ITAT rules in favor of assessee, deletes addition under Section 68 based on lack of evidence

The ITAT allowed the assessee's appeal, concluding that the transactions were genuine, supported by documentary evidence, and conducted through proper banking channels. The addition made by the AO based on suspicion and a statement without cross-examination was deemed unsustainable. Therefore, the ITAT deleted the addition of Rs. 6,02,041/- under Section 68 of the Income Tax Act, in favor of the assessee.

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Issues Involved:
1. Rejection of exemption claimed under Section 10(38) of the Income Tax Act.
2. Addition of Rs. 6,02,041/- under Section 68 of the Income Tax Act for Long Term Capital Gain (LTCG) on the sale of shares.

Issue-wise Detailed Analysis:

1. Rejection of Exemption Claimed Under Section 10(38):
The primary grievance of the assessee was the CIT(A)'s rejection of the exemption claimed under Section 10(38) of the Income Tax Act. The assessee had declared a total income of Rs. 3,73,420/- for the assessment year 2015-16 and claimed an exemption for LTCG arising from the sale of 15,000 shares of Kailash Auto Finance Ltd. The Assessing Officer (AO) treated this LTCG as bogus and made an addition under Section 68 of the Act. The assessee provided various documents such as contract notes, bills, bank statements, and demat account statements to substantiate the claim. However, the AO rejected these documents without finding any defects in them.

2. Addition of Rs. 6,02,041/- Under Section 68:
The AO's addition of Rs. 6,02,041/- was based on the suspicion that the LTCG claimed by the assessee was bogus. The AO relied on information from the investigation wing and the statement of an alleged entry operator, Sri Sunil Dokania. However, the AO did not provide the assessee with the opportunity to cross-examine Dokania or present any corroborative evidence to substantiate the claim. The CIT(A) upheld the AO's decision, leading the assessee to appeal before the ITAT.

Judgment Analysis:

Evidence Submitted by the Assessee:
The assessee submitted various documents, including income tax returns, balance sheets, profit and loss accounts, purchase bills, bank statements, demat account statements, and contract notes. The assessee argued that these documents proved the genuineness of the LTCG transaction. The AO did not find any defects in these documents but still treated the LTCG as bogus based on suspicion and probability.

ITAT's Findings:
The ITAT noted that the AO's reliance on the statement of Sri Sunil Dokania without allowing cross-examination was a serious flaw, making the order null and void. The ITAT referenced several judgments, including the Hon'ble Calcutta High Court's decision in Eastern Commercial Enterprises, which emphasized the importance of cross-examination in due process.

SEBI's Role:
The ITAT highlighted that the Securities Exchange Board of India (SEBI) had revoked its interim order that restrained entities from accessing the securities market, including Kailash Auto Finance Ltd. SEBI's final order did not find any adverse findings against the entities, including the assessee, regarding the manipulation of the scrip.

Precedent Cases:
The ITAT referred to multiple judgments where similar issues were adjudicated, including cases like Sanjib Kumar Patwari (HUF) and others, where the transactions were found to be genuine. The ITAT emphasized that the AO's conclusions were based on suspicion without any substantive evidence.

Conclusion:
The ITAT concluded that the transactions were genuine, supported by documentary evidence, and conducted through proper banking channels. The AO's addition based on suspicion and the statement of an alleged entry operator without cross-examination was not sustainable. The ITAT deleted the addition of Rs. 6,02,041/- and allowed the appeal of the assessee.

Order:
The appeal of the assessee was allowed, and the order was pronounced in court on 02.08.2019.

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