Natural justice barred addition based on third-party statement when cross-examination was denied in alleged bogus capital gains case.

Reliance on a third-party statement to support addition for alleged bogus long-term capital gains was held unsustainable where the assessee was denied cross-examination. The reassessment rested principally on accommodation-entry statements, but using that material without giving the assessee an opportunity to test it breached natural justice. On that basis, the share transaction could not be treated as sham on the material relied upon by the Assessing Officer, and the addition was deleted.

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Issues: Whether the addition made on account of alleged bogus long-term capital gains was sustainable when the assessment was founded on third-party statement without affording cross-examination.

Analysis: The reassessment and the addition were based principally on the statement of a third party regarding accommodation entries. The assessee was not given an opportunity to cross-examine the said person, though the statement was used against the assessee. The denial of cross-examination rendered the reliance on that statement contrary to the principles of natural justice. In such circumstances, the addition treating the share transaction as sham could not be sustained on the material relied upon by the Assessing Officer.

Conclusion: The addition towards alleged bogus long-term capital gains was deleted and the assessee succeeded on this issue.

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