2023 (11) TMI 431 - AT - Income Tax

ITAT allows appeal on unexplained cash credit and capital gain exemption without proof of assessee's direct collusion

Sanjay Prataplal Mehta Versus D.C.I.T, Circle-1, Bhavnagar

ITAT Ahmedabad allowed the assessee's appeal regarding unexplained cash credit u/s 68 and disallowance of exempted capital gain u/s 10(38). The AO found ... Unexplained cash credit u/s 68 - disallowance of exempted capital gain u/s 10(38) - AO on analysis of trade data from BSE also found that the counter party (exit provider) who purchased shares from the assessee were also managed by entry operator - HELD THAT:- The conduct of the assessee suggests that he was not involved in rigging or any wrongdoing. The case laws relied by the authorities below are distinguishable from the present facts of the case in so far there was SEBI enquiry conducted and found guilty of wrong practices, but it is not so in the case on hand. In our view, the income generated by the assessee cannot be held bogus only based on the modus operandi, generalisation, and preponderance of human probabilities. To hold income earned by the assessee as bogus, specific evidence has to be brought on record by the Revenue to prove that the assessee was involved in the collusion with the entry operator/ stockbrokers for such an arrangement. In absence of such finding, it is not justifiable to link the fact with the finding unearthed in case of some third party or parties with the transactions carried out by the assessee. Further the case laws relied by the AO are regarding the test of human probabilities which may be of greater impact but the same cannot used blindly without disposing off the evidence forwarded by the assessee. There were not brought any evidence from independent enquiry to corroborate the allegation. As such, the AO has highlighted various suspicious circumstances, but no addition can be made merely on the basis of suspicious circumstances or presumption unless some cogent material evidence brought on record. See case of CIT vs. Sumitra Devi [2014 (2) TMI 1205 - RAJASTHAN HIGH COURT] Whether a person who genuinely purchases the shares at a low price and sold at high price, therefore, he enjoyed the windfall from such scripts, can he be disallowed the benefit of tax exemption provided under section 10(38) of the Act in a situation where it is established that the share price of the company was rigged up to extend the benefit to certain parties. Justice cannot be delivered in a mechanical manner. what we see on the records available before us, sometimes we have to travel beyond it after ignoring the same. Furthermore, while delivering the justice, we have to ensure in this process that culprits should only be punished, and no innocent should be castigated. An innocent person should not suffer for the wrongdoings of the other parties. In the case on hand, admittedly there was no evidence available on record suggesting that the assessee or his broker was involved in the rigging up of the price of the script of M/s Comfort Fincap Ltd. Thus, it appears that the assessee acted in the given facts and circumstances in good faith. Furthermore, the shares were held by the assessee for almost 3 years. Thus, it was not possible for the assessee to foresee the price of the script in future. Thus in absence of any specific finding against the assessee in the investigation wing report, the assessee cannot be held to be guilty or linked to the wrong acts of the persons investigated as far as long-term capital gain earned on sale of share of M/s Comfort Fincap Ltd is concern. Also the addition was made by the AO based on the statements/information received from the 3rd party, but no opportunity was afforded by the revenue for the cross-examination which is against the principles of natural justice as held in the case of Andaman Timber Industries [2015 (10) TMI 442 - SUPREME COURT] Likewise, the Hon’ble Apex court in the case of Kishinchand Chellaram [1980 (9) TMI 3 - SUPREME COURT] held that the income tax authorities before relying upon any material are required to provide such material to the assessee for rebuttable. In the case on hand, the revenue authorities to hold the transaction carried out by the assessee as sham transaction referred and relied on material and statements of various broker or entry operator recorded or collected by the DDIT Kolkata and Mumbai. However, any material/ statement was neither provided to the assessee for his rebuttable nor any independent cogent material brought on record suggesting any live link between the material received from the DDIT and transaction carried out by the assessee on hand. Therefore, no adverse inference can be drawn against the present assessee - Decided in favour of assessee. Issues Involved:1. Addition of long-term capital gain as unexplained cash credits under Section 68 of the Income Tax Act.2. Non-supply of necessary material and denial of cross-examination opportunity.3. Breach of law and Principles of Natural Justice.4. Levying of interest under Section 234A/B/C.5. Initiation of penalty under Section 271(1)(c).Summary:1. Addition of Long-term Capital Gain as Unexplained Cash Credits:The assessee claimed exemption of long-term capital gain (LTCG) of Rs. 5,51,09,170/- under Section 10(38) on the sale of shares of M/s Comfort Fincap Ltd. The AO treated the LTCG as unexplained cash credits under Section 68, citing that the company was not doing substantial business and the share prices were manipulated. The AO relied on statements from brokers and entry operators admitting to providing accommodation entries. The CIT(A) upheld the AO's decision, stating that the assessee failed to disprove the presumption of bogus transactions.2. Non-supply of Necessary Material and Denial of Cross-examination Opportunity:The assessee contended that the AO did not supply the material on which the addition was based and did not provide an opportunity to cross-examine the persons whose statements were recorded. The Tribunal noted that the AO's reliance on third-party statements without providing them for rebuttal violated the principles of natural justice.3. Breach of Law and Principles of Natural Justice:The Tribunal observed that the AO's actions breached the principles of natural justice. The AO did not conduct an independent inquiry from SEBI or BSE regarding the alleged manipulation and relied solely on the modus operandi highlighted by the investigation wing. The Tribunal emphasized that suspicion alone cannot justify the addition without concrete evidence.4. Levying of Interest under Section 234A/B/C:The CIT(A) confirmed the AO's action of levying interest under Section 234A/B/C. However, the Tribunal's decision to delete the addition of LTCG would consequently affect the interest levied.5. Initiation of Penalty under Section 271(1)(c):The CIT(A) also upheld the initiation of penalty under Section 271(1)(c). Given the Tribunal's decision to delete the addition, the initiation of penalty would also be impacted.Tribunal's Decision:The Tribunal allowed the appeal of the assessee, directing the AO to delete the addition made. The Tribunal emphasized that the AO's addition was based on suspicion and third-party statements without providing the assessee an opportunity for rebuttal or cross-examination. The Tribunal held that the assessee had discharged the onus under Section 68 by providing necessary documentary evidence, and no adverse inference could be drawn solely based on the modus operandi or generalized information.