Retracting from income offered during survey and challenging non opportunity of cross examination at assessment stage – upheld
In a recent judgment, the Hon’ble Supreme Court declined to interfere with the judgment of High Court which upheld the ITAT order where non opportunity of cross examination during assessment was considered as illegal and assessee retracting from income offered during survey
ABCAUS Case Law Citation:
ABCAUS 3900 (2024) (03) SC
Important Case Laws relied upon by parties:
Suman Poddar vs. ITO (2019) 112 taxmann.com 330 (SC)
M/s. E.P. Royappa vs State of Tamilnadu AIR 1974 SC 555
Sanjay Bimalchand Jain vs. Pr. CIT (2018) 89 taxmann.com 196(Bombay)
Pooja Ajmani vs. ITO (2019) 106 Taxmann.com 65
Satish Kishore vs. ITO (2019) 110 taxmann.com 307
Anip Rastogi vs. ITO in ITANo.3809/Del/2018
CIT vs. Jasvinder Kaur (2013) 37 taxmann.com 286 (Gauhati High Court)
Chandan Gupta vs. CIT (2015) 54 taxmann.com 10 (Punjab & Haryana HC
Gopal Bhai Babu Bhai Parikh vs Pr. CIT [2021], 127 taxman.com 245 (Guj)
Sanchit Software & Solutions (P.) Ltd. vs Commissioner of Income Tax [2012] 25 taxman.com 123 (Bombay)
CIT vs M/s. Pruthvi Brokers and Share Holders
CIT vs Prabhu Steel Industries Pvt. Ltd. [1988], 171 ITR 530 (Bombay)
CIT Vs Bharat General Reinsurrance Co. LTD., 81 ITR 303 (DEL)
Thermal Power Co. Ltd., vs. 229 ITR 383 (SC)
Kailash Ben Monoharlal Chokshi [2008] 174 taxman 466 (Guj.)
The basic issue in this case was relates to genuineness of claim of Long Term Capital Gain u/s 10(38) of the Income Tax Act, 1961 (the Act) for sale of equity shares of listed companies.
The assessee was an individual earning income from various sources including income from Long Term Capital Gains (LTCG) and income from other sources. The original return of income was filed claiming exemption of LTCG u/s 10(38) of the Act.
A survey operation u/s 133A was conducted on the business premises of a business Group of which the assessee was a family member. The assessee was confronted with the statements of directors of certain Kolkata based companies whose shares bought and sold in the stock market by assessee. Those Kolkata based companies were under the scanner of the Income Tax Department (ITD) for allegedly providing accommodation entries. A list of beneficiaries who had allegedly taken accommodation entries from these Kolkata based companies had been drawn up by the ITD and the family members of the said business group featured in it.
On being confronted, the assessee filed a revised return of income u/s 139(5) of the Act wherein the original claim of exemption u/s 10(38) in respect of Long term capital gains (LTCG) on shares was withdrawn and the entire income was offered for taxation as “Income from other sources‟.
However, during the course of scrutiny proceedings, the assessee submitted that the revised return was invalid as it had been filed much after the permissible time limit for filing a revised return. The assessee contended that the revised return was filed under duress during the survey operation u/s 133A. For another year, he offered a revised computation retracting the income offered as from other sources.
Therefore, it was submitted that the claim made u/s 10(38) in the original return was valid as the receipt was from transfer of equity shares of listed companies, securities transaction tax (STT) had been duly paid and the period of holding of the equity shares exceeded twelve months.
The AO rejected this plea of the assessee and rejected the claim of exemption u/s 10(38) and treated the same as “income from other sources”.
The CIT(A) after examining the records, evidence placed by assessee and settled judicial precedence held that the assessee has rightly claimed the exemption u/s 10(38) of the Act for LTCG for the sale of equity shares.
Aggrieved by the order of the CIT(A), the revenue went in appeal before the Tribunal (ITAT).
Before the Tribunal, the assessee referred to CBDT circular No.286/98/2013 dated 09.01.2014 which strictly debars the Revenue Authorities from obtaining admission/statement during the course of survey rather, insisted on collecting evidences. The assessee also placed reliance on a number of decisions to support his case.
Further, it was contended that in view of the judgment of Hon’ble Supreme Court, assessee was entitled to make a fresh claim or modify a claim already made in the return of income, during course of Assessment proceedings with the restriction that such a claim or modification must be presented to the AO before the completion of the Assessment.
Further, placing reliance on the decision of the Hon’ble Apex Court it was contended that assessee was not provided any opportunity for cross examines those persons whose statements were relied by the ld. AO to make the impugned additions,
The Tribunal noted that assessee purchased the equity shares by making payment through banking channel. Subsequent to certain merger and split of equity shares assessee hold the equity shares of the limited company in question in the Demat Account and held them for more than 12 months and thereafter the same was sold through recognized stock exchange after paying security transaction tax.
The Tribunal observed that to justify his retraction, the assessee had submitted all necessary evidences to prove that the income was exempt u/s 10(38) and the A.O. could not dispute the evidences produce by the Assessee. Even the A.O. could not question the evidences and has accepted it. The rebuttal is permissible in the eye of law, if it is supported by the corroborative evidences.
Further the Tribunal noted that CBDT Circular strictly debarred the Authority from obtaining admission statement during course of survey rather, insisted in collecting evidences. In view of these Circulars, admission made by the Assessee which was given on force is contrary to the CBDT Circular.
The Tribunal noted that the question whether a statement recorded U/s.132(4) at midnight can be considered as voluntary statements, if it is subsequently retracted by the Assessee and necessary evidence is laid contrary to such admission was answered in negative by Hon’ble High Court. The other question as to whether merely on basis of admission, Assessee could be subjected to such admission, when despite retraction, revenue could not furnish any corroborative evidence in support of such admission, was also answered in negative.
Further, the Tribunal observed that the Co-ordinate Bench has held that it is an undisputed fact that, the statement recorded has better evidentiary value but it is also a settled position of law that, the addition cannot be sustained merely on the basis of statement. There has to be some material corroborating the contents of the statements. In the case revenue could not point out as what was the material before the A.O. which supported the contents of the statement. The A.O. failed to co-relate the disclosures made in the statement with the incriminating materials.
The Tribunal opined that it is settled principles of law that, if an Assessee had wrongly offered an item of income or omitted to claim a deduction in the return of income, he is entitled to correct such mistakes by making a request to the Assessing officer to that.
Further, the Tribunal noted that as held by Hon’ble Supreme Court, “the burden of establishing mala fide is very heavy on the person who alleges it. The allegations of mala fides are often moreeasier made then proved and the very seriousness of such an allegation demands proof of a high order of credibility.”
The Tribunal observed that the additions were made by A.O. without adhering the principles of natural justice which constitutes bedrock in any quasi-judicial proceeding. A.O‟s reliance on the statement of so called entry operators to justify the additions U/s.68 and 69 of the Act was factually unsustainable, because the statement of entry operators were recorded on various dates connected with some other proceeding and not at all connected with the Appellant proceedings and it is also not known as to what was the condition in which the makers of the statement made the statement and in what context they made the statement.
The Tribunal opined that the A.O. 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. Be that as it may be, if these statements of so called entry operators somehow triggered suspicion in the mind of the A.O. in relation to the Appellant‟s long term capital gain/claim then the A.O. was duty bound to conduct inquiry independently from the said persons and not simply rely on the statements recorded by some officers of the Department in unconnected proceedings admittedly behind back of the Assessee and cannot be used against the Assessee without testing it on the tough stone of cross-examination. The A.O. is no doubt an authority appointed by the State to exercise statutory powers to ascertain the income of a subject and the tax payable by him to the State. It is well settled that, the principles of natural justice shall be presumed to be necessary unless there exist a statutory interdict. The principles of natural justice a cardinal part of which is “audi alterem partem” is the bedrock of all quasi-judicial proceedings. It should be kept in mind by the A.O. that, his decision must be based upon logical proof or evidence and should not be based on speculation or suspicion or surmises or conjectures, because while discharging the duties as an Assessing officer, he was expected to function both as on Investigator and Adjudicator. In his role as an investigator, he was duty bound to investigate fully and bring out all the facts on record and while discharging the duty as an Adjudicator, he was required to comply with the principles of natural justice which he failed to perform.
The Tribunal opined that on facts and settled judicial precedents, the 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 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 AO making additions cannot be held to be justified.
On merit also, the Tribunal opined that nothing incriminating was found during the course of survey to challenge the genuineness of documents filed by the assessee. The AO also could not bring on record any evidence to prove that the assessee had any direct connection with the alleged entries operators or the management of the listed companies in question.
Accordingly, the Tribunal held that the CIT(A) had rightly deleted the addition for bogus LTCG made u/s 68 of the Act and dismissed the appeal of the Revenue.
Not satisfied with the order of the Tribunal, the Revenue agitated the issue before the Hon’ble High Court with the following question of law,
“Whether after making certain statements in the survey the assessee not claiming exemption u/s 10(38) of the Act at the stage of the assessment proceedings could be the assessee turned around and make such claim of wanting to cross-examine persons who made adverse statements against the assessee at the stage of appeal before the ITAT?”
The Hon’ble High Court observed that t ITAT had sufficiently dealt with the factual details concerning the Assessee. The question was regarding the claim of long-term capital gains on shares in terms of Section 10(38) of the Act. During the course of scrutiny assessment, a revised return was filed by the Assessee claiming the above exemption. After the AO rejected the plea, the Assessee went before the CIT(A). The CIT(A) was satisfied that the purchase of liquid shares have been made through Account Payee Cheques and the shares themselves were held in Demat Account for more than 12 months and then sold through the recognized stock exchange after payment of security transaction tax. A reference was made to the CBDT circular which debarred the Revenue from obtaining admissions/ statements during the course of a survey. The ITAT also noted the settled position in law that if an Assessee has wrongly offered an item of income or omitted to make a claim of deduction in the return, he was entitled to correct such a mistake by making a request to the AO to that effect.
The Hon’ble High Court further noted that another ground on which the ITAT found fault with the additions made by the AO was that reliance was placed on statement of ‘so called entry operator’ to justify the additions under Sections 68 and 69 of the IT Act. These statements were recorded on various dates in some other proceedings not connected with the Assessee. Further, the statements were recorded much before the date of the survey conducted on the Assessee. It was unable to be disputed by the Department that the Assessee did not have an opportunity to challenge such statements and further, no opportunity to cross-examine the so-called entry providers was given to the Assessee.
The Hon’ble High Court opined that both the grounds viz., the claim for benefit of Section 10(38) of the Act and denial of an opportunity to cross examine the entry providers, turned on facts. The ITAT was justified in accepting the plea of the Assessee that the failure to adhere the principles of natural justice went to the root of the matter. Also, the CBDT circular that permitted to the Assessee to file revised returns if he omitted to make a claim was also not noticed by the AO.
Accordingly, the Hon’ble High Court dismissed the appeal of the Revenue holding that no substantial question of law arose from the impugned order of the ITAT .
Not satisfied with the order of the Hon’ble High Court, the Revenue challenged it before Hon’ble Supreme Court by filing a Special Leave Petition (SLP).
However, a division bench of the Hon’ble Supreme Court declined to interfere with the judgment of the Hon’ble High Court and dismissed the SLP of the Revenue
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