2017 (11) TMI 1731 - AT - Income Tax

Appeals granted on share sale income classification, reassessment upheld. Interest charged under Section 234B. Penalty implications pending.

The Tribunal partially allowed the appeals, treating the income from the sale of shares as short-term capital gains and quashing the assessment order due ... Validity of re-assessment u/s. 147/148 - Information was received on the basis of search and seizure action u/s. 132 - specific information and admission of Shri Mukesh Chokshi - bogus entries of speculation profit/loss, commodities profit/loss - Held that:- Information was received on the basis of search and seizure action u/s. 132 of the act carried out in the group cases of M/s, Mahasagar Securities Pvt. Ltd. (now known as Alang Securities Security Pvt. Ltd.) wherein in the course of search Shri Mukesh Chokshi, who was managing and controlling the said group had admitted in his statement that the group was engaged in providing bogus entries of speculation profit/loss, commodities profit/loss. AO has initiated action u/s. 147 by issuing notice u/s. 148 after analyzing the information received from the investigation wing on the basis of action carried out u/s. 132 as the main person has admitted that these companies were not doing genuine business. Reopening of the case assessee was initiated on the basis of specific information and admission of Shri Mukesh Chokshi in this order. Therefore, we do not find any error in the findings of the ld. CIT(A) on this issue. Accordingly, this ground of the assessee is dismissed. Issues Involved:1. Validity of reassessment proceedings under Section 147/148 of the Income Tax Act, 1961.2. Addition of Rs. 5,59,500 as undisclosed income.3. Legality of proceedings initiated under Section 148.4. Non-provision of the statement of Mukesh Chokshi to the appellant.5. Characterization of income from the sale of shares.6. Burden of proving transactions as fraudulent or sham.7. Validity of off-market transactions.8. Impact of assessment of Gold Star Finvest Pvt. Ltd. on the appellant's transactions.9. Charging of interest under Section 234B.10. Initiation of penalty proceedings under Section 271(1)(c).Detailed Analysis:1. Validity of Reassessment Proceedings under Section 147/148 of the Income Tax Act, 1961:The appellant contended that the reassessment proceedings initiated under Section 147/148 were invalid as they were initiated on a deceased person and were time-barred. The Tribunal observed that the information leading to the reassessment was based on a search and seizure action under Section 132 in the group cases of M/s Mahasagar Securities Pvt. Ltd., where it was admitted that the group was involved in providing bogus entries. The Tribunal upheld the reassessment proceedings, finding no error in the CIT(A)'s decision, as the action was initiated based on specific information and admissions.2. Addition of Rs. 5,59,500 as Undisclosed Income:The appellant argued that the income from the sale of shares should be treated as short-term capital gain and not as undisclosed income. The Tribunal noted that the purchase and sale of shares were conducted through M/s Gold Star Finvest Pvt. Ltd., and the transactions were off-market. The CIT(A) concluded that the transactions were bogus and fraudulent, as admitted by Mukesh Chokshi, who managed the group companies. The Tribunal, however, relied on precedents where similar additions were deleted, noting that off-market transactions are not illegal and the transactions were supported by documentary evidence. Consequently, the Tribunal allowed the appeal on this ground, treating the income as short-term capital gain.3. Legality of Proceedings Initiated under Section 148:The appellant contended that the proceedings under Section 148 were initiated without proper application of mind and were based on roaming inquiries. The Tribunal observed that the notice under Section 148 was issued based on specific information from the investigation wing following a search action under Section 132. The Tribunal found no error in the CIT(A)'s findings and dismissed this ground of appeal.4. Non-provision of the Statement of Mukesh Chokshi to the Appellant:The appellant argued that the statement of Mukesh Chokshi, which was the basis for reopening the assessment, was not provided to them. The Tribunal noted that the assessment was based on the statement of Mukesh Chokshi, and the appellant was not given an opportunity to cross-examine him. Citing the Supreme Court's decision in Andaman Timber Industries, the Tribunal held that not allowing cross-examination was a violation of natural justice. Thus, the Tribunal quashed the assessment order on this ground.5. Characterization of Income from the Sale of Shares:The appellant contended that the income from the sale of shares should be treated as capital gains. The Tribunal observed that the transactions were supported by documentary evidence, including purchase contracts, bank statements, and demat account statements. The Tribunal found that the transactions were genuine and directed the AO to treat the surplus as short-term capital gains, allowing the exemption as claimed by the appellant.6. Burden of Proving Transactions as Fraudulent or Sham:The appellant argued that the burden of proving the transactions as fraudulent or sham was on the AO. The Tribunal noted that the AO relied on the statement of Mukesh Chokshi without conducting an independent inquiry. The Tribunal held that the AO failed to discharge the burden of proving the transactions as fraudulent or sham and allowed the appeal on this ground.7. Validity of Off-market Transactions:The appellant contended that off-market transactions are valid and not illegal. The Tribunal agreed, noting that off-market transactions are not unlawful and that the transactions were supported by documentary evidence. The Tribunal allowed the appeal on this ground, treating the transactions as genuine.8. Impact of Assessment of Gold Star Finvest Pvt. Ltd. on the Appellant's Transactions:The appellant argued that the assessment of Gold Star Finvest Pvt. Ltd. for other years should not impact their transactions for the assessment year 2003-04. The Tribunal observed that the transactions in question were supported by documentary evidence and were genuine. The Tribunal allowed the appeal on this ground, treating the transactions as genuine.9. Charging of Interest under Section 234B:The appellant contended that the interest charged under Section 234B should be canceled. The Tribunal found no merit in this ground, stating that the charging of interest under Section 234B is consequential and mandatory. Thus, this ground of appeal was dismissed.10. Initiation of Penalty Proceedings under Section 271(1)(c):The appellant argued that the initiation of penalty proceedings under Section 271(1)(c) was erroneous. The Tribunal did not specifically address this issue in detail, but considering the overall findings, it appears that the penalty proceedings would be impacted by the Tribunal's decision to treat the transactions as genuine and the income as short-term capital gains.Conclusion:The Tribunal allowed the appeals partly, treating the income from the sale of shares as short-term capital gains and quashing the assessment order due to the violation of natural justice by not allowing cross-examination of Mukesh Chokshi. The reassessment proceedings under Section 147/148 were upheld, and the charging of interest under Section 234B was found to be mandatory. The initiation of penalty proceedings under Section 271(1)(c) was not specifically addressed but would be impacted by the Tribunal's findings.