Assessment Order Quashed for Violating Natural Justice Principles. Section 68 Addition Deleted.

The Tribunal quashed the assessment order due to a violation of natural justice principles. The addition of Rs. 2,29,80,188 under section 68 was deleted, and the appeal by the assessee was allowed. The grounds challenging the additions on merits were dismissed as the assessment order was overturned on legal grounds.

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Issues Involved:
1. Validity of the CIT(A) order.
2. Confirmation of addition made under section 68 of the Income Tax Act, 1961.
3. Violation of principles of natural justice.

Detailed Analysis:

1. Validity of the CIT(A) Order:
The appellant argued that the CIT(A) order dated 12/03/2018 was arbitrary, against natural justice, unlawful, and invalid. The appeal was directed against the CIT(A)-33, Mumbai's order, which confirmed the addition made under section 68 of the Income Tax Act, 1961, amounting to Rs. 2,29,80,188 on account of Long Term Capital Gain (LTCG) claimed by the appellant.

2. Confirmation of Addition Made Under Section 68:
- Assessment Proceedings: The assessee declared LTCG from the sale of shares of NCL Research & Financial Services Ltd amounting to Rs. 2,10,99,063 and claimed exemption under section 10(38). The AO observed that NCL Research & Financial Services Ltd was a penny stock company involved in providing bogus LTCG entries. The AO concluded that the assessee was not a regular investor and treated the receipts from the sale of shares as unexplained credit under section 68, adding Rs. 2,29,80,188 to the income.
- CIT(A) Findings: The CIT(A) upheld the AO’s findings, stating that the transactions were arranged to convert unaccounted income into LTCG to claim exemption under section 10(38). The CIT(A) relied on various judicial precedents, including McDowell & Co. Ltd. v. CIT, to support the view that the transactions were not genuine and were merely accommodation entries.
- Judicial Precedents: The CIT(A) cited several Supreme Court judgments emphasizing the need to expose subterfuges and dubious methods in tax cases. The CIT(A) concluded that the transactions in penny stocks were not genuine and upheld the addition made by the AO.

3. Violation of Principles of Natural Justice:
- Assessee’s Argument: The assessee argued that the AO relied on statements from third parties without providing copies or allowing cross-examination, violating the principles of natural justice. The assessee cited the Supreme Court decisions in Kisinchand Chellaram vs CIT and Andaman Timber Industries vs Commissioner of Central Excise, which emphasized the need to provide the assessee with the opportunity to rebut third-party statements.
- Tribunal’s Findings: The Tribunal noted that the AO heavily relied on the investigation report and statements from the director of NCL Research & Financial Services Ltd. The AO did not provide these statements to the assessee or allow cross-examination, despite repeated requests. The Tribunal held that this was a gross violation of the principles of natural justice, making the assessment proceedings null and void.
- Legal Precedents: The Tribunal referred to the Supreme Court judgments in Kisinchand Chellaram vs CIT and Andaman Timber Industries vs Commissioner of Central Excise, which established that not providing the assessee with the opportunity to rebut or cross-examine third-party statements amounts to a violation of natural justice.

Conclusion:
The Tribunal quashed the assessment order passed by the AO, citing a violation of the principles of natural justice. Consequently, the addition of Rs. 2,29,80,188 under section 68 was deleted. The grounds challenging the additions on merits were dismissed as infructuous since the assessment order was quashed on legal grounds. The appeal filed by the assessee was allowed.

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