2023 (1) TMI 716 - AT - Income Tax

Reopening of assessment u/s 147 - information received from Pr. DIT (Investigation) Kolkata regarding entry of bogus LTCG at platform of Calcutta Stock Exchange - Borrowed satisfaction by AO - HELD THAT - As in case of RMG Polyvinyl ltd 2017 (7) TMI 371 - DELHI HIGH COURT has held that the information received from the Investigation wing cannot be said to be tangible material per se without further enquiry being undertaken by the AO and there is no live link between the tangible material and formation of reasons to believe that income had escaped assessment. Similarly, in case of M/s Century Fiscal Services Ltd 2020 (11) TMI 766 - ITAT CHANDIGARH held that on perusal of the reasons recorded by the AO, it is very much evident that he has mainly relied on the information passed to him by the Investigation wing regarding accommodation entry taken by the assessee without even applying his mind to it and verifying the same. AO has formed his belief solely on the information without even verifying and cross-checking the same with the facts on record available with him. The belief of escapement of income as recorded in the reasons is clearly not that of the Assessing officer but a borrowed relief and reassessment proceedings were thus held to be vitiated and not sustainable in law. Applying the aforesaid legal proposition in the present case, we refer to the reasons recorded by the Assessing officer before issuance of notice u/s 148 of the Act. What information is available with the Assessing officer is neither stated nor enclosed with the reasons so recorded by him and thus not discernable from the reasons so recorded. Merely the fact that the assessee has sold certain shares with certain value on the stock exchange cannot by itself be held as tangible material. Further we find that the Assessing officer has not just recorded a reason to belief rather recorded a conclusive finding that assessee is involved in manage trading of penny stock to convert his undisclosed income into exempt income. How the Assessing officer has reached such a conclusive finding and basis thereof is again not borne out from the reasons so recorded by him. In the second part of the reasons, AO stated that certain investigation has been conducted by the Principal Director of Income tax (Investigation), Kolkata in respect of accommodation entry of long-term capital gains and a report has been received in his office and then it goes about discussing the type of penny stock companies, the entities involved in the transaction and the different legs of the transaction and survey conducted at the premises of Ashok Kumar Kalyan where he has named some nine companies including Access Global Limited as penny stock company which is used for providing accommodation entry in form of long term capital gains. We find that these are general descriptions and how the same are relevant in the case of the assessee is not borne out from the reasons so recorded. Even the contents of the investigation report so stated to be received by the Assessing officer doesn t form part of the reasons so recorded and has thus not been shared with the assessee. How Access Global Limited which is a listed entity has been held as penny stock companies and whether any investigation/verification carried out by the Assessing officer is not borne out of the reasons so recorded. In third and fourth part of the reasons so recorded, the AO talks about the fact that M/s Access Global Ltd is a Calcutta Stock Exchange listed company having paid-up capital a generic information wherein three companies have been said to be amalgamated with M/s Access Global Ltd under the scheme of amalgamation approved by the Hon ble Calcutta High Court and merely the fact that the assessee has sold shares of M/s Access Global Ltd, how the same can lead to reasonable belief that its assessee s undisclosed income which has been routed back in form of sale consideration and income has escaped assessment is not borne out of the reasons so recorded. We find that the whole focus of the Assessing officer is on M/s Access Global Ltd and he has infact failed to carry out even preliminary enquiry that the assessee had originally purchased shares of M/s Maple Good Ltd and on its amalgamation, was allotted shares of M/s Access Global Ltd in exchange for its existing holding and there is thus no finding that the purchases so made were bogus and therefore, where the purchases have not been doubted, how the sale have been held to be bogus is again not borne out of the reasons so recorded. In part six of the reasons so recorded, the Assessing officer has stated that the assessee has filed its return of income on 28.09.2013, which has been processed under section 143(1) on 31.12.2013 wherein the assessee has shown exempt income of Rs.99,13,946/- on account of long-term capital gains from the transaction on which securities transaction tax is paid and the case has not been taken up for scrutiny earlier. Merely the fact that the return of income has not been selected for scrutiny earlier cannot be a reason sufficient enough to hold that the income has escaped assessment - he whole focus of the Assessing officer is on M/s Access Global Ltd whose shares have been sold and sale consideration thereof has been shown in the return of income and he has infact failed to carry out preliminary enquiry and examine the return of income that the assessee had originally purchased shares of M/s Maple Good Ltd and on its amalgamation, was allotted shares of M/s Access Global Ltd in exchange for its existing holding and whose cost of acquisition has been claimed as eligible deduction and net sale consideration has been claimed as exempt as long term capital gains. Assessing officer has started off with conclusion, as we have noted in the first part of the reasons, that the assessee is involved in manage trading of shares of penny stocks in order to convert its undisclosed income into exempt income and in last part of the reasons, again concluded that the assessee has taken bogus long term capital gains through managed trading of shares. The whole exercise thus shows a pre-determined mind on part of the Assessing officer to issue notice u/s 148 of the Act and complete lack of application of mind on receipt of information from the Investigation Wing without carrying out any further examination/verification and that too, at the fag end of the limitation period as evident from the fact that the notice u/s 148 was issued on 30/03/2017. In the instant case, AO has simply relied upon the report and conclusion drawn upon by Investigation Wing Kolkata without carrying out any preliminary enquiry and investigation and establishing the necessary nexus between material and formation of belief that income has escaped assessment. There is clearly no independent application of mind by the AO as can be discernable from the reasons so recorded and in view of the same, we are of the considered view that that the AO doesn t have the legal basis to acquire jurisdiction for reassessment u/s 147 and thus, the notice issued under section 148 and consequent reassessment proceedings are liable to be set-aside. Appeal of assessee allowed.

Summary

Issues Involved:
1. Legality of initiating proceedings under Section 147 of the Income Tax Act, 1961.
2. Justification of addition of Rs. 1,04,07,648/- under Section 68 of the Income Tax Act, 1961.
3. Justification of addition of Rs. 3,12,230/- under Section 69C of the Income Tax Act, 1961.
4. Adherence to principles of natural justice by the Assessing Officer.

Issue-wise
Detailed Analysis:

1. Legality of Initiating Proceedings under Section 147:

The primary issue was whether the Assessing Officer (AO) had valid reasons to believe that income had escaped assessment, justifying the initiation of proceedings under Section 147. The AO based his decision on information from the Pr. DIT (Investigation), Kolkata, regarding bogus Long Term Capital Gains (LTCG). The Tribunal emphasized that the AO must form an independent belief based on tangible material, not merely act on borrowed satisfaction from the Investigation Wing's report. Citing multiple precedents, the Tribunal highlighted that the reasons recorded must show a clear nexus and relevancy to the belief of income escapement. The Tribunal found that the AO's reasons were conclusory and lacked independent verification, making the initiation of proceedings under Section 147 invalid.

2. Justification of Addition under Section 68:

The AO treated the sale proceeds of shares amounting to Rs. 1,04,07,648/- as unexplained cash credit under Section 68. The Tribunal scrutinized whether the AO had sufficient grounds to consider the sale consideration as bogus. It was noted that the AO relied heavily on the Investigation Wing's report without conducting further independent verification. The Tribunal concluded that the AO's findings were based on presumptions rather than concrete evidence, thus invalidating the addition under Section 68.

3. Justification of Addition under Section 69C:

The AO also made an addition of Rs. 3,12,230/- under Section 69C for alleged brokerage expenses. The Tribunal found that the AO did not provide substantial evidence to support the claim that these expenses were incurred for arranging bogus LTCG entries. The addition was deemed arbitrary and not based on verified facts, leading to its dismissal.

4. Adherence to Principles of Natural Justice:

The assessee argued that the AO violated principles of natural justice by relying on statements from third parties without providing an opportunity for cross-examination. The Tribunal agreed, emphasizing that the assessment must be based on verified evidence and the assessee should be given a fair chance to contest the claims. The lack of such opportunity rendered the AO's actions unjust.

Conclusion:

The Tribunal allowed the appeals, setting aside the reassessment proceedings initiated under Section 147 and the consequent additions under Sections 68 and 69C. The Tribunal underscored the necessity for the AO to independently verify information and adhere to principles of natural justice. The findings and directions in ITA No. 1338/Chd/2018 were applied mutatis mutandis to the other appeals, resulting in their favorable disposal for the assessees.