2024 (1) TMI 1062 - AT - Income Tax

Bogus share transactions - disallowance of loss in respect of transaction of the shares - Reliance on the statement of broker/entry operator - exemption u/s 10 (38) with respect to alleged income under the head Long Term Capital Gain on sale of shares of penny stock - as argued by assessee statement as been recorded from entry operator by the DDIT (Investigation) Kolkata was not provided to be cross examined - HELD THAT - It is trite law that if any evidence is available with the Revenue and the same is going to be used against the assessee, it is compulsory that such evidence must be put to the assessee for assessee s cross examination or rebuttal. The denial of opportunity of cross examination by the AO itself is absolute failure of principles of natural justice and this itself will make the evidence to be discarded. Other than the statement of Shri Sanjay Vora, the Assessing Officer is not in possession of any evidence to show that the transaction entered into by the assessee in respect of purchase and sale of shares of Shreenath Commercial and Finance Ltd., as colourable device, is available. The assessee on the contrary has produced ledger accounts, purchase bills, sale bills and even bank account statement in respect of the transaction. It was very much open to the AO to invoke his powers u/s. 133(6) of the Act or to call for information from the stock brokers. This has not been done. AO has blindly relied upon the statement recorded from one stock broker who has given names of various companies and Shreenath Commercial and Finance Ltd., is also one of them. The shares purchased by the assessee and sold by the assessee are on Bombay Stock Exchange. STT has also been clearly paid on both the transactions. These are not off-line transactions. AO has also not considered the fact that the assessee had to sell the shares of Maa Tarini Industries Ltd., to protect itself from the financial loss caused on account of loss incurred in the transactions of shares of Shreenath Commercial and Finance Ltd. This being so, respectfully following the principles laid down in the case of Smt. Bimala Devi Singhania ( 2023 (10) TMI 1351 - ORISSA HIGH COURT the disallowance of loss in respect of transaction of the shares of Shreenath Commercial and Finance Ltd., in the case of the assessee as made by the AO and as confirmed by the ld CIT(A) stands reversed. Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Long Term Capital Loss (LTCL) on shares of Shreenath Commercial & Finance Ltd.
2. Denial of cross-examination opportunity.
3. Validity of transactions under Section 10(38) of the Income Tax Act, 1961.

Summary:

Disallowance of Long Term Capital Loss (LTCL) on shares of Shreenath Commercial & Finance Ltd.:
The assessee reported income from capital gains and other sources, including LTCL from trading in Shreenath Commercial & Finance Ltd. The Assessing Officer (AO) disallowed the LTCL on the grounds that the shares were involved in suspicious transactions. The AO relied on a statement from Shri Sanjay Vora, recorded under Section 131, indicating that Shreenath shares were used for penny stock transactions. However, the AO accepted the long-term capital gain (LTCG) from the sale of shares of Maa Tarini Industries Ltd. The assessee argued that the AO's reliance on Vora's statement was misplaced as Vora did not specifically name the assessee.

Denial of cross-examination opportunity:
The assessee requested to cross-examine Shri Sanjay Vora, which the AO denied, citing the sworn statements of brokers and entry operators. The Tribunal held that denying the cross-examination opportunity was a violation of natural justice principles. The AO's reliance on Vora's statement without allowing cross-examination was deemed insufficient. The Tribunal emphasized that evidence used against the assessee must be open for cross-examination.

Validity of transactions under Section 10(38) of the Income Tax Act, 1961:
The Tribunal referred to the High Court of Orissa's judgment in the case of Bimal Devi Singhania, which clarified that for exemption under Section 10(38), the shares must be held for more than a year, sold on a recognized stock exchange, and subject to Security Transaction Tax (STT). The assessee fulfilled these conditions for the shares of Maa Tarini Industries Ltd. The Tribunal noted that the AO failed to provide concrete evidence against the assessee and did not utilize powers under Section 133(6) to verify the transactions. The Tribunal concluded that the AO's disallowance of LTCL was unjustified, reversing the AO's and CIT(A)'s orders.

Conclusion:
The appeal of the assessee was allowed, and the disallowance of LTCL on Shreenath Commercial & Finance Ltd. was reversed. The Tribunal upheld the principles of natural justice and the conditions for exemption under Section 10(38). The order was pronounced in the open court on 01/12/2023.