2018 (4) TMI 701 - AT - Income Tax

Denial of claim of exemption u/s.10(38) - gains earned by it from the sale of equity shares - Denial of natural justice - assessment having been done pursuant to a search, ought have been u/s.153A to 153D of the Act and not u/s.143(3) - Held that - Relevant para in the assessment order relied by the ld.A.R, for buttressing this argument hardly suggest that the assessment done on the assessee was pursuant to a search. Just because an investigation was done by the investigation Department of the Department, based on some leads they might have had, reports of which were used against the assessee, would not ipso facto mean that the assessment was pursuant to any search. There is nothing whatsoever on record to suggest that the assessment was based on materials unearthed during a search. As already mentioned rules of justice do require that the reports of investigation wing, relied on bythe ld. Assessing Officer, as well as the statement recorded from Mr.Sunil Dokania are put to the assessee and its explanation sought, before deciding whether these are relevant in the assessment of the assessee. I also find the SEBI through its order dated 21.09.2017(supra) did vacate its interim exparte order dated 29th March, 2016 restraining 244 entities, inter alia including M/s.Kailash Auto Finance Ltd., from buying, selling or dealing in securities. Thus the question whether the transactions claimed by the assessee, as giving rise to the long term capital gains exempt from tax u/s.10(38) of the Act, were real or sham, requires a re-visit by the ld. Assessing Officer. I 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.

Issues Involved:
1. Denial of claim of exemption under Section 10(38) of the Income Tax Act, 1961.
2. Allegations of transactions being sham and related to Penny Stock Companies.
3. Reliance on SEBI interim order and statement of Mr. Sunil Dokania.
4. Procedural fairness and adherence to natural justice.
5. Validity of assessment under Section 143(3) versus Sections 153A to 153D.

Issue-wise Detailed Analysis:

1. Denial of Claim of Exemption under Section 10(38) of the Income Tax Act, 1961:
The assessee claimed exemption under Section 10(38) for long-term capital gains from the sale of shares of M/s. Kailash Auto Finance Ltd. The Assessing Officer (A.O.) denied this exemption, arguing that the transactions were part of an organized racket to generate bogus entries for long-term capital gains. The A.O. relied on information from the Investigation Wing and SEBI's interim order, which suggested that the shares were artificially inflated through a scheme of amalgamation and manipulation in share prices.

2. Allegations of Transactions Being Sham and Related to Penny Stock Companies:
The A.O. argued that the transactions were sham, involving Penny Stock Companies like M/s. Kailash Auto Finance Ltd. The modus operandi included buying shares at nominal prices, artificially inflating their prices, and then selling them to claim tax exemptions. The A.O. cited the SEBI's interim order and the statement of Mr. Sunil Dokania, which detailed the manipulation and artificial inflation of share prices.

3. Reliance on SEBI Interim Order and Statement of Mr. Sunil Dokania:
The SEBI interim order dated 29.03.2016 described the manipulation of share prices and the artificial inflation of share values. The A.O. also relied on a statement from Mr. Sunil Dokania, who admitted to providing accommodation entries through various companies, including M/s. Kailash Auto Finance Ltd. However, the assessee argued that the SEBI interim order was later vacated in a final order dated 21.09.2017, and that the statement of Mr. Sunil Dokania was never provided to the assessee for cross-examination.

4. Procedural Fairness and Adherence to Natural Justice:
The Tribunal noted that the statement of Mr. Sunil Dokania and the report of the Investigation Wing were not made available to the assessee during the assessment proceedings. The rules of natural justice require that the assessee be given an opportunity to explain these documents and, if necessary, cross-examine Mr. Sunil Dokania. The Tribunal found that the A.O. did not inquire how the assessee became aware of the availability of the equity shares of M/s. Panchshul Marketing Ltd., which was not listed.

5. Validity of Assessment under Section 143(3) versus Sections 153A to 153D:
The assessee argued that the assessment should have been done under Sections 153A to 153D, as it was based on materials from a search. The Tribunal disagreed, stating that just because the investigation was based on leads from the Investigation Wing, it did not mean the assessment was pursuant to a search. There was no evidence to suggest that the assessment was based on materials unearthed during a search.

Conclusion:
The Tribunal set aside the orders of the lower authorities and remitted the issue back to the A.O. for fresh consideration. The A.O. was directed to provide the assessee with the statement of Mr. Sunil Dokania and the report of the Investigation Wing, and to allow the assessee to explain and cross-examine if necessary. The Tribunal emphasized the need for adherence to natural justice and a thorough re-examination of whether the transactions were real or sham. Appeals of all the assessees were allowed for statistical purposes.

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