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2020 (4) TMI 161 - AT - Income TaxAddition u/s 68 - Bogus LTCG - penny stocks - HELD THAT - Documents furnished by the assessee and the AO having not found any defects in the documents, assessee has discharged the onus upon him to make the claim of LTCG on the sale of scrip of M/s. EIL. Assessee after purchase of shares have kept the same in the dematerialized format for more than one year and transactions happened through banking channel and both the purchase and sale happened through on line and the STT having been paid during purchase as well as the sale of the scrip, the question of denying exemption u/s. 10(38) does not arise. As relying on JAGMOHAN AGARWAL VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-35, KOLKATA 2018 (9) TMI 416 - ITAT KOLKATA allow the claim of LTCG and consequently the claim of that amount as exempt u/s. 10(38) of the Act. - Decided in favour of assessee.
Issues Involved:
1. Validity of Long-Term Capital Gains (LTCG) Claim. 2. Exemption under Section 10(38) of the Income Tax Act. 3. Treatment of LTCG as Cash Credit under Section 68. 4. Reliance on Third-Party Statements and Investigation Reports. 5. Compliance with Principles of Natural Justice. Issue-wise Detailed Analysis: 1. Validity of Long-Term Capital Gains (LTCG) Claim: The primary issue in the case was whether the LTCG claimed by the assessee on the sale of shares of M/s. Essar India Limited (EIL) was genuine. The AO disallowed the LTCG claim, citing that the transactions were suspicious and pre-arranged. The AO relied on an investigation report that suggested the involvement of the assessee in a scheme to generate bogus LTCG. However, the Tribunal noted that the assessee had provided substantial evidence, including contract notes, demat statements, and bank statements, to support the genuineness of the transactions. The Tribunal emphasized that the AO had not provided any concrete evidence to disprove the assessee's claim and had relied on generalized suspicion and third-party statements without giving the assessee an opportunity to cross-examine those parties. 2. Exemption under Section 10(38) of the Income Tax Act: The assessee claimed exemption under Section 10(38) for the LTCG earned from the sale of shares. The AO rejected this claim, treating the LTCG as bogus. The Tribunal, however, held that the assessee had fulfilled all the conditions required for claiming the exemption under Section 10(38), such as holding the shares for more than a year, paying Securities Transaction Tax (STT), and conducting the transactions through a recognized stock exchange. The Tribunal found no reason to deny the exemption, as the AO had not provided any substantial evidence to prove that the transactions were not genuine. 3. Treatment of LTCG as Cash Credit under Section 68: The AO treated the LTCG as unexplained cash credit under Section 68, adding the entire amount to the assessee's income. The Tribunal disagreed with this treatment, noting that the assessee had provided all necessary documents to substantiate the transactions. The Tribunal emphasized that the AO had not found any defects in the documents provided by the assessee and had not brought any material evidence to support the claim that the LTCG was bogus. The Tribunal directed the AO to delete the addition made under Section 68. 4. Reliance on Third-Party Statements and Investigation Reports: The AO relied heavily on statements from third parties and an investigation report by the Directorate of Investigation, Kolkata, to draw adverse inferences against the assessee. The Tribunal criticized this approach, noting that the AO had not provided the assessee with copies of these statements or the opportunity to cross-examine the individuals who made them. The Tribunal cited the Supreme Court's decision in Andaman Timber Industries, which held that statements recorded behind the back of the assessee without cross-examination could not be used to draw adverse inferences. The Tribunal concluded that the reliance on such statements was inappropriate and violated the principles of natural justice. 5. Compliance with Principles of Natural Justice: The Tribunal highlighted that the AO's actions violated the principles of natural justice. The AO had not provided the assessee with the investigation report or the statements of third parties, nor had the AO allowed the assessee to cross-examine these individuals. The Tribunal emphasized that any adverse material used against the assessee must be disclosed to the assessee, and the assessee must be given an opportunity to rebut it. The Tribunal found that the AO's failure to comply with these principles rendered the assessment order invalid. Conclusion: The Tribunal allowed the appeals of the assessee, holding that the LTCG claimed on the sale of shares of M/s. Essar India Limited was genuine and exempt under Section 10(38) of the Income Tax Act. The Tribunal directed the AO to delete the addition made under Section 68 and criticized the AO's reliance on third-party statements and investigation reports without providing the assessee an opportunity to rebut them. The Tribunal's decision emphasized the importance of adhering to the principles of natural justice in tax assessments.
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