2016 (7) TMI 16 - AT - Income Tax

Reopening of assessment - long term capital gains treated by AO as unexplained cash credit u/s.68 - AO has treated the share transaction as bogus on the plea that SEBI has initiated investigation in respect of Ramkrishna Fincap Pvt. Ltd. and investigation revealed that transaction through M/s Basant Periwal and Co. on the floor of stock exchange was more than 83% - Held that - As far as initiation of investigation of broker is concerned, the assessee is no way concerned with the activity of the broker. Detailed finding has been recorded by CIT(A) to the effect that assessee has made investment in shares which was purchased on the floor of stock exchange and not from M/s Basant Periwal and Co. Against purchases payment has been made by account payee cheque, delivery of shares were taken, contract of sale was also complete as per the Contract Act, therefore, the assessee is not concerned with any way of the broker. Nowhere the AO has alleged that the transaction by the assessee with these particular broker or share was bogus, merely because the investigation was done by SEBI against broker or his activity, assessee cannot be said to have entered into ingenuine transaction, insofar as assessee is not concerned with the activity of the broker and have no control over the same. We found that M/s Basant Periwal and Co. never stated any of the authority that transaction in M/s Ramkrishna Fincap Pvt. Ltd. on the floor of the stock exchange are ingenuine or mere accommodation entries. CIT(A) decided issue in favour of the assessee, came to the conclusion that transaction entered by the assessee was genuine. Detailed finding recorded by CIT(A) has not been controverted by the department by brining any positive material on record. Accordingly, we do not find any reason to interfere in the findings of CIT(A). - Decided against revenue

Summary

Issues Involved:

1. Validity of reopening the assessment under Section 147 of the Income Tax Act.
2. Treatment of long-term capital gains as unexplained cash credit under Section 68 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147:

The revenue challenged the reopening of the assessment, arguing that the long-term capital gains reported by the assessee were actually unexplained cash credits. The CIT(A) upheld the reopening, stating that the notice under Section 148 was issued within six years from the end of the relevant assessment year, thus complying with the provisions of Section 149. The CIT(A) noted that the Assessing Officer (AO) had concrete material, including reports from the Directorate of Income Tax (Investigation) and annexures containing various details, to form a belief that income had escaped assessment. The CIT(A) emphasized that the reasons recorded for reopening had a rational connection to the formation of belief and were not based on whims and fancies.

The CIT(A) relied on the Delhi High Court decision in the case of M/s Rajat Export Import India Pvt. Ltd. vs. ITO, which held that at the stage of recording reasons for reopening, the AO is only required to form a prima facie opinion that income has escaped assessment, not to build a foolproof case for addition. The CIT(A) concluded that the reopening was proper and valid in the eyes of the law.

2. Treatment of Long-term Capital Gains as Unexplained Cash Credit under Section 68:

The AO treated the long-term capital gains reported by the assessee from the sale of shares in "Ramkrishna Fincap Ltd." as unexplained cash credits under Section 68, citing that the transactions were accommodation entries facilitated by the broker M/s. Basant Periwal & Co., who was involved in price manipulation. The AO relied on SEBI's findings and the broker's activities to support this conclusion.

The assessee contended that the transactions were genuine, providing detailed documentation, including broker's bills, contract notes, demat account statements, and bank statements, to substantiate the purchase and sale of shares. The assessee argued that the shares were bought and sold on the floor of the Kolkata Stock Exchange, payments were made and received through account payee cheques, and the transactions were subject to Securities Transaction Tax (STT).

The CIT(A) examined the evidence and found that the transactions were genuine. The CIT(A) noted that the AO did not have any material evidence to prove that the sale of shares was bogus and had not conducted any independent investigation. The CIT(A) relied on several judicial precedents, including decisions of the jurisdictional ITAT and the Jharkhand High Court in the case of CIT vs. Arun Kumar Agarwal HUF, which held that transactions with tainted brokers do not automatically render the transactions ingenuine.

The CIT(A) concluded that the AO's reliance on SEBI's investigation against the broker was insufficient to treat the assessee's transactions as bogus. The CIT(A) deleted the addition made by the AO, treating the long-term capital gains as genuine.

Conclusion:

The appeals filed by the revenue were dismissed. The ITAT upheld the CIT(A)'s findings that the reopening of the assessment was valid and that the long-term capital gains reported by the assessee were genuine, not unexplained cash credits. The ITAT emphasized that the AO did not provide any positive material evidence to counter the CIT(A)'s detailed findings and relied on judicial precedents to support the decision.