2024 (12) TMI 1377 - AT - Income Tax

Validity of reopening of assessment - Addition u/s 68 - transaction in shares of companies identified as penny stock by the Investigation Wing - HELD THAT - AO has drawn inference from a report from investigation wing related to bogus long long/short term capital gains transaction to initiate reassessment proceedings against the Assessee without considering the nature of business of the Assessee and the inquiries conducted during the regular scrutiny assessment proceedings. The sole basis of initiating the reassessment proceedings and making addition in the hands of the Assessee is the fact that the Assessee had sold the shares of a company identified as a penny stock by the investigation wing. In our view, the approached adopted by the AO cannot be countenanced. We hold that in the facts and circumstances of the present case, neither the initiation of reassessment proceedings nor the addition made by the AO on merits can be sustained. Addition u/s 68 - CIT(A) has noted that there was sudden and steep rise in the price of shares when general market trend was admittedly recessive and that the Assessee had failed to provide explanation for steep rise in price of shares. We find no basis for the aforesaid observation made by the CIT(A) as the AO has not made any reference to quoted prices of the Shares. After referring to reasons recorded and the general modus operandi stated in the report of the investigation wing, the AO has added the sale consideration in the hands of the Assessee u/s 68 of the Act holding the same as unexplained income. The basic underlying facts that the Assessee has booked business loss in the case at hand has escaped the attention of the CIT(A) leading to incorrect factual observation and conclusion. Assessee appeal allowed.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment involves several core issues:

Whether the Assessing Officer (AO) erred in assuming jurisdiction under Section 147 of the Income Tax Act, 1961, when the jurisdictional conditions were not satisfied.
Whether the AO had a valid 'reason to believe' that income had escaped assessment, justifying the initiation of reassessment proceedings.
Whether the reassessment proceedings were initiated based on a change of opinion rather than new tangible material.
Whether the addition of INR 19,59,104 under Section 68 of the Act was justified.
Whether the lower authorities erred in denying the carry forward of business loss claimed by the Assessee.
Whether the principles of natural justice were violated by not granting the opportunity of cross-examination to the Assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Jurisdiction under Section 147

Legal Framework and Precedents: Section 147 of the Income Tax Act allows reassessment if the AO has 'reason to believe' that income has escaped assessment. This requires tangible material and not just a change of opinion.
Court's Interpretation and Reasoning: The Tribunal found that the AO proceeded based on a general understanding without considering the facts already on record. The AO failed to demonstrate how the income had escaped assessment.
Key Evidence and Findings: The Assessee had disclosed all transactions and losses in their financial statements and tax returns. The AO's belief was based on incorrect facts.
Application of Law to Facts: The Tribunal held that the initiation of reassessment proceedings was not justified as there was no new tangible material.
Conclusions: The Tribunal quashed the notice under Section 148 and the subsequent reassessment order.

Issue 2: Reason to Believe

Legal Framework and Precedents: The 'reason to believe' must be based on tangible evidence and not merely on suspicion or change of opinion.
Court's Interpretation and Reasoning: The AO's belief was based on a report from the Investigation Wing without considering the Assessee's business nature and previous assessments.
Key Evidence and Findings: The Assessee had not earned any capital gains but had recorded business losses, which were disclosed.
Application of Law to Facts: The Tribunal found that the AO's belief was not based on any new information or evidence.
Conclusions: The Tribunal concluded that the 'reason to believe' was not valid.

Issue 3: Addition under Section 68

Legal Framework and Precedents: Section 68 deals with unexplained cash credits. The burden is on the Assessee to prove the genuineness of the transaction.
Court's Interpretation and Reasoning: The Tribunal found that the AO had incorrectly treated the sale consideration as unexplained income without considering the disclosed business loss.
Key Evidence and Findings: The Assessee provided all necessary documentation, including bank statements and broker confirmations.
Application of Law to Facts: The Tribunal held that the addition under Section 68 was not justified.
Conclusions: The Tribunal allowed the Assessee's appeal on this ground.

Issue 4: Denial of Carry Forward of Business Loss

Legal Framework and Precedents: The Income Tax Act allows for the carry forward of business losses under certain conditions.
Court's Interpretation and Reasoning: The Tribunal found that the CIT(A) erred in denying the carry forward based on incorrect factual observations.
Key Evidence and Findings: The Assessee had disclosed the business loss in their returns.
Application of Law to Facts: The Tribunal reinstated the original assessment order, allowing the carry forward of the loss.
Conclusions: The Tribunal ruled in favor of the Assessee.

3. SIGNIFICANT HOLDINGS

Verbatim Quotes: "The approached adopted by the Assessing Officer cannot be countenanced."
Core Principles Established: The initiation of reassessment proceedings requires tangible material and cannot be based on a mere change of opinion.
Final Determinations: The Tribunal quashed the reassessment proceedings and reinstated the original assessment order.

The Tribunal's decision emphasizes the importance of adhering to legal standards for reassessment and the necessity for AOs to base their actions on concrete evidence rather than assumptions or incorrect interpretations of facts.

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