2023 (2) TMI 959 - AT - Income Tax

Reopening of assessment u/s 147 - Addition u/s 68 - HELD THAT - We fail to find any merit since ld. AO has reopened the proceedings after validly recording the reasons based on the information received from the investigation wing and had reason to believe for reopening of the case regarding the transactions of the sum received by the assessee from the alleged accommodation entry provider. We, thus, dismiss the legal ground raised by the assessee in ground nos. 1 2. Addition u/s 68 - The assessee broker after opening the client s account has been approached by the above referred three clients for purchase of shares. For making the said purchase amounts have been transferred to the client s bank account which is specifically used for purchasing the shares and the disbursement from such account has to go either to the stock exchange or is returned back to the client. There is no authority with the broker to utilize such amount for its own purpose. The assessee broker duly received the amount and initiated the transactions for purchase of the share on the stock exchange and the quantities desired by the client was received in parts as and when the seller was available. All the equity shares so purchased first came in the Demat account of the assessee broker and then has been transferred to the client s Demat account. No discrepancy in these transactions and the alleged cash credits are nothing but an advance sum received for purchase of equity shares and the said transaction has been duly completed and brokerage for carrying out such transaction has been charged by the assessee and therefore, no addition is called for u/s 68 of the Act. As decided in SMT. HARSHILA CHORDIA VERSUS INCOME-TAX OFFICER 2006 (11) TMI 117 - RAJASTHAN HIGH COURT both the lower authorities failed to appreciate the case of the assessee that these were the trade advances and not cash credits and against such advance, the assessee has supplied the material in due time as per details available on record - Based on this finding addition u/s 68 of the Act was deleted. We, thus, reverse the finding of ld. CIT(A), delete the addition made u/s 68 of the Act and allow the effective ground raised by the assessee on merits.

Summary

Issues Involved:
1. Validity of the notice issued under Section 148.
2. Addition of Rs. 5.05 crores as unexplained cash credit under Section 68.
3. Procedural adherence and evidentiary support for the addition.

Issue-wise Detailed Analysis:

1. Validity of the Notice Issued Under Section 148:
The assessee challenged the reopening of the assessment under Section 147/148, arguing that the original return was not processed and thus there was no escapement of income. The Tribunal found no merit in this argument, noting that the Assessing Officer (AO) had validly recorded reasons based on information from the investigation wing and had a legitimate reason to believe that income had escaped assessment. The Tribunal dismissed the legal grounds challenging the jurisdiction under Section 147/148.

2. Addition of Rs. 5.05 Crores as Unexplained Cash Credit Under Section 68:
The core issue was the addition of Rs. 5.05 crores under Section 68, which the AO attributed to unexplained cash credits from three entities: M/s. Sutanuti Distributors Pvt. Ltd. (Rs. 3.30 crores), Raj Laxmi Ornaments & Stone (Rs. 1.25 crores), and Krishna Infotech (Rs. 50 lakhs). The AO's addition was based on an investigation report suggesting that these entities were involved in providing accommodation entries and were part of a cash trail involving shell companies.

The assessee, a registered broker with the Calcutta Stock Exchange, argued that these amounts were received in the ordinary course of business for purchasing shares on behalf of clients. The assessee provided extensive documentation, including client account details, contract notes, and Demat account statements, to support the legitimacy of these transactions. The Tribunal noted that the assessee maintained three separate bank accounts as per SEBI rules: a client account, a settlement account, and a personal account. The funds in question were received in the client account and used strictly for purchasing shares, with no amounts transferred to the assessee's personal account.

The Tribunal observed that the AO failed to provide evidence that the assessee benefitted personally from these transactions or that the funds were used for purposes other than purchasing shares for clients. The Tribunal emphasized that the transactions were conducted in compliance with SEBI regulations and that the shares purchased were duly transferred to the clients' Demat accounts.

3. Procedural Adherence and Evidentiary Support for the Addition:
The Tribunal criticized the AO and the Commissioner of Income-tax (Appeals) [CIT(A)] for not adequately addressing the evidence provided by the assessee. The CIT(A) merely reproduced the AO's findings without providing specific reasons for dismissing the assessee's submissions. The Tribunal found that the AO's reliance on the investigation report was insufficient to justify the addition, especially given the lack of direct evidence linking the assessee to any wrongdoing.

The Tribunal also referenced several judicial precedents supporting the view that amounts received in the course of business for specific transactions (such as purchasing shares for clients) should not be treated as unexplained cash credits under Section 68. The Tribunal cited the decisions in M/s. Heera Steel Limited vs ITO and Sanjay Agarwal ITA No. 2463/KOL/2018, which held that trade advances received for business purposes should not be added as unexplained cash credits.

Conclusion:
The Tribunal concluded that the assessee had adequately explained the receipt of Rs. 5.05 crores, which was used for purchasing shares on behalf of clients in compliance with SEBI regulations. The addition under Section 68 was deemed unwarranted, and the Tribunal reversed the CIT(A)'s decision, deleting the addition of Rs. 5.05 crores. The appeal was partly allowed in favor of the assessee.