2018 (5) TMI 622 - AT - Income Tax

Validity of reopening of the assessment - addition on account of sale proceeds of shares of M/s Talent Infoways Ltd. by treating the transaction as bogus - claim of exemption u/s 54F of the Act against the long term capital gain arising from sale of shares M/s Talent Infoways Ltd. - indepedent application of mind by AO - Held that - Sufficiently of correctness of material is not required to be considered at the stage of initiation proceeding u/s 147/148 of the Act. Therefore, if the material available with the AO is prima facie sufficient to form the belief that the income chargeable to tax has escaped assessment then it is immaterial whether the said material subsequently found to be not sufficient for making the addition, the commencement of reassessment proceeding cannot be held as invalid if the same is sufficient to form the belief at the time of initiation. Accordingly, hold that the Assessing officer has applied his mind on the relevant material comprising of return of income filed by the assessee, the transaction of purchase and sale of shares, claim of long term capital gain as well as deduction u/s 54F of the Act in light of information received from DDIT Udaipur along with the report of the DDIT Mumbai - Decided against assessee Undisclosed income - bogus share purchases - Held that - This matter requires a proper investigation and verification of the relevant facts particularly the prevailing market price or fair market price of the shares of M/s Talent Infoways Ltd. at the time of alleged purchase as well as at the time of alleged sale of shares. Further, if the shares were dematerialized before the same were sold then the holding of the shares cannot be disputed as at the time of dematerialized and the purchase consideration can be considered on the date of dematerialization after considering the prevailing market price or fair market value of the shares on that date. Since, the transfers of purchase and sale are all market transactions and therefore, a proper investigation and inquiries is needed in this case. Accordingly the issue is set aside to the record of the AO for conducting the proper inquiry and for adjudication of issue without relying on the statement of Shri Mukesh Choksi alone.

Issues Involved:
1. Validity of reopening of the assessment under Section 148.
2. Addition of ?4,35,282/- by treating the capital gain declared by the assessee as bogus.

Issue-wise Detailed Analysis:

1. Validity of Reopening of the Assessment:
The assessee filed his return of income for the assessment year 2005-06 on 29.10.2005, declaring an income of ?4,07,974/- after claiming a deduction under Section 54F of the Income Tax Act, 1961. The return was processed under Section 143(1). Subsequently, the Assessing Officer (AO) received a report from the DDIT Investigation, Mumbai, regarding a search at the premises of Mahasagar group of companies belonging to Shri Mukesh Choksi, who admitted to providing accommodation entries for share profits and capital gains. Consequently, the AO issued a notice under Section 148 on 06.01.2012 to reopen the assessment. The assessee's objections to this notice were disposed of by the AO, and the reassessment was completed under Section 143(3) read with Section 147 on 23.01.2013, making an addition of ?4,35,282/- by treating the transaction as bogus.

The assessee argued that the AO reopened the assessment without proper satisfaction of escaped income and solely based on information from another authority, without applying his own mind. The AO's reasons for reopening were deemed insufficient by the assessee. The Tribunal, however, found that the AO had examined the return of income, the claim of exemption under Section 54F, and the information from the Investigation Wing before forming a belief that the income had escaped assessment. The Tribunal held that the AO's belief was based on relevant material and that the reopening of the assessment was valid. The Tribunal distinguished this case from others where the AO had merely followed the directions of the DDIT Investigation without applying his own mind.

2. Addition of ?4,35,282/- as Undisclosed Income:
The AO treated the transaction of purchase and sale of shares of M/s Talent Infoways Ltd. as bogus based on the statement of Shri Mukesh Choksi, who admitted to providing accommodation entries. The assessee argued that all relevant details and evidence were produced to substantiate the transaction, including contract notes and stock statements. The assessee also contended that no opportunity for cross-examination of Shri Mukesh Choksi was provided and that the statement did not specifically mention the assessee or M/s Talent Infoways Ltd.

The Tribunal noted that the assessee purchased the shares at a nominal price and sold them at a significantly higher price, indicating a transaction in penny stocks. The Tribunal found that the assessee did not produce any record to show that the shares were dematerialized before the sale. The Tribunal held that the evidence provided by the assessee was insufficient to prove the genuineness of the transaction and that a proper investigation into the prevailing market price or fair market value of the shares at the time of purchase and sale was necessary. The Tribunal set aside the issue to the AO for a proper inquiry and adjudication without solely relying on the statement of Shri Mukesh Choksi.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the validity of the reopening of the assessment but set aside the issue of the addition of ?4,35,282/- to the AO for further investigation and proper adjudication.

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