Assessee Can Claim LTCG Exemption During Assessment Despite Survey Statements

PCIT Vs Kuntala Mohapatra (Supreme Court of India)

Introduction: The Supreme Court of India recently delivered a significant judgment in the case of PCIT Vs Kuntala Mohapatra, addressing the eligibility of Long Term Capital Gains (LTCG) for exemption under Section 10(38) when transfers occur through banking channels,  stock exchanges and there was violation of Natural Justice.  In this judgment Supreme Court has upheld the judgment of Orissa High Court.

Detailed Analysis:

1. Background of the Case: The appeal by the Revenue stemmed from a decision by the Income Tax Appellate Tribunal (ITAT) dismissing the Revenue’s appeal against the Commissioner of Income Tax (Appeals) for the assessment years 2014-15 which was upheld by High Court.

2. Key Question Raised: The central question raised was whether the Assessee could claim exemption under Section 10(38) after initially not doing so during the assessment proceedings.

3. Factual Details and Legal Interpretation: The ITAT thoroughly examined the factual details of the case concerning the Assessee. It focused on the claim of long-term capital gains on shares under Section 10(38). The Assessee filed a revised return during scrutiny assessment, claiming the exemption. The ITAT noted that the shares were purchased via Account Payee Cheques, held in a Demat Account for over 12 months, and sold through recognized stock exchanges after paying security transaction tax.

4. Adherence to Principles of Natural Justice: The ITAT also highlighted the failure of the Revenue to provide an opportunity for cross-examination of the entry providers whose statements were used as a basis for additions under Sections 68 and 9 of the IT Act. This lack of opportunity to challenge statements was deemed a violation of natural justice.

5. Court’s Decision and Legal Justification: The Court upheld the ITAT’s decision, emphasizing that both grounds – the claim for Section 10(38) benefit and the denial of an opportunity to cross-examine – were factual matters. It affirmed the ITAT’s ruling that adherence to natural justice principles was crucial. Additionally, the Court noted the relevance of the CBDT circular permitting revised returns for omitted claims.

Conclusion: In conclusion, the Supreme Court’s judgment in PCIT Vs Kuntala Mohapatra reaffirms the importance of adhering to principles of natural justice in tax proceedings. It clarifies the eligibility criteria for LTCG exemption under Section 10(38), particularly emphasizing transactions conducted through banking channels and stock exchanges. This ruling sets a precedent for future cases involving similar issues and underscores the significance of fair procedures in tax assessments.

FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER

Delay condoned.

Heard the learned Additional Solicitor General.

We are not inclined to interfere with the impugned judgment and order passed by the High Court. Hence, the Special Leave Petition is dismissed.

Pending application(s), if any, shall stand disposed of.

FULL TEXT OF THE JUDGMENT/ORDER OF ORISSA HIGH COURT

01. 1. This appeal by the Revenue arises from an order dated 21st December, 2021 passed by the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack (ITAT) dismissing the Revenue’s appeal i.e. ITA No.50/CTK/2020 against the corresponding order of the Commissioner of Income Tax (Appeals) [CIT(A)] for the assessment years (AY) 2014-15.

2. The question sought to be urged by the Revenue Department in the present appeal is as follows:

“Whether after making certain statements in the survey the Assessee not claiming exemption under Section 10(38) of the Income Tax Act, 1961 at the stage of the assessment proceedings, could be the Assessee turned around and make such claim of wanting to cross examine persons make adverse statements against the Assessee at the stage of the appeal before the ITAT”?

Assessee can claim LTCG exemption during Assessment despite  making certain statements in the survey the Assessee not claiming exemption under Section 10(38)

3. The impugned order of the ITAT has sufficiently dealt with the factual details concerning the Respondent-Assessee. The question was regarding the claim of long-term capital gains on shares in terms of Section 10(38) of the Act. During the course of scrutiny assessment, a revised return was filed by the Assessee claiming the above exemption. After the AO rejected the plea, the Assessee went before the CIT(A). The CIT(A) was satisfied that the purchase of liquid shares have been made through Account Payee Cheques and the shares themselves were held in Demat Account for more than 12 months and then sold through the recognized stock exchange after payment of security transaction tax. A reference was made to the CBDT circular which debarred the Revenue from obtaining admissions/ statements during the course of a survey. The ITAT also noted the settled position in law that if an Assessee has wrongly offered an item of income or omitted to make a claim of deduction in the return, he was entitled to correct such a mistake by making a request to the AO to that effect.

4. Another ground on which the ITAT found fault with the additions made by the AO was that reliance was placed on statement of ‘so called entry operator’ to justify the additions under Sections 68 and  9 of the IT Act. These statements were recorded on various dates in some other proceedings not connected with the Assessee. Further, the statements were recorded much before the date of the survey conducted on the Assessee. It was unable to be disputed by the Department that the Assessee did not have an opportunity to challenge such statements and further, no opportunity to cross-examine the so-called entry providers was given to the Assessee.

5. Having heard learned Senior Standing Counsel for the Department (Appellant) and having perused the impugned orders of the AO, CIT(A) and the ITAT, the Court finds that both the grounds viz., the claim for benefit of Section 10(38) of the Act and denial of an opportunity to cross examine the entry providers, turned on facts. The ITAT was justified in accepting the plea of the Assessee that the failure to adhere the principles of natural justice went to the root of the matter. Also, the CBDT circular that permitted to the Assessee to file revised returns if he omitted to make a claim was also not noticed by the AO.

6. In the considered view of the Court, the ITAT committed no error in concurring with the view of the CIT(A) and in dismissing the Revenue’s appeal. No substantial question of law arises from the impugned order of the ITAT that calls for interference by this Court. The appeal is accordingly dismissed.