SHRI SANDEEP KANSAL,KANPUR V. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-I, KANPUR

ITSSA 356/LKW/2019

AI Insights

This case involves an appeal by Sh. Sandeep Kansal against the order of the ld. CIT(A)-4, Kanpur, which upheld the addition of Rs. 53,26,036 as income under section 68 of the Income Tax Act, 1961. The addition was initially made by the DCIT, Central Circle-1, Kanpur, alleging that the long-term capital gains claimed by the assessee from the sale of shares were not genuine and were part of a scheme to convert unaccounted money into tax-exempt income. The assessee contested that all transactions were legitimate, supported by verifiable documents, and that he was not given a fair opportunity to contest the evidence against him, particularly the statement of Mr. Devesh Upadhyay, an alleged entry operator. The Tribunal, after considering the submissions and the principles of natural justice, decided to restore the matter to the AO for a fresh assessment, ensuring the assessee's right to cross-examine the witnesses.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 398319 (ITAT-LUCKNOW)
• Appeal Type: Income Tax (Search & Seizure) Appeal
• Pronouncement Date: 04-06-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Other Referred Cases: PCIT vs. Prem Pal Gandhi, M/s NDR Promoters Pvt. Ltd. vs. PCIT, PCIT (Central)-1 vs. NRA Iron Steel Private Limited, Sumati Dayal vs. CIT, Kale Khan Mohammad Hanif vs. CIT, A. Govindarajulu Mudaliar vs. CIT, CIT vs. Nova Promoters & Finlease (Pvt.) Ltd., CIT vs. D.K. Garg, Vidya Reddy vs. ITO, ITO vs. Shamim M. Bharwani, Dhakeshwari Cotton Mills Ltd vs. CIT, Chuharmal vs. CIT, Moti Lal Padampat Udyog Ltd. vs. CIT, Andaman Timber Industries vs. Commissioner of Central Excise, Kolkata
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NAMITA S. PANDEY
• Keywords: Opportunity of being heard; Onus to prove; Capital Gains; Principle of natural justice; Accommodation entries; Wrong claim; Source of fund; Earning of tax free income; Share purchase agreement; Opportunity of cross examination; Penny stocks; Bogus
• Section: 143(3); 271(1)(c); 68; 133A

Judgement Text

"1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW ‘A’ BENCH, LUCKNOW BEFORE SH. KUL BHARAT, VICE PRESIDENT AND SH. NIKHIL CHOUDHARY, ACCOUNTANT MEMBER IT(SS)A No.356/Lkw/2019, A.Y. 2014-15 Sh. Sandeep Kansal, 117/H-1/441 Pandu Nagar, Kanpur, Uttar Pradesh vs. The Deputy Commissioner of Income Tax, C.C.-1, Kanpur PAN:ABAPK7440F (Appellant) (Respondent) Assessee by: None Revenue by: Smt. Namita S. Pandey, CIT (DR) Date of hearing: 18.03.2025 Date of pronouncement: 04.06.2025 O R D E R PER NIKHIL CHOUDHARY, A.M.: This is an appeal filed against the order of the ld. CIT(A)-4, Kanpur under section 250 of the Income Tax Act, 1961 dated 29.03.2019 whereby the appeal of the assessee against the order passed by the DCIT, Central Circle-1, Kanpur under section 143(3) of the Income Tax Act, 1961 dated 13.12.2016 has been dismissed. The grounds of appeal are as under:- “1. That the Ld. CIT(A)-IV, Kanpur erred in law as well as on facts in rejecting the appellant's appeal with respect to the addition amounting to Rs 53,26,036.00 made u/s 68 of the Income Tax Act in the assessment u/s 143(3) of the Income Tax Act. 2. That the Ld. CIT(A)-IV, Kanpur erred in law as well as on facts in rejecting the appellant's appeal without considering the fact that all the transactions pertaining to purchase and sale of the said equity shares were fully verifiable and duly supported by contract notes, bills etc. and were through proper banking channels. 3. That the Ld. CIT(A)-IV, Kanpur erred in law as well as on facts in rejecting the appellant's appeal without considering the fact that the Ld. A.O. failed to IT(SS)A No.356/LKW/2019 Sh. Sandeep Kansal A.Y. 2014-15 2 confront any document/evidence to the appellant and did not allowed any opportunity of cross examination to the appellant. 4. That the Ld. CIT(A)-IV, Kanpur failed to appreciate the fact that the addition-made upon the appellant was based on statement given by some Mr. Devesh Upadhya and which was recorded at the back of the appellant and with whom the appellant does not has even the remetest association. 5. That the Ld. CIT(A)-IV, Kanpur failed to appreciate that the appellant has complied with by all the conditions prescribed under section 10(38) of the Act. 6. That the Ld. CIT(A)-IV, Kanpur failed to appreciate the fact that the shares were listed on a recognized stock exchange and were sold through online trading platform wherein no manual interface is possible. 7. That the Ld. CIT(A)-IV, Kanpur failed to appreciate the fact that the L.D A.O has failed to bring out any evidence wherefrom it can be stated that the appellant paid cash in lieu of bogus Long term capital gain. 8. That the order appealed against is contrary to the facts, law, principals of natural justice and equity. 9. That the appellant craves liberty to add, alter or vary any ground of appeal either at the time of hearing of the appeal or before the disposal of the appeal before the Hon'ble Bench.” 2. The facts of the case are that the case was picked up for scrutiny to examine the introduction in capital of Rs. 53,26,036/-, stated to be received from sale of shares on BSE. The assessee had claimed a sum of Rs. 53,26,036/- as long term capital gain exempt from taxation under section 10(38) of the Income Tax Act, 1961. Deeper examination of the transaction revealed that the entire sale proceeds were obtained on the sale of one script i.e. M/s S.R.K. Industries Ltd. Further enquiries revealed that the assessee had originally purchased 6600 shares of M/s Transcend Commerce Ltd., @ Rs.10/- per share through a broker, M/s Sumangal Sales Pvt. Ltd., on 4.08.2012 and made payment from the same from its bank account maintained with HDFC, Kanpur. These shares were demated on 12.10.2012. Subsequently, these 6600 shares of M/s Transcend Commerce Ltd., got converted into 14,652 shares of M/s S.R.K. Industries Ltd. vide a scheme of arrangement on 14.05.2013. Subsequently, these shares were sub-divided into 29,304 shares of Rs.5/- each on 15.10.2013 and they were ultimately sold by the assessee, fetching a long term IT(SS)A No.356/LKW/2019 Sh. Sandeep Kansal A.Y. 2014-15 3 capital gain of Rs.53,26,036/- which was claimed exempt by the assessee. The ld. AO records that one Sh. Devesh Upadhyay, a Controller of Companies through employees, relatives and dummy Directors had admitted in a statement recorded under section 131(1A) of the Income Tax Act that the source of funds in his companies was unaccounted cash of various clients. The Investigation Wing of the Income Tax Department had carried out an analysis of BSE data and from the same, the ld. AO noted that the assessee received accommodation entry in the form of long term capital gain by paying cash. He further pointed out that the assessee had not filed a copy of contract note from M/s Sumangal Sales Pvt. Ltd., from whom the shares of M/s Transcend Commerce Ltd., had been purchased. Furthermore, he observed that while the shares of M/s Transcend Commerce Ltd., had been purchased on 4.08.2012, the payment had not been made until 27.11.2012, but the same had been demated on 12.10.2012 i.e. before the date of payment to the broker. Thus, he concluded that the transaction was not a genuine transaction and was the result of meticulously planned circular trading and the entities involved in this exercise were only there to create documentary evidence for converting unaccounted money into tax exempt income. He also pointed out that even a copy of the amalgamation order had not been filed before him and he accordingly proceeded to disallow the claim of exempt capital gain of Rs.53,26,036/-, and brought the same to tax in the hands of the assessee. Penalty proceedings under section 271(1)(c) were initiated. 3. Aggrieved by the said additions, the assessee went in appeal before the ld. CIT(A)-4, Kanpur. Before the ld. CIT(A)-4, Kanpur, it was submitted that in the course of proceedings before the ld. AO, complete details of the investment and sale of equity shares of listed companies were placed on record and the ld. AO had not disputed this fact. It was further submitted that all the transactions were duly supported by bills, share certificates, contract notes etc., and were fully verifiable and IT(SS)A No.356/LKW/2019 Sh. Sandeep Kansal A.Y. 2014-15 4 that all the transactions were duly reflected in the regular bank accounts of the assessee. The ld. AO had placed reliance on a statement of one Sh. Devesh Upadhyay, who was purported to be an, “Entry Operator” and whose statement was supposedly recorded during a survey under section 133A of the Act in the case of that person. However, the Department had not been able to establish any connection between Sh. Devesh Upadhyay and the assessee and even the statement of Sh. Devesh Upadhyay had not been shared with the assessee. Since this statement had been recorded behind the back of the assessee and the assessee had neither been given a copy of the same nor even allowed an opportunity to cross examine Sh. Devesh Upadhyay, the order was bad in law and it was prayed that the assessee must be given a chance to rebut the evidence used against him. It was further submitted that the ld. AO had not considered the fact that the transactions entered into by the assessee were on account of shares that had been listed on a regular stock exchange and sold through online trading platform, where no manual interface was possible. Furthermore, the sale was through SEBI registered stock brokers and no evidence had been uncovered of the assessee providing cash to the said brokers for this transactions. Thus, the decision of the ld. AO was completely without any evidence and his order had been passed entirely on surmises and conjectures. The assessee placed reliance on various case laws which he quoted in his submission to point out that an order passed on the basis of evidence collected behind the back of the assessee without confronting the assessee with the same and without allowing the assessee an opportunity to cross examine the statements used against him was a nullity in the eyes of law. He also relied upon the case laws to argue that the ld. AO had to bring on record the facts that the assessee had actually paid funds to the person who was alleged to be providing bogus entries to him. He submitted that Courts had held that documentary evidence was more reliable evidence than oral evidence and that the assessee had placed documentary evidence to show his transactions were in order. Therefore, unless their documentary evidence was disproved, there could be no addition in the hands IT(SS)A No.356/LKW/2019 Sh. Sandeep Kansal A.Y. 2014-15 5 of the assessee. The assessee also placed on record certain judgments of the ITAT in case of similar transactions, where the Hon’ble ITAT had held that the transactions in shares were genuine and additions in such cases could not be made. He further quoted from the judgment of the Hon’ble Punjab & Haryana High Court in the case of PCIT vs. Prem Pal Gandhi (2018) 401 ITR 253 which held that the fact of the appreciation in the value of shares in itself did not justify the transactions being treated as fictitious, if the shares were traded on the stock exchange, the payments and receipts were routed through the bank, there was no evidence to indicate that it was a closely held company and that the trading on the stock exchange was manipulated in any manner. The assessee also placed reliance on various other case laws all on the same subject to show that the Courts had consistently held that additions could not be made in the hands of the assessee holding the transactions to be bogus, if all the paper work was in order and that failure to give the opportunity of cross examination was fatal to the order. 4. The ld. CIT(A) went through the assessment order but was not convinced with the arguments of the assessee. He pointed out that the investigations done by the Income Tax Department included the script of M/s S.R.K. Industries Ltd. from which the assessee and his group company had taken entries of long term capital gains. During such investigations, the Department had recorded the statements of various share brokers, operators and beneficiaries who had dealt with the script of M/s S.R.K. Industries Ltd. in which it was admitted by them that in connivance with the promoters / brokers of some listed companies, they traded in script of shares of those listed companies which were manipulated to artificially either create gain or loss to beneficiaries, from whom entry of either long term capital gain or loss has to be provided. After holding these shares for sometimes, the clients were made to sell these shares at either higher rates or very low rates. Such shares were brought from beneficiary clients, upon receipt of cash which is collected from promoters/brokers IT(SS)A No.356/LKW/2019 Sh. Sandeep Kansal A.Y. 2014-15 6 and for doing the same, they received a commission. The ld. AO had referred to the statement of Sh. Devesh Upadhyay in which he had submitted that the transactions involved in respect of the said script, were fictitious in nature to convert black money of the beneficiary into white money in the garb of LTCG. Furthermore, the ld. AO had analyzed the movement of shares on the BSE of such suspicious scripts found that there was no change in the basic fundamentals of the company that would warrant such volatility in the movement of shares. Thus, the higher selling price of the shares was entirely on account of rigging up of the script through circular trading without any intrinsic values of the shares in such penny stocks. Thus, from those observations, the ld. CIT(A) held that it was evident that the assessee was one of the beneficiaries of such bogus penny stocks and was engaged in the exercise of converting his black money into white without payment of taxes by making a bogus claim of exemption under section 10(38). He also noted that the assessee had initially purchased the shares through off market trade and had nothing except the paper work of contract notes to explain his case. Therefore, in view of the overall situation as emerged with relation to the script, the ld. CIT(A) held that the claim of the assessee was non-genuine, concocted, bogus and fabricated. He further held that the case laws cited by the assessee were on their own footing and distinguishable on facts, inasmuch as no detailed enquiries were conducted in those cases, as had been conducted in the case of the assessee. He, thereafter, relied upont he judgments of the Hon’ble Delhi High Court in the case of M/s NDR Promoters Pvt. Ltd., vs. PCIT in ITA No. 49/2018 dated 17.01.2019 and the decision of the Hon’ble Supreme Court in the case of PCIT (Central)-1 vs. NRA Iron Steel Private Limited SLP(Civil) No.29855/2018 dated 5.03.2019 to hold that, in the facts of the case, the ratios laid down by the Hon’ble Supreme Court and the Hon’ble Delhi High Court were squarely applicable to the assessee’s case. The ld. CIT(A) further held that in order to claim exemption from the payment of income tax, the burden of proof was on the assessee to place the proper materials before the Income Tax Authority to establish the genuine claim. In IT(SS)A No.356/LKW/2019 Sh. Sandeep Kansal A.Y. 2014-15 7 the present case, the assessee had not produced any cogent evidence to discharge the onus casted upon him. On the other hand, the ld. AO had established the non-genuine nature of the alleged transaction on the basis of various enquiries conducted by the Investigation Wing and the SEBI. The assessee had not placed any findings to dislodge these findings of the ld. AO. Accordingly, he held that the judgments of the Hon’ble Supreme Court in the case of Sumati Dayal vs. CIT (2014) ITR 801 (SC), in Kale Khan Mohammad Hanif vs. CIT (1963) 50 ITR 1 (SC) and A. Govindarajulu Mudaliar vs. CIT (1958) 34 ITR 807 (SC) favoured the view of the ld. AO. He also placed reliance on the decision of the Hon’ble Delhi High Court in the cases of CIT vs. Nova Promoters & Finlease (Pvt.) Ltd. (2013) 342 ITR 169 (Delhi) and CIT vs. D.K. Garg (2017) 84 taxman.com 257 (Delhi) and the decision of the Tribunal in the case of Vidya Reddy vs. ITO (2018) in ITA No.2016/CHNY/2017 dated 15.05.2018 and ITO vs. Shamim M. Bharwani in ITA No.4906/Mum/2011 dated 27.03.2015. 5. On the issue of cross examination, the ld. CIT(A) stated that the statements of the share brokers, operators, promoters and exit providers were all shown and confronted to the assessee. He also relied upon the judgments of the Hon’ble Supreme Court in the case of judgment of Dhakeshwari Cotton Mills Ltd v. CIT (1954) 26 ITR 775 (SC) and Chuharmal vs. CIT 172 ITR 250 to state that all that was required for the Income Tax Authorities was to place the material that they had collected before the tax payer if they were going to draw an adverse inference on that basis. He also pointed out that the Hon’ble Allahabad High Court in the case of Moti Lal Padampat Udyog Ltd., vs. CIT 293 ITR 656 (All) had laid down that right of cross examination of persons from whom the ld. AO had collected the evidence was not required by law and the requirement of the statute for a valid assessment would be met if all the evidences, which is to be used against the assessee while framing the assessment order is placed before the assessee and he is given the opportunity to rebut the evidence. The ld. CIT(A) pointed out that in the instant case, all the IT(SS)A No.356/LKW/2019 Sh. Sandeep Kansal A.Y. 2014-15 8 incriminating statements had been shown to the assessee who had not challenged the contents of the incriminating statements. Therefore, he concluded that the ld. AO had observed the principles of natural justice and provided reasonable opportunity of being heard to the assessee. He, therefore, dismissed the appeal of the assessee and upheld the additions made by the ld. AO. 6. Aggrieved with this dismissal of his appeal, the assessee has approached the Tribunal. The appeal was filed on 19.05.2019. Perusal of the case records reveals that the case was fixed for hearing on many occasions. The assessee did not turn up for hearing on at least five occasions and on three occasions, the assessee filed written requests for adjournments which were not followed up with. On 18.03.2025, after providing of last opportunity, when the case was called for hearing, nobody was present on behalf of the assessee and nor was there any written request explaining the absence. Accordingly, it was decided to proceed with the matter and consider the appeal of the assessee on its merits. 7. Smt. Namita S. Pandey, ld. CIT DR appearing on behalf of the Revenue drew our attention to the findings given in the order of the ld. AO and the ld. CIT(A). She pointed out that in view of the evidences collected regarding the manipulation of the script price, it was a clear cut case of circular trading done for the purposes of the tax evasion. The ld. CIT(A) had clearly brought out the fact that there had been no change in the fundamentals of the company that could justify the abnormal increase in the price and that this have been done only with a view to facilitating the assessee in taking an accommodation entry so that the assessee could thereafter convert his black money into white, without paying taxes. Ld. CIT DR also pointed out to the fact that in the instant case, the assessee had also failed to file the proper documentation before the ld. AO. The ld. AO had pointed out that the assessee had not submitted copies of the contract note from M/s Sumangal Sales Pvt. Ltd., from whom the shares of M/s Transcend Commerce Ltd., had been purchased and also that the order of IT(SS)A No.356/LKW/2019 Sh. Sandeep Kansal A.Y. 2014-15 9 amalgamation of M/s Transcend Commerce Ltd., with M/s S.R.K. Limited had not been filed. Besides the fact that the shares had no intrinsic value and were only artificially inflated, the ld. CIT DR pointed out that the documentation in the instant case were also faulty because the shares purchased from M/s Sumangal Sales Pvt. Ltd., had been dematted on 12.10.2012, even before the date of payment to the broker which itself pointed to the fact that the transaction was contrived. Accordingly, the ld. CIT DR pleaded that the appeal of the assessee should be dismissed. She also submitted that since the assessee had been confronted with the material, there was no occasion to hold that the principles of natural justice had not been made. 8. We have duly considered the facts and circumstances of the case. The circumstances a explained by the ld. CIT DR, do create some suspicion regarding the long term capital gain claimed by the assessee because no underlying reason has been brought on record for the abnormal increase in the value of shares and the statements recorded alleged that prices appeared to have been rigged up through circular trading. We also observed that the ld. AO has relied upon the statement of one Sh. Devesh Upadhyay, who has admitted in a statement under section 131(1A), that he was engaged in providing accommodation entries to various persons in connivance with brokers by artificially rigging up the prices of certain scripts, of which M/s S.R.K. Industries Limited was one. However, from the arguments preferred before the ld. CIT(A), we note that the assessee has neither been given a copy of the said statement nor has he been given an opportunity to cross examine the said witness. The ld. CIT(A) has held that since the assessee has been provided with all documents, the principles of natural justice are met. However, we are of the opinion that it is the assessee, who must decide how best to rebut the evidences placed against him and if he feels that cross examination of the witness, whose statement is purported to be used against him, is required, then that cannot be IT(SS)A No.356/LKW/2019 Sh. Sandeep Kansal A.Y. 2014-15 10 denied to the assessee on the grounds that he has been confronted with the evidence. Furthermore, in the instant case, the assessee has actually stated in his written submission before the ld. CIT(A) that he has not been supplied with a statement of Sh. Devesh Upadhyay, nor been allowed an opportunity to cross examine Sh. Devesh Upadhyay and he has sought a chance to rebut the evidence used against him. We observe that the Hon’ble Supreme Court in the case of M/s Andaman Timber Industries vs. Commissioner of Central Excise, Kolkata in (2015) 62 taxman.com 3 (SC) held that, not allowing the assessee to cross examine a witness, though the statement of that witness was made a basis of the impugned order, was a serious flaw which makes the order a nullity, inasmuch as it amounted the violation of the principles of natural justice because of which the assessee was adversely affected. The Hon’ble Court observed that, in that case, the order of the Commissioner was based upon statements given by some witnesses and when the assessee disputed the correctness of those statements and wanted to cross examine them, the adjudicating authority did not grant this opportunity to the assessee. The Hon’ble Supreme Court held that once the assessee had contested the truthfulness of the statement of witnesses and wanted to disprove that testimony, for which purposes it wanted to avail the opportunity of cross examination, it was not for the adjudicating authority to pre-suppose as to what could be the subject matter of cross examination. Accordingly, in view of this decision of the Hon’ble Supreme Court and various other decisions that have preceded it, it is quite clear that evidences collected behind the back of the assessee cannot be used against it to make an addition no matter how strong these evidences are, as it amounts to a gross violation of the principles of natural justice. However, having taken due note of the submissions of the ld. CIT DR of the suspicious circumstances that surrounds these transactions, we deem it appropriate in the interest of justice to both parties to restore the matter back to the file of the ld. AO, so that he may confront the assessee with all the material and evidence in his possession and allow the assessee the opportunity of cross IT(SS)A No.356/LKW/2019 Sh. Sandeep Kansal A.Y. 2014-15 11 examination of those witnesses, whose statements he proposes to use against the assessee. Accordingly, the matter is restored to the file of the ld. AO for de novo assessment with the aforesaid directions. 9. In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced on 04.06.2025 in the Open Court. Sd/- Sd/- [KUL BHARAT] [NIKHIL CHOUDHARY] VICE PRESIDENT ACCOUNTANT MEMBER DATED: 04/06/2025 Sh Copy forwarded to: 1. Appellant – 2. Respondent – 3. CIT DR , ITAT, 4. CIT, 5. The CIT(A) By order Sr. P.S. "