2020 (11) TMI 650 - AT - Income Tax

Tribunal grants appeal on LTCG, rejects notional commission, and disallowance of interest expenses

The Tribunal allowed the appeals filed by the assessee, holding that the LTCG claimed was genuine and exempt under Section 10(38), the addition on account ... Bogus LTCG - exemption u/s 10(38) on sale of shares denied - investigation carried out by the Investigation Wing, Kolkata wherein certain persons were found indulged in providing accommodation entries - assessment based on statement of third party - information so gathered by the AO were not made available or confronted to the assessee - HELD THAT:- AO has narrated the modus operandi of various entry providers which is a general statement so far as the indulgence of certain persons in providing the accommodation entry of bogus long term capital gains as well as other transactions. However, in the said narration of modus operandi, there is nothing against the particular transaction of purchase and sale of shares by the assessee. AO has specifically mentioned that during the course of enquiry in certain cases it has come to light that large scale manipulation has been done in the market price of shares of certain companies listed on Stock Exchange by a group of persons working as a syndicate for the purpose of providing entry of tax exempt bogus long term capital gains to large number of beneficiaries in lieu of unaccounted cash. These observations of the AO in the assessment order cannot constitute any tangible material or evidence to show that the transaction of the assessee is bogus being an accommodation entry. No such information/documents/statementswas made available to the assessee thereby violating the basic principle of confronting the assessee with the documents which the Revenue wishes to rely against the assessee. In the assessment order so passed, the AO has made reference to a statement of Shri Vipul Vidur Bhatt recorded u/s 132 during certain search operations by the Investigation Wing, Mumbai and has relied on the same for holding the transaction as bogus by availing the accommodation entry of long term capital gain and beneficiary of the bogus LTCG scam. As the assessee was again not confronted with such statement during the show-cause notice and he came to know of the same from perusal of the assessment order, he raised the objection before the ld CIT(A) that no such statement of Shri Vipul Vidur Bhatt recorded u/s 132 was made available to him during the course of assessment proceedings and secondly, he deserves a right to cross-examine Shri Vipul Vidur Bhattwhose statement is being used against the assessee. During the appellate proceedings, the assessee was not made available any such statement and even the right of cross examination was denied by the ld CIT(A) who exercises the co-terminus powers as that of the AO. Thus, in view of the decision of CIT vs A.L Lalpuria Construction (P) Ltd [2013 (10) TMI 316 - RAJASTHAN HIGH COURT] and CCE vs. Andaman Timber Industries [2015 (10) TMI 442 - SUPREME COURT] the assessment based on statement of third party without giving an opportunity to the assessee is not sustainable in law. Therefore, the statement of a third party cannot be sole basis of the assessment without given an opportunity of cross examination and consequently it is a serious flaw which renders the order a nullity. - Decided in favour of assessee Claim u/s 10(38) - Assessee has discharged the necessary onus cast on him in terms of claim of exemption of long term capital gains u/s 10(38) of the Act by establishing the genuineness of transaction of purchase and sale of shares and satisfying the requisite conditions specified therein and the gains so arising on sale of shares therefore has been rightly claimed as exempt u/s 10(38) of the Act. Accordingly, in the facts and circumstances of the case, we set-aside the order of the ld. CIT(Appeals) and the claim of the assessee u/s 10(38) is allowed. The matter is thus decided in favour of the assessee and against the Revenue. Disallowance of interest - AR submitted that the appellant had interest bearing funds - HELD THAT:- Firstly, it is noted that the assessee has interest free funds more than interest bearing funds and in such cases of mixed funds, the Courts have held and upheld the presumption that where any interest free advances have been given, the same are given out of interest free funds. The same is however subject to caveat where it is established that interest bearing funds have a direct nexus and have been utilized in interest free advances. In the instant case, the Revenue has not established any such direct nexus which establishes that interest bearing funds have been utilized for the purposes of making interest free advances. Secondly, the AO has held that assessee has not received any interest income from the partnership firm which we found factually not correct as the assessee has received interest from partnership firm - disallowance of interest is hereby deleted and the ground of appeal so taken by the assessee is allowed. Issues Involved:1. Legitimacy of Long Term Capital Gains (LTCG) on the sale of shares.2. Addition made on account of notional commission under Section 69C of the Income Tax Act.3. Disallowance of interest expenses.Issue-wise Detailed Analysis:1. Legitimacy of Long Term Capital Gains (LTCG) on the sale of shares:The primary issue revolves around whether the LTCG claimed by the assessee on the sale of shares of M/s Sunrise Asian Ltd. is genuine or bogus. The Assessing Officer (AO) treated the LTCG as bogus, asserting that the transactions were accommodation entries to evade taxes and launder money. The AO's findings were based on an investigation report from the Investigation Wing, Kolkata, which indicated that M/s Sunrise Asian Ltd. was involved in providing bogus LTCG entries. The AO further referenced statements from various entry providers, price movements of the shares, and SEBI's suspension of trading in M/s Sunrise Asian Ltd. The assessee, however, provided comprehensive documentary evidence, including allotment advice, bank statements, Demat account statements, and contract notes, to substantiate the genuineness of the transactions. The assessee also contended that the AO did not provide any specific evidence against the assessee’s transactions and denied the opportunity for cross-examination of witnesses whose statements were used against the assessee.The Tribunal emphasized the importance of providing the assessee with the opportunity to cross-examine witnesses and confront the evidence used against them. The Tribunal found that the AO’s reliance on generalized information and the investigation report without specific evidence against the assessee was insufficient to deem the transactions as bogus. The Tribunal also noted that the assessee had consistently held shares of various companies, reflected in their financial statements, and had provided all necessary documentation to support the genuineness of the transactions. The Tribunal concluded that the AO failed to bring any contrary material or evidence to disprove the assessee’s claims, and thus, the LTCG claimed by the assessee was genuine and exempt under Section 10(38) of the Income Tax Act.2. Addition made on account of notional commission under Section 69C of the Income Tax Act:The AO made an addition on account of notional commission, assuming that the assessee paid a commission to obtain bogus LTCG entries. This addition was consequential to the AO’s finding that the LTCG was bogus. Since the Tribunal reversed the AO’s finding on the LTCG issue, it also held that the consequent addition on notional commission was unsustainable. The Tribunal deleted the addition made under Section 69C, stating that once the LTCG is held to be genuine, the notional commission addition has no basis.3. Disallowance of interest expenses:In ITA No. 123/JP/2020, the AO disallowed interest expenses of Rs. 13,77,391/-, alleging that the assessee made interest-free advances from interest-bearing funds. The assessee contended that they had sufficient interest-free funds to cover the advances and that the interest-bearing funds were used for income-yielding investments, including earning interest from partnership firms. The Tribunal noted that the assessee had more interest-free funds than interest-bearing funds and that the Revenue did not establish any direct nexus between interest-bearing funds and interest-free advances. The Tribunal also found that the assessee had earned interest from partnership firms, contrary to the AO’s findings. Consequently, the Tribunal deleted the disallowance of interest expenses, allowing the assessee’s claim.Conclusion:The Tribunal allowed the appeals filed by the assessee, holding that the LTCG claimed was genuine and exempt under Section 10(38), the addition on account of notional commission under Section 69C was unsustainable, and the disallowance of interest expenses was unwarranted. The Tribunal emphasized the need for specific evidence and proper confrontation of evidence used against the assessee, rejecting the AO’s reliance on generalized information and assumptions.