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ITO vs. K. Ramakrishna Reddy (ITAT Hyderabad)
June, 12th 2018

Bogus Long-term capital gains: As neither the statement of Mukhesh Choksi was provided to the assessee nor cross-examination was allowed and it was not even placed on record, the action of the AO in treating the LTCG and STCG as income from other sources was not warranted

HELD following the judgement in Sarita Devi & Smt. Nitika Kumari, Hyderabad ITA.Nos.1228 & 1229/H/2016:

A.O. was of the opinion that capital gains declared by the assessee was bogus. In this regard, A.O. also observed that he received information from the office of Chief Commissioner of Income Tax, Mumbai that M/s. Alliance Intermediaries and Network Pvt Ltd., one of the group companies of Mr. Mukesh Choksi, and also other companies of this group have provided accommodation entries to various persons, including the assessee. Though the assessee has furnished purchase bills of shares, cash receipts for payment of share purchases, account copies of M/s. Alliance Intermediaries and Network Pvt Ltd, the A.O. noticed that the Intermediary i.e., M/s. Alliance Intermediaries and Network Pvt Ltd., was proved to have neither affiliated to Mumbai Stock Exchange nor affiliated to National Stock Exchange which clearly indicates that the transactions were never carried out.

Relevant extract from Smt. Sarita Devi & Smt. Nitika Kumari, Hyderabad ITA.Nos.1228 & 1229/H/2016
10. We have considered the rival contentions and carefully perused the evidence placed on record and orders of the authorities. It was admitted by the order of AO and CIT(A) that some communication was received from CCIT, Mumbai that Mr. Chokshi has given a statement that he has provided accommodation entries. How those statements are relevant to the assessee or whether any transactions of the assessees were specifically stated is not forthcoming either from the orders of the authorities or from the documents furnished before us. In fact, neither the statement of Mr. Chokshi was provided to the assessees nor the cross-examination was allowed. The same was not even on record. Even though Ld. CIT(A) gave a finding that the assessment was reopened on the basis of the communication of the CCIT, whether there was any statement enclosed or not could not be verified. Surprisingly, the A.O. himself informed assessee that reopening was not based on the statement of Mr. Chokshi. The communication given to assessee viz., Smt. Sarita Devi vide letter dated 16.03.2015 placed in paper book at page 85 is extracted hereunder for ready reference:

“The scrutiny assessment proceedings for the Asst. year 2007-08 in your case are pending with the undersigned. As requested by you, letter from NSE stating that M/s. Alliance Intermediateries & Network Pvt. Ltd. is not a broker/subbroker with them is hereby provided. You have requested this office to summon Mr. Mukesh Choksi for crossverification. But, the assessment in your case is made basing on the information furnished by NSE and the material provided by yourself. Hence, there is no necessity of producing Mr. Mukesh Choksi for your cross verification.” (emphasis supplied)

10.1 This indicates that Revenue is not having any information and even though the assessment is reopened on that basis as communicated in the reasons for reopening, A.O. simply denies the same in order to avoid cross-examination to be provided to the assessee. Under these circumstances, since neither the communication from CCIT, Mumbai nor the so-called statement of Mr. Mukesh Chokshi was provided either for verification or for cross-examination, it cannot be stated that A.O. has any ‘tangible information’ so as to reopen the assessments under section 147. The returns were already filed admitting incomes under capital gains. These were accepted under section 143(1). Assessees have furnished the necessary information of purchase bills, sale bills, ledger accounts, De-mat account copies in support of transactions. Since there is no other information so as to come to conclusion that the transactions entered by the assessee are bogus, these are to be accepted as transactions entered in normal course. The enquiry from the NSE that M/s. Alliance Intermediaries and Net Work P. Ltd., is not a broker or sub-broker does not establish that the transactions with that company is bogus. Moreover, as far as Smt. Sarita Devi is concerned, the purchase transactions mostly pertain to long term capital gains and have been entered in earlier year and have been recorded as on 31.03.2006. A.O. even though has reopened the assessment in that year also, much before this assessment was reopened, the said proceedings were dropped without taking any adverse view. Consequently, the purchases shown in that year in the balance sheet has to be accepted as genuine and subsequent sale thereon cannot be considered as bogus, on presumptions and assumptions. In view of that we have no hesitation in holding that the capital gains declared by the assessee should be assessed as capital gains only.

11. As seen from the orders, the A.O. has treated the entire sale consideration received as bogus and brought to tax the entire amount as stated to have communicated to him. The Ld. CIT(A) examined this aspect and gave finding that the transactions in the case of Smt. Sarita Devi are not to the extent of Rs.2.20 crores and restricted the sale amount to the extent of Rs.90.75 lakhs correctly. She also gave correct finding that the entire gross receipts cannot be brought to tax and only the gain can be taxed. Similarly in the case of Ms. Nitika also, the correct amount was determined and amount to be taxed was the short term capital gain received by assessee. To that extent findings of Ld. CIT(A) are correct. It is to be noted that the Revenue has not come in appeal on that aspect. Therefore, only issue to be considered is with the direction of the CIT(A) to tax the said amounts as ‘income from other sources’. For the reasons stated above, we are not in agreement with the action of the A.O. either for reopening of assessment or for treating the transactions as bogus, since the very basis for reopening the assessment was not provided to the assessee nor an opportunity was given to cross-examine the socalled Mr. Chokshi. There is no basis for treating the said transactions as not genuine. Considering the documents placed on record and the case law relied, we have no hesitation in directing the A.O. to accept the long term capital gains and short term capital gains declared by Smt. Sarita Devi and short term capital gains declared by Ms. Nitika Kumari under the head “Capital Gains” only. The grounds are accordingly allowed.


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