Not allowing cross examination legally or factually incorrect. It was strange that FFA held that non providing such opportunity would not vitiate proceedings-ITAT
ABCAUS Case Law Citation:
ABCAUS 1168 (2017) (03) ITAT
Assessment Year : 2005-06
Date/Month of Pronouncement: March, 2017
Brief Facts of the Case:
A search and seizure action u/s 132 of the Income Tax Act, 1961 (‘the Act’) was carried out in case of a group of companies including its directors. It was observed by the Assessing Officer (‘AO’) that Group concerns were engaged in the business of issuing fraudulent bills and providing bogus speculation profit/losses in shares.
The AO, after recording the reasons for re-opening issued a notice u/s 148 of the Act on the ground that the appellant assessee had purchased shares of through the one of the said groups companies (‘searched company’). In its reply, the assessee said that the shares were transferred through D-mat Account, that he had sold shares through stock exchange, that share transactions entered into were genuine, that he had paid money/received money through banking channels.
The AO observed that the assessee had taken delivery of shares through off market and sold the shares through market,that he could manage the transaction through ‘touch and go’ technique. He asked the assessee as to why STCG should not be treated as undisclosed income of the assessee u/s 68. In its reply the assessee argued that in the statements of the searched company his name was not appearing. The assessee also asked for cross examination of the searched company.
As per the AO the DDIT (Investigation) had sent a list of persons who had purchased bogus bills or had claimed bogus profit/ loss, that in that list name of the assessee was appearing. The AO issued summons u/s 131 to the directors of the searched company but no one appeared. Considering the ‘circumstantial evidences’ and ‘human probability’, the AO held that the transactions entered in by the assessee were not 100% genuine. Accordingly, he held that STCG shown in the books of account was to be treated as undisclosed credit/income of the assessee u/s 68 of the Act.
Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A) being the First Appellate Authority (FAA). Before him, the assessee challenged the re-opening stating that there was no tangible material to issue notice u/s 148 and also the assessee was not allowed cross examination.
CIT(A) inter alia, held that no prejudice was caused to the assessee if opportunity of cross examination was not given, that accommodation entries had been provided to large number of people and the assessee was not justified in seeking the opportunity for cross examining. CIT(A) held that the argument of cross examination was raised with the sole object of obstructing the process of law and the evidence available on record was sufficient to support the stand taken by the AO. He observed that sale and transfer of shares were shown but purchases were not substantiated, the sources of funds for purchases remained undisclosed. That the assessee had not made any genuine purchases of shares, that the sales of shares was beyond doubt, that the genuineness of the transaction was not proved. He held that the D-mat statement produced by assessee showed that shares had been transferred from the searched company, that it was an accommodation entry.
The FAA issued notice for enhancing the income and to treat it as unexplained cash credit. Finally, he held that sale proceeds of shares sold by the assessee was to be treated as unexplained cash credit and that same was to be assessed in his hands under the head ‘income from other sources’.
Observations made by the Tribunal:
The Tribunal observed that the AO in the notice issued for reopening of the assessment u/s 148 had not mentioned in the reasons recorded as to how there was a failure on part of the assessee to disclose fully and truly the material facts which led to under assessment and resultant escapement of income. According to the ITTA, only this ground was sufficient to allow the appeal of the assessee.
However, the Tribunal discussed the merits of the case also. It was observed that the AO had relied upon the statement of the directors of the searched company to make the addition. It was his duty to provide the copy of the statement to the assessee and to afford the opportunity to cross examine.
The Tribunal found that it was very strange that the FAA, being a judicial authority, had held that non providing opportunity of cross examination would not vitiate the assessment proceedings. It opined that if the AO/assessee wants to rely upon the statements of someone it is their duty to prove the truthfulness of such statements.
The Tribunal observed that filing of affidavits/cross examination of the person making assertion can be one of the means of verifying the genuineness of the statements. The basic principles is that person relying upon statement of someone has to prove it and especially when it is challenged by another party.
The Tribunal noted that in the statement relied by the AO the name of the assessee was not included as to whom he the searched company had issue fictitious bills or bills for claiming non-genuine profit/ loss. In fact it was a general statement disclosing broader outline of the transactions entered. It had never been stated that all the transactions entered into by group were non genuine. The statement was a good lead to take the investigation further and make specific queries. But it was not done.
Thus the Tribunal observed that what is left is the general statement on side and on the other side are the facts like payment/receipt of share transaction value through banking channels, transfer of shares in and from the D-mat account, FAA’s finding that the sale was not in doubt, non observation of principle of natural justice by not providing cross examination.
Therefore, according to the Tribunal, all the facts and circumstances weighed in the scale of reasoning would tilt in favour of the assessee. the ITAT opined that there was no justification on part of the FAA to direct the AO to tax the entire sale proceed of shares in the hands of the assessee during the year under consideration. Similarly,the AO was not justified to hold the STCG as business transaction. The assessee was not dealing in the shares and securities and the shares of KCL were held by him as investment and not as stock in trade.
Held:
The ITAT holding the order of the FAA as incorrect legally or factually, reversed it and decided the effective ground of appeal in favour of the assessee.
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