2013 (10) TMI 986 - AT - Income Tax

Long term capital gain from sale of shares - bogus transaction or not - Reasons to be recorded for issuance of notice u/s 148 of the Income Tax Act Income escaping assessment u/s 147 of the Act Held that - Assessing Officer recorded the reasons and that as per the information gathered, the assessee has entered into transaction with M/s. Mahasagar Securities Pvt. Ltd., Bombay and the said company was engaged in the business of providing fraudulent bills for bogus speculation profit/loss, short term capital gain and long term capital gain, commodity profit/loss on commodity trading. On, the contrary, the assessee had not entered into any transaction with M/s. Mahasagar Securities Pvt. Ltd. and in the original return of income, the assessee had enclosed the purchase and sale bills of M/s. Goldstar Finvest Pvt. Ltd. with whom the assessee entered into transaction and earned the long term capital gain, those bills were available with the Assessing Officer for scrutiny. However, the Assessing Officer recorded the reasons that assessee entered into transaction through M/s. Mahasagar Securities Pvt. Ltd. Bombay. Therefore, the very basis of reasons recorded by the Assessing Officer for reopening of the assessment was wrong because the assessee did not enter into any transaction to get the profit on account of long term capital gain with M/s. Mahasagar Securities Pvt. Ltd. Bombay rather the transaction was entered through M/s. Goldstar Finvest Pvt. Ltd, therefore, the belief of the Assessing Officer that income had escaped assessment which was earned by the assessee on the transactions entered into with M/s. Mahasagar Securities Pvt. Ltd. Bombay was incorrect - notice issued by the Assessing Officer under section 148 of the Act on the basis of the aforesaid reasons recorded under section 147 of the Act was not sustainable and the assessment proceedings on the basis of such notice were rightly set aside and quashed Decided against the Revenue.

Issues Involved:
1. Validity of the assessment order passed under sections 147/143(3) of the I.T. Act.
2. Application of section 292B of the I.T. Act.
3. Recording of reasons for reopening the case under section 148 of the I.T. Act.
4. Procedural compliance with sections 148 to 153 of the I.T. Act.

Issue-Wise Detailed Analysis:

1. Validity of the Assessment Order:
The primary issue was whether the assessment order passed under sections 147/143(3) of the I.T. Act was valid. The department argued that the learned CIT(A) erred in quashing the assessment order on technical grounds without appreciating the provisions of section 292B of the I.T. Act. The assessee had filed a return of income showing a long-term capital gain of Rs. 18,33,466/-, which was claimed exempt under section 54F of the I.T. Act. The case was reopened based on the finding that transactions of purchase and sales of shares through M/s. Goldstar Finvest (Pvt.) Ltd. were not real and were part of accommodation entries provided by M/s. Mukesh M. Choksi.

2. Application of Section 292B:
The department's appeal contended that the learned CIT(A) failed to appreciate the provisions of section 292B, which states that an assessment or notice should not be invalidated due to any mistake, defect, or omission if it is in substance and effect in conformity with or according to the intent and purpose of the Act. However, the learned CIT(A) held that the reopening of the assessment was not sustainable due to the incorrect recording of the assessee's status and the entity involved in the transactions.

3. Recording of Reasons for Reopening:
The assessee argued that the reasons recorded for reopening the case were incorrect. The status of the assessee was recorded as "individual" instead of "HUF," and the transactions were incorrectly attributed to M/s. Mahasagar Securities Pvt. Ltd. instead of M/s. Goldstar Finvest Pvt. Ltd. The learned CIT(A) observed that the reasons for reopening were based on incorrect facts and lacked a direct nexus or live link between the material available and the formation of belief that income had escaped assessment. The principle that reasons to believe must be based on definite and relevant material was emphasized.

4. Procedural Compliance:
The learned CIT(A) noted that for reopening an assessment, the Assessing Officer must follow the procedure contained in sections 148 to 153 of the I.T. Act. The reasons recorded must be clear and show due application of mind. In this case, the reasons recorded were found to be incorrect and arbitrary, as the assessee had dealt with M/s. Goldstar Finvest Pvt. Ltd. and not M/s. Mahasagar Securities Pvt. Ltd. The reopening of the assessment was quashed due to the lack of proper and relevant material to substantiate the belief that income had escaped assessment.

Conclusion:
The appeal by the department was dismissed. The learned CIT(A) correctly quashed the assessment order passed under sections 147/143(3) of the I.T. Act due to the incorrect recording of reasons for reopening and the failure to comply with procedural requirements. The assessment proceedings based on the notice issued under section 148 were set aside and quashed. The judgment emphasized the necessity of accurate and relevant reasons for reopening an assessment and the importance of following the procedural requirements of the I.T. Act.

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