2017 (4) TMI 863 - AT - Income Tax

Reopening of assessment - Accommodation entries - Held that - A careful reading of the stated reasons for reopening of the assessment shows that the assessment has been reopened merely on the information received from Investigation Wing. A.O. is required to consider the material on record in case of the assessee and thereafter is required to form an independent opinion on the basis of the material on record that the income has escaped assessment. Without forming such an opinion, solely and mechanically relying upon the information received from other source, there cannot be any reassessment for the verification. Non application of independent mind by AO the assumption of the jurisdiction to reopen the assessment in exercise of power u/s. 147 of the Act is bad in law and contrary to the provisions of Section 147 of the Act Accommodation entries - Gains arising out of the sale of shares - capital gain or business income - Held that - There is no denying that consideration was paid when the shares were purchased. The shares were thereafter sent to the company for the transfer of name. The company transferred the shares in the name of the assessee. There is nothing on record which could suggest that the shares were never transferred in the name of the assessee. There is also nothing on record to suggest that the shares were never with the assessee. On the contrary, the shares were thereafter transferred to demat account. The demat account was in the name of the assessee, from where the shares were sold. In our understanding of the facts, if the shares were of some fictitious company which was not listed in the Bombay Stock Exchange/National Stock Exchange, the shares could never have been transferred to demat account. Shri Mukesh Choksi may have been providing accommodation entries to various persons but so far as the facts of the case in hand suggest that the transactions were genuine and therefore, no adverse inference should be drawn. In the light of the decisions of the Hon ble Supreme Court in the case of Andaman Timber Industries (2015 (10) TMI 442 - SUPREME COURT ) and considering the facts in totality, the claim of the assessee cannot be denied on the basis of presumption and surmises in respect of penny stock by disregarding the direct evidences on record relating to the sale/purchase transactions in shares supported by broker s contract notes, confirmation of receipt of sale proceeds through regular banking channels and the demat account. Accordingly, we direct the A.O. to treat the gains arising out of the sale of shares under the head capital gains- Short Term or Long Term as the case may be. - Assessee appeal allowed.

Issues Involved:
1. Delay in filing the appeals.
2. Jurisdiction of the Assessing Officer (A.O.) for reopening the assessment under Section 147 of the Income Tax Act.
3. Merits of the case regarding the treatment of gains from the sale of shares as income from undisclosed sources.
4. Denial of cross-examination and reliance on third-party statements.

Detailed Analysis:

1. Delay in Filing the Appeals:
The appeals were filed late by 12 days. The appellants submitted affidavits explaining the reasons for the delay. After considering the facts mentioned in the affidavits, the Tribunal concluded that the appellants were prevented by reasonable and sufficient cause from filing the appeals on time. Consequently, the delay was condoned.

2. Jurisdiction of the A.O. for Reopening the Assessment:
The assessee challenged the jurisdiction of the A.O. for reopening the assessment under Section 147 of the Income Tax Act. The A.O. had reopened the assessment based on information received from the Investigation Wing regarding the purchase of shares from Mahasagar Securities Group, which was allegedly issuing bogus purchase bills. The Tribunal noted that the reopening was based merely on information received from an external source without independent verification or formation of opinion by the A.O. The Tribunal cited the Gujarat High Court's decision in the case of Harikishan Sunderlal Virmani, which held that reopening based solely on external information without independent opinion formation by the A.O. is invalid. Consequently, the Tribunal quashed the reassessment proceedings and the notice issued under Section 148 of the Act, allowing the assessee's ground on this issue.

3. Merits of the Case:
On the merits, the revenue authorities had denied the claim of capital gains and treated the gains from the sale of shares as undisclosed income, relying on the statement of Shri Mukesh M. Choksi and materials found during the search of Mahasagar Securities Group. The Tribunal observed that the entire assessment was based on the statement of Shri Mukesh Choksi, and no opportunity for cross-examination was provided to the assessee. The Tribunal referred to the Supreme Court's decision in the case of Andaman Timber Industries, which held that denial of cross-examination when statements are relied upon is a violation of natural justice, rendering the order null and void. Consequently, the Tribunal quashed the assessment order on this ground as well.

4. Denial of Cross-Examination and Reliance on Third-Party Statements:
The Tribunal emphasized that the denial of cross-examination and reliance on third-party statements without providing the assessee an opportunity to challenge the statements was a serious flaw. The Tribunal noted that the shares were purchased through brokers, transferred to the assessee's name, and subsequently sold through demat accounts. There was no evidence suggesting that the shares were never transferred or were fictitious. The Tribunal concluded that the transactions were genuine and should not be disregarded based on presumptions and surmises.

Conclusion:
The Tribunal allowed the appeals filed by the assessee, directing the A.O. to treat the gains from the sale of shares as capital gains (short-term or long-term, as applicable). The other grievances of the assessee became infructuous. The order was pronounced in open court on March 9, 2017.

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