2020 (1) TMI 1025 - AT - Income Tax

Appeal partially allowed on Section 263 decision for errors in assessing exempt Long Term Capital Gains.

Motilal Salecha HUF Versus Pr. CIT-31, Room No. 301, C-13 Pratyakshakar Bahvan, Bandra Kurla Complex, Mumbai

The Tribunal partly allowed the appeal, affirming the Principal Commissioner of Income Tax's decision to invoke Section 263 due to errors in the original ... Revision u/s 263 - assessee has claimed as exempt long term capital gains (LTCG) seemed to be bogus - HELD THAT:- Assessee has claimed exempt LTCG by trading in shares of LTL. The details filed by the assessee during the course of assessment proceedings have not been examined and inquired into by the AO. This is evident from the assessment order produced above and also from the documents available on record. One cannot miss the proposition that assessment made without inquiry is prejudicial to the interest of revenue. In Rampyari Devi Saraogi [1967 (5) TMI 10 - SUPREME COURT] it is held in order that the Commissioner may consider an order to be “erroneous” for the purposes of section 263, the error of law may not be apparent on the face of the order, the Commissioner may consider an order of the Assessing Officer to be erroneous not only if it contains some apparent error of reasoning or of law or of fact on the face of it but also because it is a stereo-typed order which simply accepts what the assessee has stated in his return and fails to make inquiries which are called for in the circumstances of the case. In view of the above position of law enunciated in Rampyari Devi Saraogi (supra) and because the AO has completed the assessment in undue haste or without inquiry, the Pr. CIT has rightly exercised his power u/s 263 by holding that the order of the AO is erroneous and prejudicial to the interest of revenue. However, it is too early on the part of the Pr. CIT to direct the AO to redo the assessment so that abuse of provision of section 10(38) is prevented and income is brought to tax in light of recent judgments in penny stock cases. We modify the above direction of the Pr. CIT and direct the AO to frame an order as per the provisions of the Act, after providing reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant documents/evidence before the AO. Issues Involved:1. Whether the Principal Commissioner of Income Tax (Pr. CIT) erred in passing the order under Section 263 of the Income Tax Act, 1961.2. Whether the order passed by the Pr. CIT under Section 263 of the Income Tax Act, 1961, complied with the jurisdictional conditions necessary to invoke the power of the said section.3. Whether the transactions in shares of M/s Luminaire Technologies Ltd. (LTL) were genuine or pre-arranged to claim exempt Long Term Capital Gains (LTCG).Issue-wise Detailed Analysis:1. Error in Passing Order under Section 263:The assessee contended that the Pr. CIT erred in passing the order under Section 263 of the Income Tax Act, 1961. The Pr. CIT observed that the assessee claimed exempt LTCG of Rs. 8,94,51,920/- by trading in shares of LTL, which was identified as a penny stock by the Investigation Wing of the Department. The Pr. CIT found that the Assessing Officer (AO) did not make adequate inquiries into the details furnished by the assessee, rendering the AO's order erroneous and prejudicial to the interest of revenue under clause (a) to Explanation 2 of Section 263(1) of the Act. The Tribunal noted that the AO completed the assessment without adequate inquiry, thus justifying the Pr. CIT’s invocation of Section 263. However, the Tribunal modified the Pr. CIT's direction to redo the assessment, instructing the AO to frame an order as per the provisions of the Act after providing a reasonable opportunity of being heard to the assessee.2. Jurisdictional Conditions for Invoking Section 263:The assessee argued that the Pr. CIT did not comply with the jurisdictional conditions necessary to invoke the power under Section 263. The Tribunal referred to the case laws cited by both parties. It was observed that the AO must conduct a thorough inquiry and verification of the details submitted by the assessee. In this case, the AO failed to make such inquiries, leading the Tribunal to uphold the Pr. CIT’s exercise of power under Section 263. The Tribunal pointed out that an assessment made without proper inquiry is prejudicial to the interest of revenue, as held in Rampyari Devi Saraogi v. CIT.3. Genuineness of Transactions in Shares of LTL:The Pr. CIT made several observations regarding the transactions in shares of LTL, indicating that the price of the shares was artificially rigged, and the company was a shell entity with no business activity or future prospects. The Pr. CIT concluded that the transactions were pre-arranged to claim exempt LTCG. The assessee countered these observations by providing evidence of genuine transactions, including share purchase and sale documents, demat account details, and financials of LTL. The Tribunal acknowledged the evidence but noted that the AO did not adequately examine these details during the original assessment. Consequently, the Tribunal directed the AO to reassess the case, considering all relevant documents and providing the assessee with a reasonable opportunity to present their case.Conclusion:The Tribunal partly allowed the appeal, affirming the Pr. CIT's decision to invoke Section 263 but modifying the direction for reassessment. The AO was instructed to frame an order as per the provisions of the Act, after providing a reasonable opportunity of being heard to the assessee. The assessee was directed to file the relevant documents and evidence before the AO.