2018 (11) TMI 1575 - AT - Income Tax

Unexplained income u/s.68 - bogus long term capital gain - Long term capital gains claimed by the assessee as exempt u/s.10(38) - Held that - Transactions whether real or sham, requires a revisit by the ld. Assessing Officer. Similar directions as given in the cases of Vimalchand Gulabchand, Praveen Chand, Gatraj Jain & Sons (HUF) and Mahendra Kumar Bhandari 2018 (4) TMI 701 - ITAT CHENNAI), read alongwith the directions given in the case of Heerachand Kanunga 2018 (4) TMI 701 - ITAT CHENNAI are given herealso. Useful reference may be made to the law laid down by Hon ble Apex Court in the case of CIT vs. Sunita Dhadda 2018 (3) TMI 1610 - SUPREME COURT OF INDIA , while affirming a judgment of Hon ble Rajasthan High Court 2017 (7) TMI 1164 - RAJASTHAN HIGH COURT , where the importance of providing an opportunity to cross examine the witness has been stressed. Their lordship held that this was an important constituent of natural justice. Only after all the steps required under law is complete, it can be ascertained whether claim of capital gains was bogus or not. We therefore set aside the orders of the lower authorities and remit the issue back to the file of the ld. Assessing Officer for consideration afresh in accordance with law. - decided partly in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Denial of exemption of long-term capital gains under Section 10(38) of the Income Tax Act, 1961.
2. Treatment of a sum as unexplained income under Section 68 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Denial of Exemption of Long-Term Capital Gains under Section 10(38) of the Income Tax Act, 1961:

The assessee claimed exemption on long-term capital gains amounting to ?47,06,741/- arising from the sale of 1,25,000 shares of M/s. Kailash Auto Finance Ltd. The lower authorities disbelieved the sale of shares, citing that M/s. Kailash Auto Finance Ltd was a penny stock company, as reported by the Directorate of Income Tax (Investigation) Kolkata and Delhi. The assessee argued that the shares were initially purchased from M/s. Careful Projects Advisory Services Ltd, which later merged with M/s. Kailash Auto Finance Ltd under a scheme approved by the Hon’ble Allahabad High Court. The shares were sold through a recognized stock exchange, and the transactions were genuine. The assessee contended that the statements and reports relied upon by the lower authorities were not disclosed to them, violating the rules of natural justice. The SEBI's interim report was initially adverse but later exonerated the accused in its final report.

The Tribunal noted that similar cases had been reconsidered by directing the Assessing Officer to adhere to the rules of natural justice. It was observed that the Assessing Officer did not provide the assessee with the statements and reports used against them, nor did they inquire about the assessee's awareness of the shares' availability. The SEBI's final order also vacated the interim ex-parte order, indicating a need for reassessment.

2. Treatment of a Sum as Unexplained Income under Section 68 of the Income Tax Act, 1961:

The Departmental Representative supported the lower authorities' decision, emphasizing the lack of evidence from the assessee regarding the identification and purchase of shares. The Tribunal referred to the case of Heerachand Kanunga, where it was held that assessments should not be based on suspicion but facts. The statement of Shri Ashok Kumar Kayan, which was used as a foundation for the assessment, was not provided to the assessee for cross-examination, rendering it mere information rather than evidence.

The Tribunal highlighted the necessity of providing the assessee with an opportunity to substantiate their claims and cross-examine witnesses. The facts required for adjudicating the appeal were not adequately presented in the assessment order or the order of the CIT(A). The Tribunal directed the Assessing Officer to re-adjudicate the issues after granting the assessee adequate opportunity to substantiate their case and produce relevant evidence and witnesses.

Conclusion:

The Tribunal set aside the orders of the lower authorities and remitted the issues back to the file of the Assessing Officer for fresh consideration in accordance with the law. The Tribunal emphasized the importance of following the rules of natural justice, including providing the assessee with an opportunity to cross-examine witnesses and present their case comprehensively. The appeal of the assessee was partly allowed for statistical purposes.