2018 (1) TMI 1300 - AT - Income Tax

Reopening of assessment - treating the LTCG as bogus - Held that - As we have already seen that the assessment was reopened for the reason that the jewellery purchased by the Assessee was from undisclosed sources and the purchases were bogus. That addition has not been sustained now. The Assessing Officer however, proceeded to make an addition on account of Long Term Capital Gain (LTCG) on sale of shares. This was clearly beyond the scope of the proceedings under section 148 of the Act. The Assessing Officer, therefore, could not have proceeded to make the impugned addition of bogus LTCG. See CIT vs. Jet Airways India Ltd 2010 (4) TMI 431 - HIGH COURT OF BOMBAY

Issues Involved:
1. Validity of initiation of reassessment proceedings under Section 147 of the Income Tax Act.
2. Addition on account of bogus purchases of diamonds.
3. Addition on account of unexplained cash credit.
4. Addition of Long Term Capital Gain (LTCG) as bogus.

Detailed Analysis:

1. Validity of initiation of reassessment proceedings under Section 147 of the Income Tax Act:
The Assessee objected to the validity of the initiation of reassessment proceedings, arguing that the Assessing Officer (AO) merely relied on the information from the Directorate of Income Tax (Investigation) without applying his own mind. The AO initiated reassessment based on information received from DIT (Inv.)-II, Mumbai, indicating that the Assessee had availed of bogus purchase entries amounting to ?14,55,472/- from M/s. Nice Diamonds, Mumbai. The CIT(A) confirmed the initiation of proceedings, but the Tribunal ultimately found that the initiation of reassessment proceedings was not valid as the primary reason for reopening the assessment was not sustained.

2. Addition on account of bogus purchases of diamonds:
The AO added ?14,55,472/- to the Assessee's income, treating the purchase of diamonds from Nice Diamonds as bogus. The Assessee provided documentary evidence, including invoices and bank statements, to prove the genuineness of the purchases. However, the AO insisted on proof of delivery of diamonds and did not provide an opportunity for cross-examination of Shri Bhanwarlal Jain, who allegedly admitted to providing bogus purchases. The CIT(A) upheld the AO's decision, citing the Assessee's inability to prove the actual transport and receipt of the diamonds. The Tribunal, however, found that the investments were duly reflected in the books of accounts and the source of funds was satisfactorily explained. Therefore, the addition made by the AO and confirmed by CIT(A) was directed to be deleted.

3. Addition on account of unexplained cash credit:
The AO treated the long-term capital gain declared by the Assessee as bogus and added ?41,38,799/- as unexplained cash credit. The CIT(A) confirmed this addition. The Tribunal noted that the reassessment was initiated for the reason of bogus diamond purchases, and since this addition was not sustained, any further addition on different grounds was beyond the scope of the reassessment proceedings. The Tribunal referred to the judgment of the Hon’ble Bombay High Court in the case of CIT vs. Jet Airways India Ltd., which held that if the AO does not assess the income for which reasons were recorded, he cannot assess other income. Consequently, the addition of ?41,38,799/- was deleted.

4. Addition of Long Term Capital Gain (LTCG) as bogus:
The AO added ?41,17,365/- as unexplained cash credit, treating the LTCG on the sale of shares as bogus. The Assessee argued that all evidence regarding the earning of the capital gain was filed, and the AO failed to bring any contrary evidence. The Tribunal found that since the primary reason for reopening the assessment (bogus diamond purchases) was not sustained, the AO could not make an addition on account of LTCG. The Tribunal deleted the addition, following the precedent set by the Hon’ble Bombay High Court in Jet Airways India Ltd. and the Hon’ble Delhi High Court in Ranbaxy Laboratories vs. CIT.

Conclusion:
The Tribunal allowed the Assessee's appeal, deleting the additions made by the AO and confirmed by the CIT(A) on account of bogus diamond purchases and unexplained cash credit. The Tribunal also held that the reassessment proceedings were not valid as the primary reason for reopening the assessment was not sustained.

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