2019 (2) TMI 1131 - AT - Income Tax

Tribunal invalidates Section 68 invocation, upholds natural justice principles

NAZIA ZAFAR, C/O KAPIL GOEL, ADVOCATE, NASEEM ZAFAR, NASEEM SAAD AND KAMRAN NASEEM Versus ITO, WARD 46 (3), NEW DELHI

The Tribunal found in favor of the assessee by invalidating the invocation of Section 68 of the Income Tax Act due to the absence of proper books of ... Addition u/s 68 - bogus LTCG - exemption claimed by assessee u/s 10(38) denied - violation of principle of natural justice - denial of cross examination - Held that:- We find merit in the arguments advanced by the Ld. Counsel for the assessee that the shares have been sold at the rate as prevailing on the stock exchange at the time of sale and the share prices of all the scrip are closely monitored by the stock exchange and SEBI. Even if the prices have gone up artificially as alleged by the revenue authorities, however, there is no material to hold that the assessee was involved therein. It is also an admitted fact that although the Assessing Officer had made enquiries from various entities i.e. assessee’s banker, depository, broker and the banker of M/s. TCL Technologies Limited, however, nothing adverse have been found. There is no adverse finding by SEBI in relation to the scrip in question has been given to the Assessing Officer - merely on the basis of preponderance of human probabilities the addition cannot be made in the hands of the assessee without disproving the various documents filed by the assessee. Referencing to impact of lack of cross examination and violation of principle of natural justice, have no hesitation to accept the plea of Ld AR that lack of cross examination and violation of principle of natural justice results is total nullity of the entire addition, hence, the additions in dispute is hereby deleted. - Decided in favour of assessee. Issues Involved:1. Applicability of Section 68 of the Income Tax Act, 1961.2. Denial of cross-examination rights to the assessee.3. Violation of principles of natural justice.Issue-wise Detailed Analysis:1. Applicability of Section 68 of the Income Tax Act, 1961:The main issue in the assessment was the exemption of long-term capital gains (LTCG) arising from the sale of shares. The Assessing Officer (AO) invoked Section 68 of the Income Tax Act, treating the share sale proceeds as unexplained cash credits. The Tribunal analyzed the text of Section 68, which requires that any sum found credited in the books of an assessee must be satisfactorily explained. The Tribunal emphasized that mere bank statements cannot be considered as 'books of account' as defined under Section 2(12A) and Section 44AA of the Act. The Tribunal referred to various judicial decisions, including the Bombay High Court in Sheraton Apparels and the Delhi High Court in JCB case, to assert that credits in bank accounts or raw data cannot be treated as books of account under Section 68. Consequently, the Tribunal held that the invocation of Section 68 in the absence of proper books of account was invalid and reversed the additions made by the AO and sustained by the CIT(A).2. Denial of Cross-Examination Rights to the Assessee:The Tribunal addressed the issue of the denial of cross-examination rights, which the assessee had repeatedly requested. The Tribunal cited several judicial precedents, including the Supreme Court's decision in Andaman Timber Industries, which held that not allowing cross-examination of witnesses whose statements are relied upon by the revenue is a serious flaw and amounts to a violation of the principles of natural justice. The Tribunal noted that the AO heavily relied on statements recorded by the investigation wing without offering the assessee an opportunity to cross-examine the witnesses. This denial of cross-examination was deemed a violation of natural justice, rendering the assessment order unsustainable. The Tribunal emphasized that cross-examination is an integral part of natural justice, and the lack thereof invalidates the assessment.3. Violation of Principles of Natural Justice:The Tribunal underscored the importance of adhering to the principles of natural justice, particularly when the revenue relies on statements from third parties. The Tribunal referred to various decisions, including those of the Supreme Court and High Courts, which mandate that any material used against an assessee must be disclosed, and the assessee must be given an opportunity to cross-examine witnesses. The Tribunal highlighted that the AO's failure to provide the assessee with the investigation wing's report and other back materials, as well as the denial of cross-examination, constituted a gross violation of natural justice. This violation was deemed sufficient to quash the assessment order and the order passed by the CIT(A).Conclusion:The Tribunal concluded that the invocation of Section 68 of the Act was invalid due to the absence of proper books of account. Additionally, the denial of cross-examination rights and the violation of principles of natural justice rendered the assessment order unsustainable. The Tribunal directed the AO to delete the additions made in relation to the share sale proceeds and the alleged commission portion. The appeals were partly allowed in favor of the assessee.