961. The AO treated this gain as bogus, alleging that the assessee arranged accommodation entries from entities providing fake capital gains. The assessee presented evidence of purchasing 10,000 shares of M/s. Paridhi Properties Ltd. through a private placement, paying Rs. 10,00,000/- by cheque. These shares were later converted into 100,000 shares of M/s. Luminaire Technologies Ltd. after amalgamation, which were dematerialized and sold through the stock exchange. The Tribunal found that the acquisition and sale of shares were genuine and supported by credible evidence, including payment records, demat account statements, and contract notes. The Tribunal held that the AO's addition was based on suspicion and lacked cogent material evidence. The Tribunal deleted the addition, emphasizing that the transaction was genuine and the AO failed to prove any unaccounted income.2. Denial of opportunity for cross-examination and rebuttal of material collected at the back of the assessee:The assessee requested the cross-examination of Shri Deepak Patwari, whose statement was used by the AO to support the addition. The AO did not provide this opportunity. The Tribunal cited the Supreme Court's decision in Andaman Timber Industries vs. CCE, which held that not allowing cross-examination of witnesses whose statements form the basis of an order is a serious flaw, violating principles of natural justice. The Tribunal noted that the AO should have summoned the principal officers of the companies involved if their examination was necessary instead of shifting this burden onto the assessee. The Tribunal concluded that the denial of cross-examination rendered the AO's order null and void.3. Treatment of the sale of shares as a non-genuine transaction based on human probabilities:The AO doubted the genuineness of the share transactions, considering them to be arranged accommodation entries. The Tribunal referred to a similar case (Shri Pramod Jain & Others vs. DCIT) where the genuineness of share transactions was upheld. The Tribunal found that the assessee provided all necessary documentation, including share application forms, payment proofs, share certificates, and demat account statements. The Tribunal emphasized that the AO's suspicion was not supported by any concrete evidence. The Tribunal reiterated that the holding and subsequent sale of shares were genuine, and the AO's reliance on the statement of Shri Deepak Patwari without allowing cross-examination was unjustified.Conclusion:The Tribunal allowed the appeal, deleting the addition of Rs. 4,78,38,157/- and ruling in favor of the assessee. The Tribunal held that the transaction was genuine, the AO's addition was based on mere suspicion, and the denial of cross-examination violated principles of natural justice. The Tribunal's decision was pronounced in the open court on 06/04/2018.