Facts of the Case

The assessee’s case was selected for scrutiny based on AIR information regarding share transactions amounting to ₹59,84,641. The return of income for AY 2008-09 was filed declaring total income of ₹5,82,850.

Reassessment proceedings were initiated under Sections 147/148. During reassessment, the Assessing Officer found that the assessee had not disclosed transactions carried out through Kotak Securities. Information obtained revealed long-term capital gains (LTCG) of ₹39,67,163 from share transactions, which were not reported in the return of income. The assessee had also not disclosed the bank accounts used for such transactions.

Accordingly, the Assessing Officer added ₹39,67,163 as taxable income in the reassessment order passed under Section 143(3) read with Section 148.

Subsequently, the assessee filed a rectification application under Section 154 claiming that the LTCG was exempt under Section 10(38). The Assessing Officer rejected the application due to lack of documentary evidence and because an appeal against the assessment order was already pending.

The CIT(A) also dismissed the appeal against the rectification order.

Issues Involved

  1. Whether rectification under Section 154 can be sought when an appeal against the assessment order is pending.
  2. Whether exemption under Section 10(38) for LTCG on shares can be considered in rectification proceedings.
  3. Whether absence of documentary evidence justifies rejection of rectification application.

Petitioner’s Arguments (Assessee)

  • The LTCG earned from sale of shares was exempt under Section 10(38).
  • The Assessing Officer failed to consider the exemption claim.
  • Rectification was sought to correct a mistake apparent from the record.
  • The lower authorities rejected the application without examining merits.

Respondent’s Arguments (Revenue)

  • The assessee did not produce supporting documents before the authorities.
  • Exemption under Section 10(38) is conditional upon payment of Securities Transaction Tax (STT).
  • Without verification of evidence, the claim could not be accepted.

Court Findings / Order

The ITAT observed that both parties agreed the matter required fresh examination. The Tribunal held that the issue should be restored to the file of the Assessing Officer for de novo consideration.

The assessee was directed to produce complete evidence of share transactions, including proof that STT was paid and that all statutory conditions under Section 10(38) were satisfied.

The Tribunal clarified that:

  • If the conditions of Section 10(38) are fulfilled, exemption must be granted.
  • The issue does not involve complex reasoning and can be examined in rectification proceedings.
  • The burden of proof lies on the assessee to establish eligibility for exemption.

Accordingly, the appeal was allowed for statistical purposes and the matter was remanded to the Assessing Officer.

Important Clarification

The Tribunal emphasized that exemption claims under Section 10(38) depend on factual verification, particularly proof of STT payment. Rectification under Section 154 is not barred merely because an appeal on the assessment order is pending, especially when the issue can be resolved based on verifiable records.

Link to download the order -  https://itat.gov.in/public/files/upload/1694771718-ITA%20No.%2037%20alld%202022%20Aroti%20Ghosh%20New.pdf

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