2021 (2) TMI 540 - AT - Income Tax

Tribunal rules in favor of assessee, rejects AO's additions under Sections 68 and 69C

The Tribunal allowed the appeals of the assessee, holding that the transactions of purchase and sale of shares were genuine. The additions made by the AO ... Long term capital gain - accommodation entries - addition under section 68 of the Income-tax Act - exemption under section 10(38) of the Income-tax Act - dematerialised shares and Demat account as independently verifiable evidence - statements of investigation wing and requirement of cross-examination / principles of natural justice - preponderance of probabilities and surrounding circumstances insufficient without corroborative material - addition under section 69C of the Income-tax ActLong term capital gain - accommodation entries - addition under section 68 of the Income-tax Act - exemption under section 10(38) of the Income-tax Act - dematerialised shares and Demat account as independently verifiable evidence - statements of investigation wing and requirement of cross-examination / principles of natural justice - preponderance of probabilities and surrounding circumstances insufficient without corroborative material - Whether the long term capital gain claimed on sale of shares could be treated as sham accommodation entries and assessed as unexplained cash credit by invoking section 68. - HELD THAT: - The Tribunal examined the documentary material produced by the assessee - share purchase invoice, bank payment reflected in the assessee's bank account, demat account entries showing dematerialisation and subsequent credit of shares following the court approved amalgamation, contract notes for sale on the stock exchange, STT payment and receipt of sale proceeds in the assessee's bank account. The Assessing Officer mainly relied on investigation wing reports and statements of third parties which did not mention the assessee and which were not placed for cross examination. The Tribunal held that where the assessee produces independent, third party verifiable records (bank statements, depository/demat records, allotment documentation) and the AO does not bring any contrary material to show those documents are fabricated or manipulated, mere suspicion, surrounding circumstances or untested statements cannot suffice to treat genuine transactions as accommodation entries. Reliance solely on investigation statements not confronted with or subjected to cross examination of the declarants is a breach of principles of natural justice and cannot be the basis for additions. Applying these principles to the facts, and following coordinate decisions considering identical transactions, the Tribunal found no cogent material to impugn the assessee's claim and deleted the addition under section 68. [Paras 7, 11, 13]Addition treating the long term capital gain as unexplained cash credit under section 68 deleted; claim of exemption under section 10(38) accepted.Addition under section 69C of the Income-tax Act - consequential addition - Whether the notional commission added as unexplained expenditure under section 69C ought to be sustained. - HELD THAT: - The addition under section 69C was consequential to the assessment treating the capital gain as an accommodation entry. Having held that the capital gain could not be treated as bogus and that the primary addition under section 68 was not sustainable, the consequential unexplained commission addition lacked any independent foundation. Accordingly, the Tribunal allowed the consequential deletion of the section 69C addition. [Paras 15]Consequential addition under section 69C deleted; ground decided in favour of the assessee.Final Conclusion: Appeals allowed. Additions made by the Assessing Officer treating the claimed long term capital gain as accommodation entries and the consequential commission addition were deleted in light of independently verifiable documentary evidence produced by the assessee and absence of contrary material or opportunity to test investigation statements. Issues Involved:1. Addition under Section 68 of the IT Act, 1961 as accommodation entries.2. Addition under Section 69C of the IT Act, 1961 as commission provided for sale of shares as accommodation entries.Detailed Analysis:1. Addition under Section 68 of the IT Act, 1961 as accommodation entries:The primary issue in this case was whether the long-term capital gain (LTCG) on the sale of shares was genuine or a sham transaction. The assessee purchased 4,80,000 shares of M/s. Careful Projects Advisory Ltd. which later merged with M/s. Kailash Auto Finance Ltd. The assessee sold 66,500 shares for a substantial gain, which was claimed as exempt under Section 10(38) of the IT Act. The Assessing Officer (AO) treated the LTCG claim as bogus based on a report from the Investigation Wing, Kolkata, and a statement from Shri Sunil Dokania, who admitted to providing accommodation entries.The assessee argued that all transactions were genuine, supported by documentary evidence like purchase bills, bank statements, demat account statements, and contract notes for the sale of shares. The Tribunal found that the AO did not provide any concrete evidence to disprove the assessee's claims or the authenticity of the documents provided. The Tribunal emphasized that the AO's reliance on the statement of Shri Sunil Dokania, without offering the assessee an opportunity for cross-examination, violated the principles of natural justice.The Tribunal referred to several precedents, including decisions from the Hon'ble Jurisdictional High Court and other Tribunal decisions, which supported the assessee's position. It was concluded that the AO's addition under Section 68 was based on mere suspicion and not on concrete evidence. The Tribunal held that the transactions were genuine and directed the deletion of the addition made under Section 68.2. Addition under Section 69C of the IT Act, 1961 as commission provided for sale of shares as accommodation entries:This issue was consequential to the first issue. The AO had made an addition for commission expenses on the alleged bogus LTCG transactions. Since the Tribunal found the LTCG transactions to be genuine, it also directed the deletion of the addition made under Section 69C for commission expenses.Conclusion:The Tribunal allowed the appeals of the assessee, holding that the transactions of purchase and sale of shares were genuine. The additions made by the AO under Sections 68 and 69C were deleted. The Tribunal's decision was based on the lack of concrete evidence from the AO and the violation of principles of natural justice.