2017 (3) TMI 969 - AT - Income Tax

Reopening of assessment - long term capital gain from sale of shares treated as undisclosed income of the assessee thereby denying exemption u/s 10(38) - Held that - Considering the facts in totality including the claim of assessee of the long term capital gain from sale of shares disregarding the direct evidences on record, relating to sale/purchase transactions in shares supported by brokers contract notes, confirmation of receipt of sale proceeds through regular banking channels and demant account, we quash the re-assessment proceedings u/s 147 of the Act and direct the Assessing Officer to treat the surplus as long term capital gain from sale of shares and allow exemption u/s 10(38) of the Act. See case of Pratik Suryakant Shah & others 2017 (2) TMI 463 - ITAT AHMEDABAD - Decided in favour of assessee

Summary

Issues Involved:
1. Reopening of assessment under Section 147 of the Income-tax Act, 1961.
2. Treatment of long-term capital gain from the sale of shares as undisclosed income, thereby denying exemption under Section 10(38) of the Act.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147 of the Income-tax Act, 1961:

The primary contention in these appeals is the validity of the reopening of assessments under Section 147. The assessees challenged the reopening on the grounds that the Assessing Officer (A.O.) did not have any reason to believe that income chargeable to tax had escaped assessment. The reopening was based on information from the Investigation Department regarding transactions with M/s Mahasagar Securities (P) Ltd. and its group companies controlled by Mr. Mukesh M. Choksi, which were alleged to be providing bogus entries for profit or loss through the sale or purchase of shares. The A.O. issued a notice under Section 148 after recording reasons and obtaining necessary approval under Section 151.

The Tribunal observed that the facts and grounds of appeal were similar to those in the case of Pratik Suryakant Shah, where the reopening was quashed. The Tribunal noted that the reopening was based solely on the statement of Mr. Mukesh Choksi, which was not provided to the assessee for cross-examination, thus violating the principles of natural justice. Citing the Supreme Court's decision in Andaman Timber Industries, the Tribunal held that not allowing cross-examination of witnesses whose statements form the basis of the assessment is a serious flaw, rendering the order a nullity. Consequently, the reassessment proceedings under Section 147 were quashed.

2. Treatment of Long-term Capital Gain from Sale of Shares as Undisclosed Income:

The second issue was the denial of exemption under Section 10(38) for long-term capital gains from the sale of shares, which the A.O. treated as undisclosed income. The A.O. based this decision on the statement of Mr. Mukesh Choksi, who admitted that his group companies were engaged in fraudulent billing activities.

The Tribunal noted that the assessee had provided all necessary details, including evidence of payment through banking channels, transfer of shares to demat accounts, and sale thereof. The A.O. dismissed the assessee's request for cross-examination of Mr. Choksi and relied on the statement to deny the exemption.

The Tribunal, following the Co-ordinate Bench's decision in the case of Pratik Suryakant Shah, held that the transactions were genuine. The Tribunal emphasized that the shares were listed on the Bombay Stock Exchange, purchased and transferred through proper channels, and the sale consideration was received through cheques. There was no evidence to suggest that the transactions were bogus or that the sale consideration was returned in cash.

The Tribunal concluded that the denial of exemption under Section 10(38) was based on presumption and surmises, disregarding direct evidence of genuine transactions. The Tribunal directed the A.O. to treat the surplus as long-term capital gains and allow the exemption as claimed by the assessee.

Conclusion:

The Tribunal allowed all four appeals, quashing the reassessment proceedings under Section 147 and directing the A.O. to treat the surplus from the sale of shares as long-term capital gains, thereby granting the exemption under Section 10(38). The decision was pronounced in the open Court on 20th March 2017.