2019 (12) TMI 1470 - AT - Income Tax

Bogus LTCG - assessee invested is a penny stock company - deduction under Section 10(38) denied - HELD THAT - It is not brought on record how the assessee is involved in promoting the penny stock company and how the assessee involved in inflating the shares of the company. Moreover, the copy of the investigation report said to be received from the Investigation Wing of the Department at Kolkata was not furnished to the assessee. On identical circumstances, this Tribunal in the case of Kanhaiyalal Sons (HUF) 2019 (2) TMI 1640 - ITAT CHENNAI has remitted back the matter to the file of the Assessing Officer for reconsideration. This Tribunal is of the considered opinion that the matter needs to be re-examined by the Assessing Officer. Accordingly, orders of both the authorities below are set aside and the issue raised by the assessee with regard to deduction under Section 10(38) of the Act is remitted back to the file of the Assessing Officer. The Assessing Officer shall examine the matter as directed by this Tribunal in the case of Kanhaiyalal Sons (HUF) (supra) and thereafter decide the issue afresh in accordance with law, after giving a reasonable opportunity to the assessee. Appeal assessee is allowed for statistical purposes.

Summary

Issues involved:
Claim of exemption under Section 10(38) of the Income-tax Act, 1961 for long term capital gains arising from the sale of shares. Reliance on investigation report of Directorate of Investigation, Kolkata. Non-furnishing of investigation report to the assessee. Disallowance of long term capital gains by the Assessing Officer on the ground that the company is a penny stock company. Need for reconsideration by the Assessing Officer.

Analysis:

1. Claim of Exemption under Section 10(38):
The assessee claimed exemption under Section 10(38) of the Income-tax Act for long term capital gains from the sale of shares. The dispute arose when the Assessing Officer disallowed this claim based on the investigation report from the Directorate of Investigation, Kolkata. The counsel for the assessee argued that the investigation report was not provided to the assessee, depriving them of a fair opportunity to respond. The Tribunal noted that the Assessing Officer failed to establish the assessee's involvement in promoting the penny stock company or inflating share prices. Citing a similar case, the Tribunal directed the matter to be reconsidered by the Assessing Officer, emphasizing the need for furnishing relevant materials and providing a reasonable opportunity to the assessee.

2. Reliance on Investigation Report:
The Assessing Officer relied on the investigation report from the Directorate of Investigation, Kolkata to disallow the long term capital gains claimed by the assessee. However, the Tribunal highlighted that the report was not shared with the assessee, raising concerns about procedural fairness. The Tribunal stressed the importance of providing the assessee with all relevant materials and details of any inquiries made by the Assessing Officer to ensure a transparent and just assessment process.

3. Disallowance of Long Term Capital Gains:
The Assessing Officer disallowed the long term capital gains declared by the assessee, citing the involvement of the company as a penny stock company. Despite this disallowance, the Tribunal noted the lack of evidence linking the assessee to any activities related to promoting the penny stock company or artificially inflating share prices. The Tribunal's decision to set aside the orders of the lower authorities and remit the issue back to the Assessing Officer underscored the need for a thorough re-examination of the matter in line with legal provisions and after affording the assessee a fair opportunity to present their case.

4. Need for Reconsideration by the Assessing Officer:
In light of the discrepancies and procedural lapses identified in the assessment process, the Tribunal concluded that the matter required a fresh examination by the Assessing Officer. The Tribunal directed the Assessing Officer to reevaluate the issue, considering the guidelines laid out in a previous case, and to make a decision in accordance with the law while ensuring the assessee's right to a fair hearing. The Tribunal's decision to allow the appeal for statistical purposes signified the importance of a just and transparent tax assessment process.

In conclusion, the judgment by the Appellate Tribunal highlighted the significance of procedural fairness, the need for substantiated evidence in tax assessments, and the requirement for Assessing Officers to provide all relevant materials to taxpayers for a fair and thorough review of tax claims and disallowances.