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 the share transactions as fictitious based on a statement by Shri Deepak Patwari, similar to evidence used in Shri Pramod Jain's case. The Tribunal found that since purchase consideration was paid by cheque directly to the company and the company subsequently merged under a HC-approved scheme, the transactions could not be deemed bogus. Following the coordinate bench decision in Shri Pramod Jain vs. DCIT, the Tribunal held that the AO's addition was based merely on suspicion without cogent material to controvert the assessee's evidence. The AO failed to establish that unaccounted income was converted into long term capital gains. The addition was deleted.

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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.

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