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2018 (10) TMI 1396 - AT - Income TaxAssessment framed u/s 147 - penny stock - assessee has made transactions through M/s. AINPL which was not a registered broker - Treatment of Long Term Capital Gains as undisclosed income - Held that - If the shares were of some fictitious company which was not listed in the Bombay Stock Exchange/National Stock Exchange, the shares could never have been transferred to demat account. Shri Mukesh Choksi may have been providing accommodation entries to various persons but so far as the facts of the case in hand suggest that the transactions were genuine and therefore, no adverse inference should be drawn. Identical facts and circumstances in the case of Shri Pratik Suryakant Shah vs ITO 2017 (2) TMI 463 - ITAT AHMEDABAD the claim of the assessee cannot be denied on the basis of presumption and surmises in respect of penny stock by disregarding the direct evidences on record relating to the sale/purchase transactions in shares supported by broker s contract notes, confirmation of receipt of sale proceeds through regular banking channels and the demat account. AO is directed to treat the surplus as Long Term Capital Gains and allow the exemption as claimed by the assessee. The re-assessment proceedings initiated u/s 147 of the Act is not sustainable. Accordingly, we quash the order framed u/s 147 of the Act. Decided in favour of assessee.
Issues Involved:
1. Validity of reassessment proceedings under section 147 of the Income Tax Act. 2. Disallowance of Long Term Capital Gain (LTCG) exemption under section 10(38) of the Income Tax Act. Detailed Analysis: Issue 1: Validity of Reassessment Proceedings under Section 147 of the Income Tax Act The assessee challenged the reassessment framed under section 147 of the Act, arguing that the reassessment proceedings were invalid. The assessee contended that the reassessment was based solely on information received from the DIT(I & C), Ahmedabad, without independent application of mind by the Assessing Officer (AO). The AO had received specific information from the CCIT (Central-I) Mumbai regarding the Mukesh Choksi Group, which was involved in providing accommodation entries. The AO recorded reasons to believe that income had escaped assessment and issued a notice under section 148 of the Act. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the reassessment, noting that the AO had received specific information and recorded reasons to believe that the assessee had taken accommodation entries for bogus LTCG. The CIT(A) referenced several judicial precedents, including decisions from the High Courts of Gujarat and Mumbai, supporting the validity of reassessment based on specific information and tangible material. The Income Tax Appellate Tribunal (ITAT) reviewed the case and found that the reassessment proceedings were not sustainable. The ITAT noted that the AO did not provide the assessee with an opportunity to cross-examine Mukesh Choksi, whose statement was the basis for the reassessment. The ITAT relied on the Supreme Court's decision in Andaman Timber Industries, which held that not allowing cross-examination violated principles of natural justice. The ITAT quashed the reassessment order, citing the lack of opportunity for cross-examination and the absence of independent application of mind by the AO. Issue 2: Disallowance of Long Term Capital Gain (LTCG) Exemption under Section 10(38) of the Income Tax Act The AO disallowed the assessee's claim for LTCG exemption under section 10(38), treating the LTCG as bogus. The AO's decision was based on the statement of Mukesh Choksi, who admitted to providing accommodation entries. The CIT(A) upheld the disallowance, stating that the assessee had shown LTCG on shares purchased through an entity involved in providing accommodation entries. The assessee argued that the transactions were genuine, supported by documentary evidence, including purchase bills, demat statements, and bank statements. The assessee also contended that the AO's reliance on the statement of Mukesh Choksi without providing an opportunity for cross-examination was against the principles of natural justice. The ITAT found that the assessee had provided sufficient evidence to support the genuineness of the transactions. The ITAT noted that the shares were purchased, transferred to the demat account, and sold through recognized channels, with payments made and received through banking channels. The ITAT emphasized that the AO had not provided the assessee an opportunity to cross-examine Mukesh Choksi, whose statement was the basis for the disallowance. The ITAT relied on the Supreme Court's decision in Andaman Timber Industries, which underscored the importance of cross-examination in ensuring natural justice. The ITAT allowed the assessee's appeal, directing the AO to treat the surplus as LTCG and allow the exemption under section 10(38). The ITAT's decision was consistent with previous rulings in similar cases, where the courts had upheld the genuineness of transactions supported by documentary evidence and had emphasized the need for cross-examination when statements from third parties were used as the basis for disallowance. Conclusion: The ITAT quashed the reassessment proceedings under section 147 due to the lack of opportunity for cross-examination and the absence of independent application of mind by the AO. The ITAT also allowed the assessee's claim for LTCG exemption under section 10(38), directing the AO to treat the surplus as LTCG and allow the exemption, based on the genuineness of the transactions supported by documentary evidence. The ITAT's decision was in line with judicial precedents emphasizing the principles of natural justice and the need for cross-examination.
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