2022 (5) TMI 1625 - AT - Income Tax

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 ... Unexplained credit u/s. 68 - exemption u/s. 10(38) - penny stock - sham transaction - confrontation of investigation material - mandatory compliance of section 142(3) - remand for fresh adjudicationUnexplained credit u/s. 68 - exemption u/s. 10(38) - penny stock - sham transaction - Validity of the addition treating the capital gain from sale of shares as unexplained credit and rejection of exemption claimed as long term/penny stock gains. - HELD THAT: - The Tribunal did not decide the merits of the AO's and CIT(A)'s finding that the transactions in NCL Research & Financial Services Ltd. were sham/penny stock and that the capital gain was an unexplained credit. Instead, having noted that material from investigation (SEBI and Investigation Wing reports) relied upon by the AO was not confronted to the assessee, the Tribunal set aside the orders of the AO and CIT(A) and restored the matter to the file of the AO for fresh adjudication. The Tribunal expressly refrained from expressing any view on the substantive correctness of the addition or the denial of exemption, limiting itself to procedural directions that the AO must reconsider the issue after furnishing all material relied upon and giving the assessee a reasonable opportunity of hearing. [Paras 4, 14]Matter remitted to the Assessing Officer for fresh adjudication after furnishing the investigation material to the assessee; no adjudication on merits.Confrontation of investigation material - mandatory compliance of section 142(3) - remand for fresh adjudication - Whether failure to furnish and confront investigation material requires remand and vitiates the assessment. - HELD THAT: - The Tribunal held that compliance with the procedural requirement under section 142(3) of the Act to furnish statements/material on which adverse findings are based is mandatory. Where such material relied upon by the AO (for example, investigation or SEBI reports) was not made available to the assessee or confronted, the Tribunal followed High Court and coordinate bench precedents and directed that the assessment be set aside and remitted to the AO. The AO was directed to comply with the statutory requirement, furnish the material to the assessee, and afford a reasonable opportunity of hearing; failure to do so may vitiate the assessment proceedings. [Paras 4, 5, 14]Assessment set aside and remitted; AO to furnish all material relied upon, comply with section 142(3) and afford opportunity of hearing; appeal allowed for statistical purposes.Final Conclusion: The Tribunal set aside the orders of the AO and CIT(A) and remitted the matter to the Assessing Officer for fresh adjudication of the disputed capital gain/addition after mandatory compliance with the requirement to furnish and confront the investigation material under section 142(3), without expressing any view on the merits; the appeal is allowed for statistical purposes. 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.