2020 (2) TMI 1088 - AT - Income Tax

Undisclosed income - Addition u/s 68 - action of AO in charging tax at special rate u/s. 115BBE whereas the same should have been charged at the normal rates - Penny stock company - order/warning or penalty visited upon bogus company by SEBI/Regulatory Authority Specific company in the specific period has been held to be a bogus/sham company by the appropriate Regulatory Authority or not? - There is no reference whatsoever to the fact that SEBI, the concerned Regulatory Authority has held the said company to be a bogus/sham company for its activities during the period. It is a fact that issues of irregular prices/malpractices and bogus companies etc. are to be looked into by SEBI who is authorized to issue warnings, direct orders for delisting etc. and penalize the errant companies by resorting to take action in terms of the powers vested on it. I find no reference has been made to any order of SEBI or any other Regulatory Authority either delisting or threatening delisting/warning etc. issued in the name of M/s. UNNO Industries Ltd. To my understanding, this power vested in the Regulatory Authority cannot be usurped by any other Authority. The power to hold, penalize and act against a company in the event the company is a sham company floated against the laws of the land vests with the Ministry of Corporate Affairs, SEBI and SFIO who can recommend the removal of its name from the Registrar of Companies. For want of any relevant discussion thereon, the order at best proceeds only on presumptions and suspicions. It is seen that this aspect has not been considered in the case of Shri Abhimanyu Soin 2018 (4) TMI 1620 - ITAT CHANDIGARH relied upon by Id. CIT-DR. Accordingly, adjournment application of the Id. AR was rejected and it was deemed appropriate to restore the file back to the CIT(A) with the direction to bring out necessary facts as to whether the specific company in the specific period has been held to be a bogus/sham company by the appropriate Regulatory Authority or not. I am of the view that the facts, evidences and deficiencies noticed are sufficient to justify re-assessment or re-opening in cases where other statutory formalities in regard to re-opening etc. have been fulfilled as suspicions of stock manipulation etc. are damaging facts and are sufficient in certain circumstances to arouse suspicion and justify a greater scrutiny. However, ultimately whether a specific company is a bogus company or a sham company, is an order which has to be passed by the Appropriate Regulatory Authority. No such order has been referred to by the parties. The impugned order is set aside and the matter is restored back to the file of the CIT(A) with the direction to pass a speaking order in accordance with law

Summary

Issues Involved:
1. Treatment of undisclosed income.
2. Charging tax at special rate under section 115BBE.

Detailed Analysis:

Treatment of Undisclosed Income:
The primary contention of the assessee was against the orders of the CIT(A)-3, Ludhiana, which upheld the action of the Assessing Officer (AO) in treating specific amounts as undisclosed income. For the assessment years 2014-15 and 2015-16, the AO had treated ?2,56,367/- and ?28,98,987/- respectively as undisclosed income. The assessee's appeals were dismissed on the grounds that the transactions were deemed to be accommodation entries from M/s. UNNO Industries Ltd. and M/s. Golden Legend Finance & Leasing Ltd., which were considered bogus companies involved in providing fake long-term capital gains (LTCG).

In the judgment, it was noted that the tax authorities did not provide substantial evidence from the Securities and Exchange Board of India (SEBI) or any other regulatory authority to prove that M/s. UNNO Industries Ltd. and M/s. Golden Legend Finance & Leasing Ltd. were indeed bogus companies. The CIT-DR relied on the consistent orders of the AO and the CIT(A) but failed to present any findings from SEBI or any other regulatory authority. The tribunal emphasized the necessity of referring to actions or penalties imposed by SEBI to conclusively determine the status of these companies. The tribunal concluded that the issue must be decided based on facts and evidence, not on conjecture or presumptions.

Charging Tax at Special Rate Under Section 115BBE:
The second issue involved the application of a special tax rate under section 115BBE on the assessed undisclosed income. The assessee argued that since the income from the sale of shares was declared as "Income from other sources" and not claimed as exempt under section 10(38), it should not be subjected to the special rate under section 115BBE. However, the CIT(A) upheld the AO’s decision to apply the special rate, reasoning that the transactions were accommodation entries to launder unaccounted money, and thus, the special rate was justified.

The tribunal found that the tax authorities had not adequately addressed whether SEBI or any other regulatory authority had taken action against M/s. UNNO Industries Ltd. or M/s. Golden Legend Finance & Leasing Ltd. for their activities during the relevant periods. The tribunal stressed that the power to declare a company as bogus lies with the appropriate regulatory authorities, and such determinations cannot be made solely by the tax authorities without reference to regulatory findings.

Conclusion:
The tribunal set aside the impugned orders and restored the matters back to the file of the CIT(A) with directions to pass a speaking order in accordance with the law. The CIT(A) was instructed to ascertain and bring on record any orders, warnings, or penalties imposed by SEBI or any other regulatory authority on M/s. UNNO Industries Ltd. and M/s. Golden Legend Finance & Leasing Ltd. The appeals were allowed for statistical purposes, ensuring that the assessee would be given a reasonable opportunity of being heard.