2024 (11) TMI 765 - AT - Income Tax

Assessee wins reopening case for alleged bogus LTCG and Section 68 addition due to insufficient evidence

ITAT Delhi ruled in favor of the assessee in a case involving reopening of assessment for alleged bogus Long Term Capital Gains (LTCG) and addition under ... Reopening of assessment - Bogus LTCG - Addition u/s 68 - HELD THAT:- During the assessment proceedings, the Assessee stated that he is a regular investor and making investments in the shares and the said fact has not been denied by the A.O. while passing the assessment order. Merely because alleged script to be a penny stock does not mean that actually that script is a penny stock as it is not the case where the Assessee had invested only in the said script. In the present case, the Assessee has produced the document to show that he has made a genuine transactions of the aforesaid script and sold the same when the prices are high and there is no allegation from the Department that there is any adverse report from SEBI or any other authorities against the said script. A perusal of the assessment order shows that the A.O. has relied on the report of the Investigating Wing during the assessment proceedings. The A.O. has not made any enquiry from relevant parties or independent source or evidence, but the A.O. heavily relied upon the statement recorded by the Investigating Wing as well as information received from the Investigating Wing. Even the statement recorded by the Investigating Wing has not been confirmed or corroborated by the person during the assessment proceedings. In our opinion, the A.O. ought to have conducted a separate and independent enquiry and any information received from the Investigating Wing is required to be corroborated and confirmed during the assessment by the Assessing Officer by examining the concerned persons who can affirm the statement already recorded by any other authority or the Department. No allegation in the assessment order or the order of the CIT(A) that the Assessee was involved in any price rigging or price increase. Merely because a particular scrip is identified as a penny stock by the income tax department, it does not mean all the transactions carried out in that scrip would be bogus. So many investors enter the capital market just to make it a chance by investing their surplus monies. They also end up with making investment in certain scrips based on market information and try to exit at an appropriate time the moment they make their profits. In this case, no adverse inference in regard to the scrip of M/s Wagend Infra Venture Ltd in context of SEBI report etc, finds place in the reassessment order or the CIT (A) order and thus the transaction carried out by the assessee cannot be termed as bogus. Assessee has specifically asked for cross examination of the person who alleged that he has provided accommodation entries through Long Term Capital Gain, but the said request has been turned down by the A.O. stating that in “these type cases, the spread of the network of the entry operators and the number of persons taking accommodation entries are large and therefore, it is not possible for every A.O. to summon every entry operator/broker and record his statement. The entry operator in this case before the Investigation wing. Income tax department has accepted oath that M/s Wagend Infra Venture Ltd. was being used for the purpose of providing bogus entries of LTCG. A.O. committed grave error in denying the opportunity of cross examination by the Assessee. Decided in favour of assessee. Issues Involved:1. Legality of the assessment order under section 147 of the Income Tax Act.2. Validity of approval under section 151 of the Income Tax Act.3. Violation of the principle of natural justice.4. Sustenance of income addition and enhancement by CIT(A).5. Applicability of sections 234A, 234B, and 234C of the Income Tax Act.Detailed Analysis:1. Legality of the Assessment Order Under Section 147:The assessee challenged the legality of the assessment order passed under section 147, asserting it was 'illegal, bad in law and without jurisdiction.' The assessment was reopened based on information from a search operation indicating that the shares involved were used for accommodation entries of bogus Long Term Capital Gains (LTCG). The tribunal found that the Assessing Officer (AO) did not provide sufficient evidence or conduct an independent inquiry to substantiate the claim that the transactions were bogus. The tribunal noted that the AO relied heavily on an investigation report without corroborating the findings with independent evidence.2. Validity of Approval Under Section 151:The assessee argued that the approval under section 151 was granted without proper application of mind, rendering the assessment order invalid. The tribunal observed that the AO did not present any evidence to demonstrate that the approval was obtained in compliance with the legal requirements. The tribunal emphasized the necessity of a thorough and reasoned approval process, which was lacking in this case.3. Violation of the Principle of Natural Justice:The assessee contended that the assessment proceedings violated the principle of natural justice as they were not provided an opportunity to cross-examine individuals whose statements were relied upon by the AO. The tribunal agreed, stating that the denial of cross-examination was a 'grave error' and underscored the importance of allowing the assessee to challenge the evidence against them. The tribunal highlighted that the AO's justification for denying cross-examination, citing the impracticality of summoning entry operators, was insufficient.4. Sustenance of Income Addition and Enhancement by CIT(A):The tribunal scrutinized the CIT(A)'s decision to sustain the addition of income and further enhance it by including a notional commission for arranging accommodation entries. The tribunal found that the CIT(A) erred in upholding the additions without concrete evidence. The tribunal referenced precedents where courts held that mere suspicion or conjecture could not replace substantive evidence. The tribunal concluded that the assessee had provided adequate documentation to support the legitimacy of the transactions, and the CIT(A)'s reliance on uncorroborated investigation reports was misplaced.5. Applicability of Sections 234A, 234B, and 234C:The assessee argued that the provisions of sections 234A, 234B, and 234C, relating to interest for defaults in furnishing returns, payment of advance tax, and deferment of advance tax, were not applicable. The tribunal did not find substantial discussion on this issue in the judgment, suggesting that the primary focus was on the legality and validity of the assessment and the additions made.Conclusion:The tribunal allowed the appeals filed by the assessee, concluding that the additions made by the AO and confirmed by the CIT(A) were unjustified due to lack of evidence, procedural lapses, and violation of natural justice principles. The tribunal emphasized the necessity of evidence-based assessments and the importance of granting the assessee the opportunity to contest the evidence against them.