2024 (10) TMI 247 - AT - Income Tax

Reassessment proceedings - Reasons to believe - validity of notice issued u/s 148 and the consequent order passed u/s 147 - addition made by AO u/s 69A holding that long term capital gain on sale of shares claimed exempt u/s 10(38) as bogus - HELD THAT - In case if the reopening is based on information received from the investigation wing then in that eventuality the reasons must show that the AO independently applied his mind to the information and formed his own opinion. The AO in the reasons in the present case has just stated the information received and his conclusion about the alleged escapement of income but he has not mentioned anywhere as to what the AO did with the information made available to him is not discernible from the reason. The reasons must also paraphrase any investigation report which may form the basis of the reasons and any enquiry conducted by the AO thereon as also the conclusion thereof further where the reasons make a reference to any document then in that eventuality such document and/or relevant portion their of must be enclosed along with the reasons. In the present case what information is available with the AO is neither stated nor enclosed with the reasons so recorded by him and thus not discernible from the reasons so recorded. Therefore reasons recorded by the AO are found to be not in accordance with law. Another factual mistake wherein the AO has incorrectly mentioned while disposing the objection of the Assessee that assessee has not declared the long term capital gain in the return filed in response to notice u/s 148 whereas in this return assessee has categorically shown exempt Income comprising of capital gain exempt u/s 10(38) and dividend from shares. Thus notice issued under section 148 and the consequent order passed under section 147 is illegal and bad in law and the same stands quashed - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of notice issued under Section 148 of the Income Tax Act.
2. Legality of the order passed under Section 147 of the Income Tax Act.
3. Addition made under Section 69A regarding long-term capital gains.

Issue-wise Detailed Analysis:

1. Validity of Notice Issued Under Section 148:

The primary issue was whether the notice issued under Section 148 was valid. The assessee argued that the notice was issued solely based on information received from the DDIT(Inv.), Unit-1(3), Ahmedabad, without any independent examination or verification by the Assessing Officer (AO). The AO did not provide the order of SEBI or statements from Jignesh Shah and Umang Shah, who allegedly admitted to providing accommodation entries. The assessee cited several precedents, including *B.U. Bhandari Autolines (P.) Ltd. Vs. ACIT* and *Sabh Infrastructure Ltd. Vs. ACIT*, which emphasize that the AO must independently apply his mind to the information received and form his own opinion. The tribunal found that the AO failed to conduct an independent inquiry or verify the existence of the company before issuing the notice, rendering the notice under Section 148 illegal and bad in law.

2. Legality of the Order Passed Under Section 147:

The assessee challenged the order under Section 147, arguing that it was based on insufficient grounds. The AO had concluded that the assessee was involved in a scheme to convert black money into white using penny stocks, without providing tangible material or conducting a preliminary inquiry. The tribunal observed that the AO relied on information from the investigation wing without forming an independent opinion, which is necessary for reassessment proceedings. The tribunal referenced cases like *Deepraj Hospital Pvt. Ltd. Vs. ITO* and *Smt. Anshita Vimal Jain Vs. ITO*, which highlight the need for the AO to independently assess the information and record reasons based on tangible material. Consequently, the tribunal quashed the reassessment proceedings and the order under Section 147, deeming them unsustainable in law.

3. Addition Made Under Section 69A Regarding Long-term Capital Gains:

The assessee contested the addition made under Section 69A, where the AO treated the long-term capital gains from the sale of shares as bogus. The tribunal noted that since the notice under Section 148 and the order under Section 147 were quashed, there was no need to adjudicate this issue further. The tribunal found that the assessee had declared the long-term capital gain as exempt income in the return filed in response to the notice, contrary to the AO's incorrect assertion. As the primary issue of the validity of the notice and order was resolved in favor of the assessee, the addition under Section 69A became academic and was not further addressed.

Conclusion:

The tribunal allowed the appeal, quashing the notice issued under Section 148 and the consequent order under Section 147. The tribunal found that the AO did not independently verify the information received or form a valid basis for reassessment, rendering the proceedings invalid. As a result, the appeal was partly allowed, with no need to address the second ground regarding the addition under Section 69A.