LTCG exemption denied for Penny stock set aside by ITAT as AO not confronted the assessee

LTCG exemption denied for Penny stock set aside by ITAT as AO had placed reliance on documents not confronted to the assessee

ABCAUS Case Law Citation:
ABCAUS 3000 (2019) (06) ITAT

Important Case Laws Cited/relied upon by the parties:
Kothari Metals Vs. ITO
Mr. Sunil H Ashar Vs. ITO
K.L Tripathi Vs. State Bank of India (1984) AIR 273

The assessee was aggrieved by the decision of CIT(A) in confirming the assessment of income from sale of share as income of the assessee, rejecting the claim of long term capital gain and consequently denying exemption claimed u/s 10(38) of the Income tax Act 1961 (‘the Act’).   

The assessee had declared long term capital gains on sale of shares of M/s PS IT infrastructure Ltd. The Assessing Officer (AO), on noticing that the above said share is categorized as Penny stock, disbelieved the long term capital gains declared by the assessee.

Accordingly he assessed the sale proceeds of shares as income of the assessee. The CIT(A) also confirmed the same.

Before the Tribunal the assessee submitted that the AO had passed the impugned order on the basis of report received from investigation wing with regard to alleged penny stocks and also by placing reliance on the statements given by certain share brokers.

He further submitted that the AO also placed reliance on the report of SEBI. He submitted that none of these documents were confronted with the assessee and accordingly contended that the impugned order had been passed in violation of principles of natural justice.

Accordingly it was submitted that matter may be restored to the file of the AO for examining the same afresh after providing to the assessee all the documents that were relied upon by the AO.

On the contrary, the Revenue submitted that the AO did not rely on sworn statements given by brokers. Accordingly he submitted that there was no necessity to provide opportunity of cross examination to the assessee. He further submitted that the assessee did not ask for various documents that were relied upon by the AO and hence there was no occasion for the AO to provide the same.

The Tribunal noticed that it was the AO who had identified the above said stock as penny stock on the basis of report given by Investigation Wing and also the report of SEBI. The AO had also recorded that the Director of Investigation had investigated transactions in 84 penny Stock shares and also examined the promoters of said companies, entry operators who managed the price rigging of the shares.

Thus, the Tribunal noted that the AO had placed reliance on certain documents and the same had not been confronted to the assessee in order to reject the claim of long term capital gain.

The Tribunal set aside the order passed by CIT(A) and restore all the issues to the file of the AO with the directions to confront with the assessee all the documents that were relied upon by him in accordance with law.

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