2021 (12) TMI 1425 - AT - Income Tax

Bogus LTCG - Capital Gains Generated on Sale of Penny Stock - realince on third party information - A.O. has accepted the statements recorded by some other officers of the Department in some unconnected proceeding and believed it as a gospel truth against the Appellant and relying on it proceeded to draw inference against the Appellant - genuineness of claim of Long Term Capital Gain u/s 10(38) of the Act for sale of equity shares of listed companies denied - HELD THAT - AO failed to perform his twin duties that of the investigator and adjudicator resulting in the additions being vitiated in the process. The entire disallowances in this case is based on third party information gathered by the Investigation Wing of the Department which have not been independently subjected to further verification by the A.O. who has not provided the copy of such statement to the Appellant thus denying opportunity of cross-examination to the Appellant who has prima facie discharged the initial burden the impugned addition made by the A.O. is not sustainable thus is directed to be deleted. In the fact of the present case save and except relying on the statement of so called entry operators the Revenue could not bring on record any credible evidence which could show that the Appellant has routed his unaccounted money in the form of bogus capital gain. The A.O. never examined any one of these persons whose statement relied upon by him in the Assessment order nor did he grant an opportunity for cross-examination except the bald references to the recorded statement. The Revenue could not bring on record any material which could link the Assessee with any wrong doing. When the learned CIT(A) found that the A.O. has not followed the due procedure of law as stated in the above paragraph he rightly deleted the impugned additions. Assessee should be assessed for the correct income and ignorance if any made by the assessee in filing the return but brought to the notice of the Ld. AO before the conclusion of the assessment proceedings should be entertained and also as per the principle of natural justice if any addition is made on the basis of statement of 3rd party a proper opportunity of cross examination should be given to the affected party and if the same is not done action of the Ld. AO making additions cannot be held to be justified. Exemption u/s 10(38) - As assessee has fulfilled necessary conditions to claim the exemption u/s 10(38) of the Act for the Long Term Capital Gain earned from sale of equity shares of M/s Kailash Auto Finance Ltd. and M/s Lifeline Drugs Pharma Ltd. Therefore we hold that the assessee has rightly claimed the exemption u/s 10(38) of the Act before the conclusion of assessment proceedings. We therefore find no reason to interfere in the finding of ld. CIT(A) and the same is confirmed. Assessee appeal allowed.

Issues Involved:
1. Genuineness of Long Term Capital Gain (LTCG) claims under Section 10(38) of the Income Tax Act.
2. Validity and impact of revised returns filed by the assessee.
3. Admission of bogus LTCG claims during survey operations.
4. Reliance on third-party statements without cross-examination.
5. Judicial precedents and their applicability.
6. Principles of natural justice and procedural fairness.

Detailed Analysis:

1. Genuineness of Long Term Capital Gain (LTCG) Claims:
The primary issue was whether the LTCG claims from the sale of equity shares of M/s Kailash Auto Finance Ltd. (KAFL) and M/s Lifeline Drugs & Pharma Ltd. (LD&DL) were genuine. The revenue argued that these were bogus entries meant to convert undisclosed income into tax-free income. However, the Tribunal found that the assessee had provided sufficient documentary evidence, including purchase and sale records, demat account statements, and bank statements, to substantiate the genuineness of the transactions. The Tribunal noted that the shares were purchased through banking channels, held in demat accounts, and sold through recognized stock exchanges after paying Securities Transaction Tax (STT).

2. Validity and Impact of Revised Returns:
For the assessment year 2014-15, the assessee filed a revised return after the survey operation, offering the LTCG for taxation instead of claiming exemption under Section 10(38). The Tribunal observed that the revised return was filed under duress and was invalid as it was filed beyond the permissible date. The original return, which claimed exemption under Section 10(38), was deemed valid. Similarly, for the assessment year 2015-16, the assessee initially did not claim the exemption but later filed a revised computation during the assessment proceedings, which was also accepted by the Tribunal.

3. Admission of Bogus LTCG Claims During Survey Operations:
The revenue relied on the statements made by the assessee during the survey, where they admitted to the bogus nature of the LTCG claims. The Tribunal noted that statements made during survey operations under Section 133A do not have the same evidentiary value as those made under Section 132(4) during search operations. The assessee retracted these statements, and the Tribunal held that the retraction was valid as it was supported by documentary evidence.

4. Reliance on Third-Party Statements Without Cross-Examination:
The revenue's case was heavily based on statements from third parties, such as brokers and directors of the companies involved, who allegedly admitted to providing accommodation entries. The Tribunal found that these statements were recorded in unrelated proceedings, and the assessee was not given an opportunity to cross-examine these individuals. Citing the Supreme Court's decision in Andaman Timber Industries, the Tribunal held that the denial of cross-examination violated the principles of natural justice, rendering the statements inadmissible.

5. Judicial Precedents and Their Applicability:
The Tribunal referred to several judicial precedents that supported the assessee's claims. It cited cases where courts had held that the mere suspicion of price rigging or the modus operandi of certain companies could not be the sole basis for denying legitimate LTCG claims. The Tribunal emphasized that the revenue failed to provide concrete evidence linking the assessee to any fraudulent activity.

6. Principles of Natural Justice and Procedural Fairness:
The Tribunal underscored the importance of adhering to the principles of natural justice. It criticized the revenue for relying on third-party statements without allowing cross-examination and for not independently verifying the evidence. The Tribunal reiterated that any addition to the assessee's income must be based on logical proof and evidence, not merely on suspicion or conjecture.

Conclusion:
The Tribunal dismissed the revenue's appeals and upheld the assessee's claims for exemption under Section 10(38) of the Income Tax Act. It emphasized the need for concrete evidence and adherence to the principles of natural justice, thereby setting a precedent for similar cases involving LTCG claims and the procedural conduct of tax authorities.

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