2018 (9) TMI 1401 - 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 - As relying on MR. VIMALCHAND GULABCHAND, MR. PRAVEEN CHAND, MR. GATRAJ JAIN & SONS (HUF) , MR. MAHENDRA KUMAR BHANDARI VERSUS THE INCOME TAX OFFICER, CHENNAI 2018 (4) TMI 701 - ITAT CHENNAI 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.

Summary

Issues:
- Denial of exemption of long term capital gains under section 10(38) of the Income Tax Act
- Treatment of the sum as unexplained income under section 68 of the Act

Analysis:
1. The appeal challenged the order denying exemption of long term capital gains of ?25,20,625 arising from the sale of shares under section 10(38) of the Income Tax Act. The assessee contended that the lower authorities disbelieved the sale of shares based on reports from the Directorate of Income Tax, Kolkata and Delhi, labeling M/s. Kappac Pharm Ltd as a penny stock company. The assessee argued that the purchase of shares was genuine, albeit off-market, and the sale was conducted through a recognized stock exchange. The assessee claimed that statements relied upon by the authorities were not provided for rebuttal, emphasizing the need for adherence to the rules of natural justice as per precedents cited by the authorized representative.

2. The Departmental Representative supported the lower authorities' decision, asserting sufficient grounds to doubt the transactions involving shares of M/s. Kappac Pharm Ltd. Lack of evidence regarding the identification of shares for off-market purchase was highlighted. A previous decision by a Co-ordinate Bench was referenced to strengthen the argument against the assessee.

3. Upon review, it was acknowledged that the long term capital gains in question arose from the sale of shares of M/s. Kappac Pharm Ltd, acquired through an off-market transaction. The Tribunal referred to similar cases where exemptions under section 10(38) were claimed, emphasizing the importance of natural justice principles. Citing specific instances, the Tribunal highlighted the necessity of providing opportunities for cross-examination and substantiating claims, ultimately remitting the issue back to the Assessing Officer for reevaluation in accordance with the law.

4. The Tribunal drew parallels with a Co-ordinate Bench decision involving suspicion-based assessments unsupported by concrete facts. The necessity of factual substantiation, particularly regarding share transactions, was emphasized. The Tribunal stressed the importance of providing adequate opportunities for the assessee to substantiate claims and address inconsistencies, ultimately directing a revisit by the Assessing Officer to ensure compliance with legal procedures.

5. In conclusion, the Tribunal partially allowed the appeal for statistical purposes, emphasizing the need for a thorough reevaluation by the Assessing Officer to determine the legitimacy of the capital gains claim. The importance of adhering to natural justice principles, providing opportunities for cross-examination, and ensuring compliance with legal procedures was underscored, aligning with established legal precedents and the principles of fair assessment practices.