2013 (9) TMI 1325 - AT - Income Tax

Order upholds treating sham share sales as unexplained income under s.68, rejects s.48 capital gains claim

Chandan Gupta Versus A.C.I.T.C.C. VII, Ludhiana

ITAT upheld the appellate authority's order as speaking and dismissed challenges to its consideration of submissions. It found the alleged share sales to ... - ISSUES PRESENTED AND CONSIDERED 1. Whether the appellate order is a speaking order and whether the assessee's oral and written submissions were considered. 2. Whether long-term capital gains shown in return arising from sale of certain shares are genuine transactions or sham/bogus, and whether the sale proceeds can be assessed as income under the provision corresponding to Section 68 where explanation is unsatisfactory. 3. Whether enquiries made by the Assessing Officer (from stock exchanges, registrar of companies, brokers, company, and bank records) may be relied upon when some of that material was not separately 'confronted' to the assessee before making the addition. 4. Whether statements or evidence obtained in assessment proceedings for another assessment year (broker statements recorded in assessment year 2005-06) can be relied on in determining genuineness for the assessment year under appeal (2004-05), and whether the assessee had adequate opportunity to cross-examine. 5. Whether once an item is shown as capital gain and returned under Section 48 (full value of consideration), the Assessing Officer is precluded from treating the credited amount as unexplained income u/s 68. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Speaking nature of appellate order and consideration of submissions Legal framework: An appellate order must address and adjudicate the arguments raised; failure to do so may render it non-speaking. Precedent treatment: No specific precedent required; standard administrative law principle of reasons. Interpretation and reasoning: The Tribunal examined the CIT(A)'s order and found paras 7-16 specifically deal with the assessee's contentions; the appellate authority considered the remand report and the materials, and the assessee's claim that oral arguments were ignored was not substantiated. Ratio vs. Obiter: Ratio - an appellate order that addresses the issues raised and refers to the evidence and remand report is a speaking order. Conclusion: Grounds attacking the speaking nature of the CIT(A) order dismissed; the CIT(A) had considered the arguments. Issue 2 - Genuineness of share transactions; addition under Section 68 Legal framework: Where sums are found credited in the assessee's books and the explanation about nature/source is not, in the AO's opinion, satisfactory, the sum may be charged to tax as the assessee's income (provision corresponding to Section 68). The burden of proving genuineness lies primarily on the assessee when transactions are doubted; Assessing Officer applies tests of human probability and corroborative inquiries. Precedent treatment (followed/distinguished): Followed and applied authorities that hold (a) burden on assessee to prove genuineness where transactions are suspicious; (b) sums proved to be bogus can be taxed as income u/s 68 (Supreme Court precedent on bogus receipts); (c) the 'test of human probabilities' from Sumati Dayal and related High Court decisions upholding such approach. Interpretation and reasoning: The AO made multi-pronged inquiries: (i) stock exchanges largely reported no listing/trading during relevant period; (ii) Registrar of Companies balance sheets showed NAV ˜ Rs.7 per share while sale transactions were at Rs.105-113; (iii) broker account bank records showed cash deposits followed by cheques issued to assessee (accommodating entries); (iv) statements obtained from broker/accountant indicated cheques issued to assessee in lieu of cash and that entries were fabricated; (v) assessee failed to produce the broker despite summons and gave evasive replies in his statement (could not recall purchase/sale details, demat particulars, delivery slips); (vi) newspaper quotations submitted were unsigned/unsatisfactory and, in context of known modus operandi for bogus gains, did not establish genuine market trades. Applying human probabilities and considering cumulative evidence, the Tribunal found the transactions to be sham and the credited sale proceeds to be unexplained receipts liable to be taxed under Section 68. Ratio vs. Obiter: Ratio - where overwhelming independent evidence (stock exchange replies, ROC records, bank traces, broker statements) demonstrates that purported share trades did not occur, credited sale proceeds may be treated as unexplained income under Section 68; the assessee's mere production of sale/purchase bills or unsigned newspaper extracts is insufficient to discharge burden. Conclusion: The Tribunal upheld the addition treating sale proceeds as income under Section 68; capital gains claim rejected as transactions were found bogus. Issue 3 - Reliance on third-party enquiries not separately 'confronted' to assessee Legal framework: Fair opportunity to meet material relied upon is required; however, confrontation need not be literal in every instance where the assessee has had notice of inquiries and opportunity to produce evidence or be heard. Precedent treatment: The Tribunal relied on authorities recognizing that burden to prove genuineness is on the assessee and that AOs may make independent inquiries; appellate authority has coextensive powers to consider materials. Interpretation and reasoning: The assessee was shown stock exchange replies during recording of his statement and questioned about absence of trading; the assessee promised but failed to furnish corroboration. Broker statements and bank evidence were placed before assessee (and cross-examination of broker was permitted in related proceedings). Given the assessee's failure to produce the broker or supporting evidence, the AO's independent inquiries were legitimate and the assessee had been given opportunity to meet those enquiries. Ratio vs. Obiter: Ratio - independent enquiries by AO are admissible and can be relied upon where the assessee has been informed of findings and given opportunities to rebut but fails to do so; mere non-confrontation of each piece of third-party correspondence does not invalidate reliance where the assessee had notice and chance to respond. Conclusion: Reliance on enquiries from stock exchanges, ROC, banks and broker statements is permissible; non-confrontation argument fails. Issue 4 - Use of broker statements recorded in another assessment year; adequacy of opportunity to cross-examine Legal framework: Appellate authorities and AOs may consider material which emerges subsequently if it bears on the true facts; hearings must afford reasonable opportunity to test such material (cross-examination where appropriate). Precedent treatment: CIT v. Kanpur Cola Syndicate principle that appellate authority's powers are co-terminus with AO's powers; Lord Macmillan's principle that courts need not shut eyes to subsequently discovered true facts. Interpretation and reasoning: The broker's statements, though recorded in assessment year 2005-06, related to the same modus operandi and were available during appellate proceedings for the year under appeal; the assessee was permitted cross-examination (and the broker had previously appeared in related proceedings). Given the availability of the statements to CIT(A) and opportunity afforded to the assessee, reliance on these statements was lawful and material to establish pattern across years. Ratio vs. Obiter: Ratio - evidence from other years may be relied upon if it is relevant, available in appeal proceedings and the assessee had opportunity to test it; appellate authority may treat subsequent corroborative material as clarifying true facts. Conclusion: Broker statements from another year were admissible and supportfinding of sham transactions; contention that they could not be relied upon is rejected. Issue 5 - Applicability of capital gains charging provision (Section 48) vs. Section 68 where transaction found bogus Legal framework: Section dealing with computation of capital gains requires full value of consideration to be taken for genuine transfers; Section 68 permits taxation of unexplained credits if explanation is unsatisfactory. Precedent treatment: Where a transaction is found to be a sham, the legal form of return does not prevent the AO from treating credited amounts as unexplained income under Section 68 (Supreme Court and Tribunal precedents affirming that bogus receipts/gifts are taxable u/s 68). Interpretation and reasoning: The question is not arithmetic treatment under capital gains provisions but genuineness of the underlying transaction. Once transactions are established as bogus, amounts credited as purported sale proceeds are unexplained receipts; consequently, they are chargeable as income under Section 68 notwithstanding that the assessee had declared them as capital gains under Section 48. Ratio vs. Obiter: Ratio - form of return (declared as capital gains) does not bar AO from invoking Section 68 if the credited sums arise from sham transactions and explanation is unsatisfactory. Conclusion: Section 48 filing did not preclude AO from assessing the credited sums under Section 68 where transactions were proved bogus; the Tribunal sustained such assessment.