2025 (3) TMI 1461 - AT - Income Tax

Unexplained cash credit addition under Section 68 deleted for legitimate share transactions with proper documentation

Late Arvind Kumar Kotawal, Through L/H Manish Kumar Kotawala Versus ACIT, Circle 70 (1), New Delhi.

ITAT Delhi allowed the assessee's appeal against addition of unexplained cash credit under section 68 read with section 115BBE for alleged bogus LTCG. The ... Bogus LTCG - Addition of unexplained cash credit u/s 68 r/w sec 115BBE - HELD THAT:- AR correctly relied upon the judgment of Smt. Krishna Devi [2021 (1) TMI 1008 - DELHI HIGH COURT] in which held that if there was no dispute that shares of said companies were purchased by assessee online and payments were made through banking channel and shares were dematerialized and sales were routed from demat account and consideration was received through banking channels, then the Ld. AO could not make addition only on assumption and conjecture by treating impugned LTCG as bogus. Addition in question made without confronting any direct material / statement collected against the assessee. As during the assessment proceedings on being enquired, assessee / appellant duly submitted that shares were originally purchased in cash and were physically delivered on 28.04.2011, and then bonus share were also issued to the appellant and all of them were dematerialized in the demat account ledger, transaction account statement with the registered broker namely M/s Quest Securities Ltd. and copies of the bank statement etc. Perusal of abovementioned documents the legitimacy of the transaction is clearly proved and the Ld. AO only on the basis of some investigation report, made the aforesaid addition and it is relevant to mentioned here that the assessee has not been provided the copy of said investigation report. Thus, we find material substance in the submissions advanced on behalf of the assessee / appellant and have thoughtful consideration that addition in question deserves to the deleted by allowing the appeal. Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:Whether the assessment proceedings initiated and notices served on a deceased person are valid.Whether the addition of Rs. 88,84,000/- as unexplained cash credit under Section 68, read with Section 115BBE, was justified, given the claim of exemption under Section 10(38) for long-term capital gains (LTCG) from the sale of shares.Whether the addition of Rs. 4,44,200/- as commission paid, based on conjecture and without evidence, was justified.Whether the assessee was denied the opportunity to cross-examine witnesses, thereby violating principles of natural justice.2. ISSUE-WISE DETAILED ANALYSISValidity of Assessment Proceedings on a Deceased PersonRelevant Legal Framework and Precedents: The legal question revolves around the validity of serving notice and conducting assessment proceedings on a deceased person, which is generally considered invalid unless served on legal heirs.Court's Interpretation and Reasoning: The Tribunal noted that the notice dated 21.09.2015 was served on the legal heir, Manish Kumar Kotawala, after the death of Arvind Kumar Kotawala on 05.05.2015.Key Evidence and Findings: The notice was initially issued to the deceased but served on his legal heir, which could render the proceedings null and void.Application of Law to Facts: The Tribunal considered the procedural lapse in serving notice directly to a deceased person, albeit through his legal heir.Treatment of Competing Arguments: The appellant argued for nullity of proceedings, while the Revenue maintained procedural correctness post-service on the legal heir.Conclusions: The Tribunal found merit in the appellant's argument about procedural invalidity.Addition of Rs. 88,84,000/- as Unexplained Cash CreditRelevant Legal Framework and Precedents: Section 68 deals with unexplained cash credits, and Section 115BBE imposes a tax rate on such credits. Section 10(38) provides exemption for LTCG on listed shares.Court's Interpretation and Reasoning: The Tribunal scrutinized the AO's reliance on investigation reports and the lack of direct evidence against the appellant.Key Evidence and Findings: The appellant provided documentation for share transactions, including demat statements and bank records, which were not directly disputed by the AO.Application of Law to Facts: The Tribunal emphasized the need for substantive evidence rather than suspicion to justify such additions.Treatment of Competing Arguments: The appellant argued for the genuineness of transactions, while the Revenue relied on circumstantial evidence and investigation reports.Conclusions: The Tribunal found the addition unjustified due to lack of direct evidence and procedural lapses in denying cross-examination.Addition of Rs. 4,44,200/- as CommissionRelevant Legal Framework and Precedents: The addition was based on conjecture, lacking direct evidence.Court's Interpretation and Reasoning: The Tribunal noted the speculative nature of the commission addition, unsupported by concrete evidence.Key Evidence and Findings: The AO's reliance on general industry practices and statements from third parties without cross-examination was deemed insufficient.Application of Law to Facts: The Tribunal highlighted the need for evidence-based conclusions rather than assumptions.Treatment of Competing Arguments: The appellant contested the lack of evidence, while the Revenue cited general practices.Conclusions: The Tribunal deemed the addition of commission as speculative and unsupported.Denial of Cross-ExaminationRelevant Legal Framework and Precedents: Principles of natural justice require an opportunity for cross-examination when adverse statements are used.Court's Interpretation and Reasoning: The Tribunal criticized the AO's failure to provide cross-examination opportunities, which is a procedural necessity.Key Evidence and Findings: The AO's reliance on statements without allowing cross-examination was a procedural flaw.Application of Law to Facts: The Tribunal emphasized the importance of cross-examination in ensuring fair proceedings.Treatment of Competing Arguments: The appellant highlighted procedural injustice, while the Revenue focused on practical challenges in cross-examination.Conclusions: The Tribunal found the denial of cross-examination as a significant procedural lapse.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'According to us, not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority... is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice...'Core Principles Established: Procedural fairness, including the right to cross-examination, is essential in tax proceedings. Additions based on suspicion without substantive evidence are unjustified.Final Determinations on Each Issue: The Tribunal allowed the appeal, deleting the additions made by the AO, and emphasized the need for procedural correctness and evidence-based assessments.