Long Term Capital Gain exemption challenged as bogus transaction; failure to allow cross-examination and lack of evidence led to deletion

Addition under unexplained income allegation challenged the claim of exempt long term capital gain where holding and sale of shares were undisputed. The tribunal emphasised that mere suspicion without material showing the assessee introduced unaccounted funds as capital gain cannot sustain an addition; therefore the addition was deleted. The tribunal further found denial of a meaningful opportunity to cross-examine investigating witnesses and reliance on vague witness statements and broker confirmations given late in proceedings undermined the assessment, leading to deletion of the disputed addition in favour of the assessee.

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Issues Involved:
1. Genuineness of Long Term Capital Gain on Sale of Shares.
2. Addition to Income under Section 69 of the IT Act, 1961.
3. Denial of Exemption under Section 10(38) of the IT Act.
4. Opportunity to Cross-Examine Witnesses.

Issue-wise Detailed Analysis:

1. Genuineness of Long Term Capital Gain on Sale of Shares:
The primary issue was whether the long term capital gain of Rs. 72,61,309/- on the sale of shares was genuine. The assessee claimed exemption under section 10(38) of the IT Act for the capital gain arising from the sale of equity shares of M/s. Well Pack Papers & Containers Ltd. The Assessing Officer (AO) doubted the genuineness of the transaction, suspecting it to be a sham. The AO conducted an enquiry, which revealed that the broker, M/s. Arihant Securities & Shares, did not exist at the given address. Despite the assessee providing purchase bills, broker confirmations, D-mat account statements, and sale bills, the AO concluded the transaction was bogus based on the statement of Shri Mahesh Pancholi from M/s. Arihant Capital Market Ltd., who denied any transaction with the assessee. However, the Tribunal noted that the shares were dematerialized and sold through recognized channels, and the purchase and sale transactions were recorded in the books of accounts and balance sheets. The Tribunal emphasized that mere suspicion without concrete evidence could not invalidate the transaction.

2. Addition to Income under Section 69 of the IT Act, 1961:
The AO added the entire sale consideration of Rs. 72,61,309/- to the income of the assessee under Section 69, treating it as unaccounted money. The assessee argued that the shares were purchased and recorded in the books of accounts and balance sheet as of 31st March 2009, and the sale proceeds were received through banking channels. The Tribunal found that the AO's addition was based on suspicion without any direct evidence of unaccounted money. The Tribunal held that the AO’s action of treating the transaction as bogus without disproving the documentary evidence provided by the assessee was not justified.

3. Denial of Exemption under Section 10(38) of the IT Act:
The AO and CIT (A) denied the exemption under Section 10(38) on the grounds that the transaction was bogus. The Tribunal observed that the shares were listed on the Stock Exchange, and the sale transactions were subjected to Securities Transaction Tax (STT). The Tribunal reiterated that the AO did not dispute the sale of shares or the receipt of consideration through banking channels. The Tribunal held that in the absence of any contrary evidence proving the transaction to be bogus, the denial of exemption under Section 10(38) was not sustainable.

4. Opportunity to Cross-Examine Witnesses:
The assessee contended that the AO did not provide an opportunity to cross-examine Shri Mahesh Pancholi, whose statement was used to deny the claim. The Tribunal noted that the statement was recorded at the back of the assessee, and merely supplying the statement at the end of the assessment proceedings did not fulfill the requirement of providing an opportunity for cross-examination. The Tribunal cited the decision of the Hon’ble Supreme Court in CIT vs. Sunita Dhadda, emphasizing the necessity of cross-examination when a statement is used against an assessee. The Tribunal concluded that the denial of the claim based on such a statement without cross-examination was not justified.

Conclusion:
The Tribunal set aside the orders of the authorities below, holding that the disallowance of the claim based on mere suspicion without cogent evidence was not sustainable. The Tribunal allowed the appeal of the assessee and deleted the addition made by the AO.

Order Pronounced:
The appeal of the assessee was allowed, and the order was pronounced in the open court on 16/07/2018.

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