Assessee entitled to fair hearing when SEBI reports used against LTCG exemption under section 10(38) without confrontation

ITAT Chennai held that where assessee claimed exemption u/s. 10(38) on LTCG from sale of shares, but AO rejected exemption treating shares as penny stocks and assessed unexplained credit u/s. 68, the matter must be remitted back to AO. The tribunal consistently ruled that when SEBI reports or Investigation Wing reports are used against assessee without confrontation, natural justice principles are violated. Since material gathered during investigation was never confronted to assessee, appeal was allowed for statistical purposes with directions to AO to provide opportunity of being heard.

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Issues:
1. Addition of unexplained profit on sale of shares under section 68 of the Income Tax Act.
2. Rejection of claim of exemption under section 10(38) of the Income Tax Act.
3. Validity of the assessment order and procedural compliance requirements under section 142(3) of the Act.

Issue 1: Addition of unexplained profit on sale of shares under section 68:
The appeal pertained to the confirmation by the CIT(A) of the AO's action in treating the profit from the sale of shares as unexplained credit under section 68 of the Act. The appellant claimed the profit as exempt under section 10(38) of the Act. The AO based the decision on reports from the Investigation Wing of Kolkata and Delhi, as well as SEBI reports, indicating that the transaction was sham. Both the AO and CIT(A) concluded that the transaction was a colorable device to account for unaccounted money. The appellant failed to substantiate the genuineness of the transaction, leading to the confirmation of the addition by the CIT(A).

Issue 2: Rejection of claim of exemption under section 10(38):
The appellant's claim for exemption under section 10(38) in relation to the profit earned from the sale of shares was disallowed by the AO and confirmed by the CIT(A). The authorities found that the transaction was sham in nature and a colorable device to portray unaccounted money as Long Term Capital Gain. The appellant's reliance on documents and papers to support the transaction was deemed insufficient to prove the genuineness of the transaction. The CIT(A) upheld the AO's decision, citing relevant case law and emphasizing the need to consider the true nature of the transaction rather than the entries in the books of accounts.

Issue 3: Validity of the assessment order and procedural compliance requirements under section 142(3):
The Tribunal noted a consistent view in cases involving penny stocks where reports from SEBI and Investigation Wings were not confronted to the assessee. Following previous decisions, the matter was remanded back to the AO for confronting the material used against the assessee. The Tribunal emphasized the mandatory nature of compliance with section 142(3) of the Act, stating that failure to comply could vitiate the assessment. Referring to relevant case law, the Tribunal directed the AO to provide a fair hearing and furnish necessary details to the assessee. The Tribunal set aside the orders of the CIT(A) and AO, restoring the matter for fresh adjudication while ensuring the assessee's right to be heard and cooperate in the assessment proceedings.

In conclusion, the judgment addressed the issues of addition of unexplained profit on sale of shares, rejection of claim of exemption under section 10(38), and the validity of the assessment order regarding procedural compliance requirements under section 142(3) of the Income Tax Act. The Tribunal upheld the decisions of the authorities regarding the transaction being sham and a colorable device, while emphasizing the need for procedural compliance and fair hearing in assessment proceedings.

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