2018 (9) TMI 1171 - AT - Income Tax

Denial of exemption of long term capital gains - gain arising on transfer of shares - exemption claimed u/s.10(38) - treating such sum as unexplained income u/s.68 - denial of natural justice - Held that - The transactions claimed by the assessee whether real or sham, requires a revisit by the ld. Assessing Officer. 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 in the case of CIT vs.Smt. Sunita Dhadda 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. Appeal of the assessee is partly allowed for statistical purposes.

Issues:
Denial of exemption of long term capital gains under section 10(38) and treatment as unexplained income under section 68.

Analysis:
1. The appeal was filed against the Commissioner of Income Tax (Appeals)-4's order denying exemption of long term capital gains of ?49,51,787 arising from the sale of shares of a company claimed under section 10(38) of the Income Tax Act, 1961. The contention was that the lower authorities disbelieved the sale of shares based on reports from the Directorate of Income Tax (Investigation) Kolkata and Delhi, labeling the company as a penny stock company. The assessee argued that the purchase of shares was genuine even though it was done off-market and the sale was made through a recognized stock exchange. The Tribunal referred to similar cases where directions were given to the Assessing Officer for reconsideration, adhering to the rules of natural justice.

2. The Departmental Representative supported the lower authorities' decision, citing reasons for disbelief in the transactions regarding the equity shares of the company. The representative highlighted the lack of evidence showing how the shares were identified for purchase. The Tribunal considered the contentions of both parties and reviewed the orders of the authorities below. It acknowledged that the long term capital gains arose from the sale of shares of the company acquired through an off-market transaction. Referring to previous cases, the Tribunal emphasized the importance of following the rules of natural justice and providing the assessee with an opportunity to explain the transactions.

3. The Tribunal noted the decision in another case where suspicion alone was not sufficient for assessment and emphasized the need for supporting facts. It highlighted the lack of evidence and information regarding the share transactions, including the purchase process, possession of shares, and duration of holding. The Tribunal concluded that the issues required further examination by the Assessing Officer, with the assessee having the opportunity to substantiate the claims and provide necessary evidence. The importance of following due process and natural justice in assessments was reiterated.

4. Considering the facts and circumstances, the Tribunal decided to set aside the orders of the lower authorities and remit the issue back to the Assessing Officer for a fresh consideration in accordance with the law. The Tribunal highlighted the need for the assessee to prove the transactions of long term capital gains claimed for exemption under section 10(38) by providing all necessary evidence and allowing examination of involved parties. The decision emphasized the significance of providing opportunities for cross-examination and following proper legal procedures.

5. In conclusion, the Tribunal partly allowed the appeal for statistical purposes and directed the reassessment of the issue by the Assessing Officer, ensuring adherence to the principles of natural justice and due process. The judgment underscored the importance of providing opportunities for explanation and substantiation in tax assessments, following legal procedures and upholding the rules of natural justice.

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