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Facts
The assessee claimed exemption on sale of shares under Section 10(38) of the Income Tax Act. The Assessing Officer (AO) treated the shares as penny stock and disallowed the exemption, making additions. The Commissioner of Income Tax (Appeals) confirmed the AO's order. The assessee appealed to the Income Tax Appellate Tribunal (ITAT). The ITAT noted that the AO was not aware of CBDT guidelines for penny stock cases and, following its own earlier decision in a similar case involving the same scrip, remanded the matter to the AO for fresh adjudication.
Held
The ITAT held that the AO's assessment order was flawed because it did not adhere to the CBDT guidelines for penny stock cases. The Tribunal noted that the assessee's grounds of appeal and the scrip involved were similar to a previous case decided by a coordinate bench. Relying on that precedent, the Tribunal decided to remand the matter back to the AO for a denovo assessment.
Key Issues
Whether the shares are to be treated as penny stocks and whether exemption under Section 10(38) is allowable; whether the AO followed the prescribed guidelines for assessing penny stock cases.
Sections Cited
10(38), 143(2), 142(1), 68, 115BBE, 69C, 234A, 234B, 234C, 144, 148
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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SHRI PRAKASH CHAND YADAV
PER SHRI PRAKASH CHAND YADAV, JUDICIAL MEMBER :
Present appeal filed by the assessee against the order passed by the NFAC, Delhi dated 23/01/2024 having DIN No. ITBA/NFAC/S/250/2023-24/1060016149(1) for the assessment year 2015- 16.
The grounds of appeal
raised by the assessee are as under:- “1. That the order of the authorities below in so far as it is against the assessee is opposed to law, facts, circumstances, natural justice, equity all other known principles of law.
2. That the total income and total tax computed is hereby disputed.
3. The authorities below erred in not providing sufficient and adequate opportunity to the appellant as required under law, thereby violating the principles of natural justice, hence the order requires to be cancelled.
4. That the Assessing Officer erred in relying on the sworn statement of Shri Sajjan Kedia dt.13.06.2014 without furnishing the same to the assessee before passing the assessment order.
5. That the Assessing Officer erred in relying on the Special Investigation Team Report without furnishing the same to the assessee before passing the assessment order. 6. That the authorities below erred in not providing complete statements of persons before calling for objections from the assessee. 7. That the authorities below erred in relying on statements without providing opportunity to cross examine. 8. That the Assessing Officer erred in submitting remand report without following the principles of natural justice and overlooking the grounds taken by the assessee. Further the CIT-Appeals erred in relying on such a remand report. 9. That the authorities below erred in relying on irrelevant material while ignoring the relevant material. 10. That the authorities below erred in treating the capital gains declared by the assessee from transfer of shares of M/s. PSIT Infrastructure & Services Limited (formerly known as Parag Shilpa Investments Ltd) of Rs.32,49,47,192/- u/s 68 rws 11 5BBE of the IT Act. 11. That the authorities below erred in treating the purchase consideration of M/s. PSIT Infrastructure & Services Limited (formerly known as Parag Shilpa Investments Ltd) of Rs.44,19,350/- u/s 68 rws 115BBE of the IT Act. 12. That the authorities below erred in resorting to section 68 and section 115BBE of the Act. Further erred in holding the sum of Rs.32,93,66,542/- as unexplained in nature. 13.That the authorities below erred in refusing to apply the beneficial treatment provided under the Act of the Capital gains earned by the assessee from the transfer of shares in M/s. PSIT Infrastructure & Services Limited (formerly known as Parag Shilpa Investments Ltd) of Rs. 32,49,47,192/-. 14. That the authorities below erred in making addition of Rs.98,80,997/- u/s 69C of the Act without adducing any evidence in support of the same. 15. That the authorities below erred in estimating 3% of sale consideration of shares as the commission paid u/s 69C of the Act merely on surmise. 16. The appellant denies the liabilities for interest u/s 234A, 234B and 234C of the Act. Further prays that the interest if any should be levied only on returned income. 17. No opportunity has been given before levy of interest u/s 234A, 234B and 234C of the Act. 18. Without prejudice to the appellant's right of seeking waiver before appropriate authority, the appellant begs for consequential relief in the levy of interest u/s 234A, 234B and 234C of the Act.
For the above and other grounds and reasons which may be submitted during the course of hearing of the appeal, the assessee requests that the appeal be allowed as prayed and justice be rendered.”
The assessee is an individual field his return of income(ROI) for the impugned assessment year on 30/03/2016 declaring gross total income of Rs.2,44,77,947/-. Thereafter, the case of the assessee was selected for scrutiny and statutory notices us/ 143(2) and 142(1) of the Income-tax Act were issued to the assessee. During the course of assessment proceedings, the AO observed that the assessee has claimed exemption of Rs.28,57,58,962/- u/s 10(38) of the Act on account of sale of shares of M/s PSIT infrastructure and services limited (hereinafter PSIT for the sake of convenience).
In the course of assessment proceedings, the assessee, in support of his claim has filed documents such as, share certificates, DMAT account details, share purchase details, contract notes for sale of shares etc.. On query from the Bench the Ld AR clarified that the shares were purchased in 20.07.2012 and payments were made by cheque. All these facts are explained by the assessee before the AO vide his reply dated 20.11.2017, copy of the reply and evidences filed before the AO are annexed in Paper Book- Page Number 103-119. However, the ld. AO relying upon the reports of investigation wing as well as certain other reports of agencies concluded that the impugned shares of M/s PSIT was penny stock and hence the assessee is not entitled for the benefit of sec. 10(38) of the Act.
Aggrieved with the order of the AO, the assessee preferred an appeal before the ld.CIT(A) and assailed the order of the AO. However, the ld. CIT(A) could not find force in the arguments of the assessee and affirmed the order of the AO. The ld. CIT(A) has extensively relied upon the . judgment of the of Hon’ble Calcutta High Court in the case of PCIT Vs. Swati Bajaj reported in [2022] 139 taxmann.com 352 (Cal).
Aggrieved with the order of ld. CIT(A), the assessee is in appeal before us and has raised the grounds as extracted above.
At the outset, the ld. Counsel for the assessee submitted that in assessee’s own case, the Hon’ble ITAT in & 379/Bang/2020 vide order dated 29/08/2022 for the assessment year 2012-13 and 2013-14 has remanded the matter back to the AO for fresh adjudication, though the scrip involve there was a different scrip.
The ld. DR appearing on behalf of revenue has relied upon the judgment Hon’ble Calcutta High Court in the case Pr. CIT Vs. Swati Bajaj cited supra and argued that appeal of the assessee may kindly be dismissed.
We have heard both the parties and perused the materials available on record. Before commenting upon the merits of the case, we would like observe that there are certain Standard Operating Procedures formulated by the CBDT and Circulated among the Departments on vide notification number 225/291/2019-ITA-II dated 11/10/2019. In these SOPs, the CBDT has laid down certain guidelines vis-a-vis the manner in which, the assessment of alleged penny stock cases are to be framed.
9.1 We, further note that when the Bench has asked the ld. DR as to whether these guidelines are followed by the AO while framing the impugned assessment. The ld. DR candidly accepted that the AO was not aware of these guidelines. Now We would like to make a reference to the . decision of the Co-ordinate Bench in the assessees own case, therein it has been dealt as under:-
“12. We note that the issue of sale of shares in case of Blue Circles has been considered by Coordinate Bench of this Tribunal in the case relied by the Ld.AR (supra) by observing as under: “6.4. In present facts of the case, the statements recorded of third parties only reveal that the alleged companies involved in providing bogus LTCG/STCG or LTCL/STCL and provide accommodation entries by beneficiaries. We note that the Ld.AO in para 7.11 for AY 2013-14 raised serious doubts on capacity of assessee to purchase shares of these companies in such huge volumes, which has not been satisfactorily/reasonably established by assessee to be genuine. Assessee thus did not establish genuineness of purchase and source of investment of this company during the relevant period. 6.5. Ld.AO upon verifying credentials of these companies and other attending circumstances, observed that alleged companies were included in list of penny stock companies, in enquiries conducted by SEBI/BSE, as well as in Investigation Report issued by Investigation Wing, Kolkata. The Assessee having purchased shares of this company in huge volumes, should have possessed all required documents, as a prudent investor. The Assessee thus did not establish activities/business of companies, financial statements, annual income tax returns etc., in respect of alleged companies. In the above list of decisions, relied by the Ld.AR, we note that the Hon’ble Mumbai Tribunal deleted the addition on the basis that the assessee therein established the sale of shares to be genuine and therefore the disallowance of LTCG is unwarranted for. However in the present facts of the case, the Ld.AO has doubted the capacity of assessee in making such huge investment in the alleged comapnies during the year in which they were purchased. 6.7. The decision of Hon’ble Delhi, Bombay and Madras High Courts is also on distinguishing facts. In those cases, the statements of third person recorded were direct evidence against the assessed person and cross examination was denied by the revenue. Under such circumstances, Honble Courts held that there was violation of natural justice. 6.8 Therefore in our view, none of the decisions are of any help to assessee on merits in the present facts of the case. The Ld.AR relied heavily on the decision of coordinate bench of this Tribunal in Shri.Lxmipat Dudheria Vs.ACIT in to 2376/Bang/2018 by order dated 09/04/2019, wherein investment in Bule circles Services Ltd by the assessee therein and the there assessment was reopened which was struck down by this Tribunal. We note that in the decision by this Tribunal nothing is decided on merits but the entire decision was on the validity of reopening where there the assessment order was passed under section144 of the Act. We therefore are of the opinion that the decision is of no rescue to assessee.
6.9. We are conscious of principle laid down by Hon’ble Supreme Court in case of M/s Andaman Timber Industries vs CCE, Kolkata-II, reported in (2015) 127 DTR 241, in support of his contention as well as decision of Hon’ble High Courts relied by the Ld.AR. All these decisions lay down that, without opportunity of cross-examination, statements cannot be relied upon against any asessee. However, such right, as held in various decisions by Hon’ble Supreme Court, is not an absolute right and depends on circumstances of the case and the statute concerned, as held in State of J&K Vs. Bakshi Gulam Mohd. AIR 1967 (SC) 122, and Nath International Sales Vs. UOI reported in AIR 1992 Del 295. Similar is the view taken by Hon’ble Allahabad High Court in case of In case of Prem Castings Pvt.Ltd. Vs.CIT (Supra). 6.10. At this juncture we referred to decision of T.Devasahaya Nadar V. CIT reported in (1964) 51 ITR 20 (Mad), wherein, it has been held that; "We are of opinion that it cannot be said as a general proposition of law that any evidence upon which the department might rely should have been subjected to cross-examination. The procedure for assessment is indicated in section 23 (3) of the Act.” 6.11. Further Hon’ble Mumbai Tribunal in case of GTC Industries Ltd. V. Asstt. CIT reported in (1998) 60 TTJ 308 , held that, where statement and report of third parties are only secondary and subordinate material which were used to buttress the main matter connected with the quantum of addition, denial of opportunity to cross examine third parties did not amount to violation of natural justice. 6.12. Therefore, each case has to be decided on facts and circumstances of that case. In our considered opinion, relevant factors to be considered are surrounding circumstances, objective facts, evidence adduced, presumption of facts based on common human experience in life and reasonable conclusions. 6.13. Under such circumstances, the assessee was liable to discharge its onus regarding purchase of shares by way of cogent documentary evidences. We note that assessee has not placed anything on record regarding the source of investments and capacity to invest such huge monies during the year in which the investments were made. Be that as it may, we also note that, the assessee having invested huge monies in these alleged companies, has not been able to provide any documents to establish sound financial of these companies and that, the fluctuation in price was market driven. Assessee is therefore directed to provide all relevant documents to establish source of investment and capacity to invest in the alleged companies in the year of investment. Ld.AO shall take all evidences into consideration and then decide the issue as per law. 6.14. At the outset we also hold that the statements recorded are secondary and subordinate evidence, and therefore cross examination is not relevant. Ld.AO is directed to re-examine the case of assessee in the light of aforestated direction in accordance with law. Needless to say that proper opportunity shall be granted to assessee to represent its case as . per. Accordingly we allow grounds on merits raised by assessee for statistical purposes for all the years under consideration.”
Para 6.8 has been rectified wherein the following amendment was issued by way of M.P. No. 41/Bang/2022 by order dated 01/07/2022. “3. We note that section 148 also has to be mentioned in the said para which was missed out originally. Henceforth the limited portion of para 6.8 shall be read as under: “6.8…………….We note that in the decision by this Tribunal nothing is decided on merits but the entire decision was on the validity of reopening where there the assessment order was passed under section 144 r.w.s. 148 of the Act. We therefore are of the opinion that the decision is of no rescue to assessee.” ”
We note that the scrip involved in the present facts of the case is also Blue Circle Services Ltd. and the assessee before us had earned long term capital gains that was treated as exempt u/s. 10(38) of the Act. The arguments advanced by the Ld.AR are identical with that raised in the case of M/s. Sarita Dudheria vs. ACIT (supra) before this Tribunal. Respectfully following the view taken by Coordinate Bench of this Tribunal in that case (hereinabove), we remand the present case back to the Ld.AO. Based on the above, we remand the present case back to the Ld.AO to be decided in accordance with the principles laid down hereinabove. Accordingly, the appeal filed by the assessee for Assessment Year 2013- 14 stands allowed for statistical purposes. In the result, the appeal filed by the assessee for A.Y. 2013-14 stands allowed for statistical purposes.
Respectfully following the above decision of the Co-ordinate Bench in assessee’s own case and in view of fact that the AO has not adhered to the guidelines of CBDT (Supra), we remit this matter to the file of the AO to frame denovo assessment keeping in view of the CBDT guide lines. Hence, the appeal is allowed for statistical purposes.