AO Erred in Disallowing ₹1.89 Cr Penalty & Other Expenses: ITAT remands ₹73.26 Lakh UIL Penny-Stock Loss for Fresh Examination [Read Order]

The Kolkata bench of Income Tax Appellate Tribunal ( ITAT ) held that the AO erred in disallowing ₹1.89 Cr penalty and other expenses. The bench remanded ₹73.26 Lakh UIL penny-stock loss for fresh examination.

The assessee, Shyam Metalics and Energy Ltd had sold shares of UIL at a loss of Rs. 1,89,53,757/-. Though the assessee had furnished contract notes, bank statements and other documents in support of the sale of shares of UIL, as per the Investigation Wing database, the share of UIL was a penny stock which was being used by entry operators to provide bogus accommodation entries in the guise of capital gains or losses.

The AO held that the loss of Rs 1,89,53,757/- incurred on shares of UIL was not genuine and therefore added the same by way of cash credit.

In the appellate proceedings, the CIT(A) confirmed the order of the AO. Being aggrieved by the order of the CIT(A), the assessee proceeded with an appeal.

The assessee submitted that the loss quantified by the AO was factually incorrect. He pointed out that the impugned loss figure was a summation of loss incurred on the sale of several listed shares and that the loss incurred in shares of UIL was only Rs. 73,26,040/- and not Rs 1,89,53,757/-.

He contended that neither the purported report of the Investigation Wing, statement of brokers, nor statement of entry operators, etc., was provided to him, nor was he provided with a fair opportunity to rebut the same.

The assessee argued that the impugned disallowance was made in gross violation of principles of natural justice and submitted that the impugned issue ought to be set aside.

The two member bench of Pradip Kumar Choubey ( Judicial Member) and Rajesh Kumar (Accountant Member) held that there was prima facie merit in the assessee’s plea that the correct quantum of loss incurred on sale of shares of UIL was Rs.73,26,040/- and the lower authorities had grossly erred in disallowing the entire gross short term capital loss of Rs.1,89,53,757/-. The AO was directed to delete the excess loss of Rs. 1,16,27,717/- incorrectly disallowed.

As far as the allowability of short-term capital loss of Rs. 73,26,040/- incurred in the sale of shares of UIL is concerned, the Tribunal observed that the AO had passed a cryptic order alleging the impugned loss to be bogus.

It was observed that though the AO had cited reports of the Investigation Wing enlisting UIL as a penny stock and statements of several brokers who were manipulating the scrip of UIL, none of these details were communicated to the assessee. It is seen that no show cause was also given to the assessee before making the impugned addition.

The Bench held that the assessee is entitled to a right of fair hearing. Thus, the Tribunal set aside the issue involving the disallowance of loss incurred in shares of UIL back to the file of the AO to examine the same afresh.

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