2022 (3) TMI 1418 - AT - Income Tax

Reopening of assessment u/s 147 - Addition u/s 68 - denial of capital gains earned by assessee u/s 10(38) - Information from investigation wing was received by intimating the organised racket involved in generating bogus entries of long term capital gains which was exempt from capital gains tax - HELD THAT - In present facts of the case we note that, the Ld.AO received information from investigation wing regarding the company Blue Circles Services Ltd being penny stock. And it is an admitted fact that assessee had sold the shares in Blue Circles Services Ltd and had earned LTCG. Therefore in order to investigate regarding the purchase/sale of shares in Blue Circles Services Ltd., by assessee, the assessment was reopened by the Ld.AO. The decisions by Ld.AR by Honble Courts on challenge of the validity of reopening in the paper book are distinguishable on facts based on the above discussions. We therefore do find any infirmity in the reopening of the assessment. Bogus LTCG/STCG - Each case has to be decided on facts and circumstances of that case. In our considered opinion, relevant factors to be considered are surrounding circumstances, objective facts, evidence adduced, presumption of facts based on common human experience in life and reasonable conclusions. Assessee was liable to discharge its onus regarding purchase of shares by way of cogent documentary evidences. We note that assessee has not placed anything on record regarding the source of investments and capacity to invest such huge monies during the year in which the investments were made - The assessee having invested huge monies in these alleged companies, has not been able to provide any documents to establish sound financial of these companies and that, the fluctuation in price was market driven. Assessee is therefore directed to provide all relevant documents to establish source of investment and capacity to invest in the alleged companies in the year of investment. Ld.AO shall take all evidences into consideration and then decide the issue as per law. Statements recorded are secondary and subordinate evidence, and therefore cross examination is not relevant. Ld.AO is directed to re-examine the case of assessee in the light of aforestated direction in accordance with law. Needless to say that proper opportunity shall be granted to assessee to represent its case as per. We allow grounds on merits raised by assessee for statistical purposes for all the years under consideration.

Summary

Issues Involved:
1. Denial of capital gains exemption under Section 10(38) of the Income Tax Act.
2. Validity of reopening of assessment under Section 147.
3. Genuineness of transactions and investments in shares of alleged companies.
4. Right to cross-examination of third parties whose statements were used against the assessee.
5. Onus of proving the source of investment and genuineness of transactions.

Issue-wise Detailed Analysis:

1. Denial of Capital Gains Exemption under Section 10(38):
The primary issue in these appeals is the denial of capital gains exemption under Section 10(38) of the Income Tax Act on the sale of shares held in Blue Circles Services Pvt. Ltd. and Parag Shilpa Investments Ltd. The Assessing Officer (AO) observed that the assessee claimed exemptions for long-term capital gains (LTCG) on the sale of shares, which were allegedly part of an organized racket generating bogus entries of LTCG exempt from tax. The AO concluded that the transactions were not based on commercial principles and market factors but were part of a preconceived scheme to procure LTCG. This view was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], leading to the present appeals.

2. Validity of Reopening of Assessment under Section 147:
For the assessment year 2013-14, the AO reopened the assessment under Section 147, which was challenged by the assessee on the grounds that the reasons for reopening did not mention any new/tangible material/information against the assessee. The Tribunal noted that no assessment under Section 143(3) was passed for the year 2013-14, and hence the argument of change of opinion was not accepted. The Tribunal held that the AO had cause or justification to believe that income had escaped assessment based on information from the investigation wing regarding the company being a penny stock. Thus, the reopening of the assessment was deemed valid.

3. Genuineness of Transactions and Investments in Shares:
The AO carried out detailed investigations and found that the companies in question lacked sound financials and were mere paper companies without any business activities. The assessee failed to provide satisfactory evidence of the genuineness of the transactions and the source of investment. The Tribunal noted that the AO's findings were based on substantial evidence, including the nature of the companies and the manner in which the shares were traded. The Tribunal directed the assessee to provide all relevant documents to establish the source of investment and the capacity to invest in these companies during the relevant period.

4. Right to Cross-Examination:
The assessee argued that no opportunity for cross-examination was provided, which violated the principles of natural justice. The Tribunal acknowledged that the right to cross-examination is not absolute and depends on the circumstances of the case. The Tribunal held that the statements recorded were secondary and subordinate evidence, and therefore, cross-examination was not relevant in this case. The Tribunal directed the AO to re-examine the case, taking into consideration all evidences provided by the assessee.

5. Onus of Proving the Source of Investment and Genuineness of Transactions:
The Tribunal emphasized that the assessee was liable to discharge its onus regarding the purchase of shares by providing cogent documentary evidence. The assessee failed to establish the source of investment and the capacity to invest such huge amounts during the relevant period. The Tribunal directed the AO to re-examine the case, considering all relevant documents and evidence provided by the assessee, and to decide the issue as per law.

Conclusion:
The Tribunal upheld the validity of the reopening of the assessment for the year 2013-14 and directed the AO to re-examine the genuineness of the transactions and the source of investment. The Tribunal allowed the appeals for statistical purposes, directing the AO to grant the assessee an opportunity to present its case with all relevant evidence. The order was pronounced in the open court on 15th March 2022.