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Pratik Suryakant Shah v. Income-tax Officer, Ward- 10 (3), Ahmedabad
Structured Summary of the Tribunal Order (as provided)
Factual and Procedural Background
These consolidated appeals were filed by different assessees against separate orders of the Commissioner of Income Tax (Appeals) (CIT(A)). The facts and issues in the appeals were common and were heard together; the Tribunal considered in detail the facts of ITA No.810/Ahd/2015 for Assessment Year 2006-07 in the case of Shri Pratik Suryakant Shah.
The assessee's return was initially accepted under section 143(1). Thereafter, after a search and seizure operation in the group case of M/s. Mahasagar Securities Pvt. Ltd. (and related group companies controlled by Shri Mukesh M. Choksi), the Assessing Officer (AO) reopened the assessment. Shri Mukesh Choksi, in a statement recorded by the Department, admitted that his group companies provided accommodation entries — i.e., entries showing purchase or sale of shares and securities to create profit or loss for various parties, for which he charged commission. Based on data/details received linking the impugned assessees to such accommodation entries, the AO issued reassessment notices alleging that the assessee's transactions amounting to Rs. 2,77,740/- for FY 2005-06 were unverifiable/bogus and should be treated as deemed income.
The assessee responded with a detailed reply explaining the nature of the share transactions, stating that payments were made through banking channels, shares were transferred to the purchaser's name by the issuing company, and later transferred to the assessee's demat account from which they were sold. The assessee requested a copy of Shri Mukesh Choksi's statement and an opportunity to cross-examine him; these requests were denied by the AO. The AO relied on several materials (including confirmations from NSE/ISE, statements attributed to Shri Mukesh Choksi recorded under section 132, and findings of DDIT(Inv.), Mumbai) and concluded that the exemption for Long Term Capital Gains under section 10(38) could not be allowed, treating the gains as undisclosed/deemed income. The CIT(A) affirmed the AO's findings. The assessee appealed to the Tribunal.
Legal Issues Presented
- Whether the Long Term Capital Gains arising on sale of shares should be treated as undisclosed income and denied exemption under section 10(38) on the basis of the material relied upon by the Revenue.
- Whether the AO's reliance on the statement of a third party (Shri Mukesh M. Choksi) and other third-party materials, without supplying a copy of the statement to the assessee or granting an opportunity of cross-examination, vitiated the assessment on grounds of violation of principles of natural justice.
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The assessee submitted that the transactions were genuine: payments were made through banking channels, the shares were transferred in the assessee's name by the issuing company, and later transferred to a demat account from which they were sold.
- The assessee argued that the AO's reliance on the statement of Shri Mukesh Choksi was improper because a copy of that statement was not supplied to the assessee and no opportunity to cross-examine the deponent was provided.
- The assessee contended that denial of natural justice (i.e., the opportunity to cross-examine and to see the statement relied upon) vitiated the assessment order and its conclusions.
- The assessee further argued that if the brokers through whom the purchases/sales were effected were fraudulent, that does not make the assessee automatically responsible for their alleged misconduct.
Respondent's (Department's/DR) Arguments
- The Departmental Representative (DR) supported the findings of the AO and CIT(A), arguing that the assessment was not based solely on Shri Mukesh Choksi's statement but on a broader set of materials showing the transactions were bogus.
- The DR pointed to confirmations from NSE/ISE, the statement attributed to Shri Mukesh Choksi (recorded under section 132), findings by DDIT(Inv.), and the absence of supporting documentation from the assessee (payment receipts, transfer forms, demat application details, etc.) as justifying the denial of exemption.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Andaman Timber Industries (Civil Appeal No. 4228 of 2006) — Hon'ble Supreme Court | The principle that when an adjudicating authority bases its decision on statements of witnesses, not allowing the affected party to cross-examine those witnesses is a serious flaw amounting to violation of natural justice and can render the order a nullity. | The Tribunal applied this decision to hold that the assessment order — which was based substantially on the third-party statement of Shri Mukesh Choksi that was not supplied to the assessee and where no cross-examination opportunity was given — had to be quashed on grounds of denial of natural justice. |
Court's Reasoning and Analysis
The Tribunal's analysis proceeded along two principal lines: (A) procedural/natural justice considerations derived from precedent, and (B) the factual merits of the transactions.
A. Procedural/Natural Justice Analysis
The Tribunal emphasized that the assessment was based, to a material extent, on the statement of Shri Mukesh Choksi. It was undisputed that:
- No copy of Shri Mukesh Choksi's statement was supplied to the assessee; and
- No opportunity to cross-examine Shri Mukesh Choksi was given to the assessee.
Relying on the Hon'ble Supreme Court's decision in Andaman Timber Industries, which held that refusal to allow cross-examination of witnesses whose statements form the basis of an order is a serious flaw rendering the order a nullity, the Tribunal concluded that the assessment order had to be quashed on that ground.
B. Factual Merits Analysis
The Tribunal also examined the factual matrix of the specific case (ITA No.810/Ahd/2015) and identified the following undisputed or relevant facts from the record:
- The assessee purchased 3,000 shares of Telant Info Ltd from M/s. Mahasagar Securities Pvt. Ltd. in April 2004 and paid the consideration (payment through banking channels was not disputed).
- The shares were listed on the Bombay Stock Exchange at that time.
- The shares purchased in physical form were sent to the company (with share application form) and the company transferred the shares in the name of the purchaser (assessee).
- The shares were thereafter transferred to the assessee's demat account and sold from that demat account; the sale consideration was received by cheque.
- The Revenue did not contend that the consideration paid at purchase was returned in cash, nor that the sale consideration received by the assessee was returned in cash; nor did the Revenue contend that the shares were still lying with the assessee or that the amounts received exceeded what was declared.
On this factual basis the Tribunal observed that, as a matter of fact, there was direct evidence of genuine purchase and sale transactions — broker contract notes, confirmation of sale proceeds through banking channels, and the presence of a demat account in the assessee's name. The Tribunal reasoned that if shares had been of some fictitious company and not freely tradable/listed, they could not have been transferred to a demat account. While acknowledging that Shri Mukesh Choksi may have been providing accommodation entries to various persons, the Tribunal found that the particular transactions on record bore indicia of genuineness.
The Tribunal held that the claim of the assessee could not be denied merely on presumption and surmise regarding penny stocks or on the basis of a third-party statement without affording the assessee procedural opportunities; direct documentary evidence on record supported the assessee's position.
Holding and Implications
HOLDING: The Tribunal allowed all the consolidated appeals. It quashed the assessment order (on the ground of denial of natural justice as supported by the Andaman Timber Industries precedent) and, on the merits, found that the transactions could not be treated as bogus solely on the basis of presumption and the third-party materials relied upon by the Revenue.
The Tribunal directed the Assessing Officer to treat the surplus as Long Term Capital Gains and to allow the exemption claimed by the assessees.
Implications: The direct effect is that the assessees' appeals succeed and the exemption for Long Term Capital Gains is to be allowed for the matters adjudicated in these appeals. The order quashes the impugned assessment insofar as it treated the gains as deemed/undisclosed income. The opinion itself does not purport to lay down a new precedent beyond applying the cited Supreme Court authority (Andaman Timber Industries) and does not discuss broader policy implications.
End of summary.
ORDER
1. The above captioned appeals by different assessees are preferred against separate orders of the CIT(A). The Counsel for the assessees, at the very outset, stated that in this bunch of appeals, the facts and issues are identical. The DR fairly conceded to this and, on such concession, all these appeals were heard together and disposed of by this common order for the sake of convenience and brevity.
2. As agreed by the Representatives of both the sides, we have considered the facts of ITA No.810/Ahd/2015 for AY 2006-07 in the case of Shri Pratik Suryakant Shah.
3. The common grievance in all these appeals relates to the treatment of Long Term Capital Gains as undisclosed income of the assessee, denying the exemptions of Long Term Capital Gains on sale of shares.
4. Briefly stated facts of the case are that the returns of income of the assessees were accepted u/s 143(1) of the Act. Subsequently, the Assessing Officer received information relating to a search and seizure action carried out in the case of M/s. Mahasagar Securities Pvt Ltd, including group companies which were controlled by one Shri Mukesh M. Choksi at Mumbai. In his statement, Shri Mukesh Choksi admitted that all his group- companies were providing entries for taking profit or loss by showing purchase or sales of the shares and securities to various parties across India, on which he charged certain commission from the beneficiary parties. Since the impugned appellants were the beneficiaries of such accommodation entries provided by Shri Mukesh Choksi, the assessments were reopened. Statutory notices were issued and served upon the assessees and the reasons for the reopening of the assessment were provided. The relevant portion of the same reads as under:—
"Please refer to the on-going re-assessment proceedings in your case for A. Y. 2006-07.
In this connection, it is to state that a search and seizure action carried out by the Department on 25/11/2009 in the group case of M/s. Mahasagar Securities Pvt. Ltd. and also covered its all group companies which were controlled by Shri Mukesh M. Chokshi at Mumbai. Shri Mukesh M. Choksi himself admitted that my all the group companies are providing entry for taking profit or loss by showing purchase or sale of the shares and securities to various parties across India en which he charged certain commission from the beneficiary parties. The same information received by this office along with copy of statement of Shri Mukesh M. Chokshi recorded by the Department on oath u/s. 131 of the I. T. Act in which the details also pertain to you. On scrutiny of the data/details received in this office, it is ascertained that you were also involved for taking unverifiable/bogus beneficial entries from the group companies belongs to Shri Mukesh Choksi during the F. Y. 2005-06. Your total transaction involved is Rs.2,77,740/- for taking unverifiable/bogus entries by showing purchase and sale of share and securities.
3. In this context, a letter issued to you on 17/10/2013 and duly served upon you on the same date. In the said fetter, reasons were furnished to you and requested to produce or cause to be produced before the undersigned the accounts and/or documents as that may be necessary to produce in support of your explanation. However, it is observed that you have not complied this letter till date.
4. In view of the above, you are requested to show cause in writing with as to why the transaction of Rs.2,77,740/- should not be treated as bogus treating it as bogus entries of purchase and sale of shares and securities and should not be treated as your deemed income and taxed under the head Income from Other Sources."
5. In response to the notice and the queries, the assessee filed a detailed reply explaining the nature of transactions including purchase and sale of shares. It was explained that the payments have been done through banking channels, the shares were transferred to the respective demat accounts and were sold from there.
6. The assessee also questioned the statement of Shri Mukesh Choksi and strongly contended that no adverse view should be taken merely on the strength of the statement of a third party whose statement has not been confronted to the assessee, nor any opportunity is given to cross-examine.
7. The detailed submissions of the assessee did not find any favour with the Assessing Officer. The Assessing Officer also dismissed the request of the assessee for providing an opportunity of cross-examination. The relevant findings of the Assessing Officer read as under:—
"(vi) Regarding assessee's opinion/request to give an opportunity of cross- examination both of material found from the third party, i.e. his book, etc. as well as cross-examination of the person who has deposed against her and without compliance of the same, it would not be correct or maintainable to draw any adverse inference as observed in the show cause notice, it has no weight for the following reasons: ~
Thus, as stated above, there is no reason to give an opportunity to the assessee to cross-examine Shri Mukesh R. Chokshi and the materials found from the third party, i.e. books, etc. Therefore, I do not agree with the opinion of the assessee and reject the request of the assessee."
8. The Assessing Officer concluded by denying the exemption of Long Term Capital Gains on the sale of shares and treated this sale consideration as deemed income.
9. The assessee carried the matter before the CIT(A), but without any success.
10. Aggrieved by this, the assessee is before us.
11. The ld. Counsel for the assessee(s) vehemently stated that denial of cross-examination and relying on a third party's statement without affording any opportunity to the assessee(s) and also by not providing the copy of the statement has vitiated the entire assessment order. It is the say of the Counsel that denial of natural justice cannot be considered in framing the assessment order. The Counsel for the assessee continued by stating that the shares were purchased through brokers and the same were also sold through brokers. If the brokers turned out to be scamster, the assessee cannot be held responsible for the same.
12. Per contra, the DR strongly supported the findings of the Revenue Authorities. It is the say of the DR that the assessment is not merely based upon the statement of Shri Mukesh Choksi, but also on the fact that the entire transactions of the assessee were bogus.
13. Having heard the rival contentions, we have carefully perused the orders of the authorities below. As mentioned elsewhere, we have considered the facts in ITA No.810/Ahd/2015. We find that the assessee had purchased 3000 shares of Telant Info Ltd from M/s. Mahasagar Securities Pvt Ltd on April 2004. The consideration was paid and the payment of consideration is not in dispute. The shares of Telant Info Ltd were listed in the Bombay Stock Exchange at that point of time. The shares so purchased were sold through M/s. Alliance Intermediateries & Network Pvt Ltd and the consideration was received by cheque. It would be pertinent to mention here that though the shares were purchased in physical form, the same were sent to the company with share application form and the shares were transferred by the company in the name of the purchaser. Thereafter, the shares were transferred in the demat account, from where they were sold. It is not the case of the Revenue that the consideration paid by the assessee at the time of purchase of shares was received back in cash, nor it is the case of the Revenue that the sale consideration received by the assessee was returned back in cash. It is also not the case of the Revenue that the shares in question are still lying with the assessee, nor it is the case of the Revenue that the amounts received by the assessee on sale of the shares is more than what is declared by the assessee.
14. The entire assessment is based upon the statement of Shri Mukesh Choksi. It is an undisputed fact that neither a copy of the statement was supplied to the assessee nor any opportunity of cross-examination was given by the Assessing Officer/CIT(A). The Hon'ble Supreme Court in the case of Andaman Timber Industries [Civil Appeal No. 4228 of 2006] was seized with the following action of the Tribunal:—
"6. The plea of no cross examination granted to the various dealers would not help the appellant case since the examination of the dealers would not bring out any material which would not be in the possession of the appellant themselves to explain as to why their ex factory prices remain static. Since we are not upholding and applying the ex factory prices, as we find them contravened and not normal price as envisaged under section 4(1), we find no reason to disturb the Commissioners orders."
15. The Hon'ble Apex Court held as under:—
"According to us, not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority. As far as the Tribunal is concerned, we find that rejection of this plea is totally untenable. The Tribunal has simply stated that cross-examination of the said dealers could not have brought out any material which would not be in possession of the appellant themselves to explain as to why their ex-factory prices remain static. It was not for the Tribunal to have guess work as to for what purposes the appellant wanted to cross-examine those dealers and what extraction the appellant wanted from them.
As mentioned above, the appellant had contested the truthfulness of the statements of these two witnesses and wanted to discredit their testimony for which purpose it wanted to avail the opportunity of cross-examination. That apart, the Adjudicating Authority simply relied upon the price list as maintained at the depot to determine the price for the purpose of levy of excise duty. Whether the goods were, in fact, sold to the said dealers/witnesses at the price which is mentioned in the price list itself could be the subject matter of cross-examination. Therefore, it was not for the Adjudicating Authority to presuppose as to what could be the subject matter of the cross-examination and make the remarks as mentioned above. We may also point out that on an earlier occasion when the matter came before this Court in Civil Appeal No. 2216 of 2000, order dated 17.03.2005 was passed remitting the case back to the Tribunal with the directions to decide the appeal on merits giving its reasons for accepting or rejecting the submissions.
In view the above, we are of the opinion that if the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the Show Cause
We, thus, set aside the impugned order as passed by the Tribunal and allow this appeal."
16. On the strength of the aforementioned decision of the Hon'ble Supreme Court, the assessment order has to be quashed.
17. For the sake of the completeness of the adjudication, even on facts of the case, the orders of the authorities below cannot be accepted. There is no denying that consideration was paid when the shares were purchased. The shares were thereafter sent to the company for the transfer of name. The company transferred the shares in the name of the assessee. There is nothing on record which could suggest that the shares were never transferred in the name of the assessee. There is also nothing on record to suggest that the shares were never with the assessee. On the contrary, the shares were thereafter transferred to demat account. The demat account was in the name of the assessee, from where the shares were sold. In our understanding of the facts, if the shares were of some fictitious company which was not listed in the Bombay Stock Exchange/National Stock Exchange, the shares could never have been transferred to demat account. Shri Mukesh Choksi may have been providing accommodation entries to various persons but so far as the facts of the case in hand suggest that the transactions were genuine and therefore, no adverse inference should be drawn.
18. In the light of the decisions of the Hon'ble Supreme Court in the case of Andaman Timber Industries (supra) and considering the facts in totality, the claim of the assessee cannot be denied on the basis of presumption and surmises in respect of penny stock by disregarding the direct evidences on record relating to the sale/purchase transactions in shares supported by broker's contract notes, confirmation of receipt of sale proceeds through regular banking channels and the demat account.
19. As mentioned elsewhere and as agreed by the Representatives of both the sides; since the facts are common in all the impugned appeals, all the appeals by the assessees are allowed. The Assessing Officer is directed to treat the surplus as Long Term Capital Gains and allow the exemption as claimed by the assessees.
20. In the result, all the appeals filed by the assessees are allowed.
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