2009 (2) TMI 828 - AT - Income Tax

Summary

Issues Involved:
1. Validity of reassessment proceedings under Section 148.
2. Genuineness of the transaction involving the purchase and sale of units of J.M. Mutual Fund.
3. Addition made under Section 68 of the Income Tax Act for unexplained cash credits.

Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 148:
The assessee challenged the validity of the reassessment proceedings initiated by the Assessing Officer (AO) under Section 148 of the Income Tax Act. The AO issued a notice on 15th Feb 2005, based on information received that M/s S.K. Garg & Co. was declared a defaulter by the stock exchange and that transactions involving J.M. Mutual Fund were arranged. The CIT(A) upheld the reassessment proceedings, but the assessee contended that the reasons recorded for initiating the proceedings were based on incorrect assumptions and irrelevant material.

The tribunal observed that the belief entertained by the AO must not be arbitrary or irrational and that there must be a direct nexus or live link between the material coming to the notice of the AO and the formation of his belief. The tribunal found that the reasons recorded by the AO were not relevant and did not afford a valid basis for issuing the notice under Section 148. The tribunal quashed the notice and the reassessment proceedings, stating that the reasons to believe must be held in good faith and should have a rational connection and relevant bearing on the formation of the belief.

2. Genuineness of the Transaction Involving the Purchase and Sale of Units of J.M. Mutual Fund:
The AO observed that the transaction involving the purchase and sale of units of J.M. Mutual Fund was a sham and a colorable device to evade taxes. The AO noted that the assessee purchased units of J.M. Mutual Fund for Rs. 2 crores and redeemed them within three days, resulting in a dividend income of Rs. 58,06,451 and a loss of Rs. 63,48,387.10. The AO concluded that the transaction was not genuine and was undertaken to bring undisclosed income into the books as exempt income.

The CIT(A) deleted the addition made by the AO, holding that the transaction was a genuine business transaction. The tribunal upheld the order of the CIT(A), referring to the decision of the Bombay High Court in the case of Wallfort Shares & Stock Brokers Ltd., which approved the genuineness of similar transactions. The tribunal concluded that the dividend received by the appellant on such units would be exempt under Section 10(33), and the resultant loss would be eligible for adjustment against any other income in accordance with the provisions of the Act.

3. Addition Made under Section 68 of the Income Tax Act for Unexplained Cash Credits:
The AO made an addition of Rs. 61,93,275 under Section 68, representing unexplained cash credits received against the sale of shares through M/s S.K. Garg & Co. The AO concluded that the transactions were not genuine, as the broker was declared a defaulter and the assessee could not furnish the requisite information.

The CIT(A) deleted the addition, holding that the transactions were genuine and supported by relevant documentary evidence, including contract notes and sale bills. The tribunal upheld the order of the CIT(A), stating that the SEBI debarred the broker from membership beyond the period under consideration and that the non-availability of the broker at the relevant point of time did not prove the transactions to be bogus. The tribunal emphasized that the burden of proof in reassessment proceedings is on the Revenue to establish that there was income which escaped assessment, and the AO failed to discharge this burden.

Conclusion:
The tribunal dismissed the appeal of the Revenue and allowed the cross-objection of the assessee, quashing the reassessment proceedings initiated under Section 148 and upholding the genuineness of the transactions involving J.M. Mutual Fund and the share transactions with M/s S.K. Garg & Co. The tribunal emphasized the importance of relevant and rational reasons for initiating reassessment proceedings and the burden of proof on the Revenue to establish escapement of income.