2020 (7) TMI 38 - AT - Income Tax

Tribunal upholds assessment reopening, deletes addition under Income Tax Act; assessee's appeal partly allowed.

The Tribunal upheld the validity of the reopening of the assessment but deleted the addition of Rs. 56,43,084 made by the AO under section 68 of the ... Reason to believe for reopening assessment under section 147 - Application of mind by Assessing Officer in forming belief for reassessment - Investigation report as actionable material for initiation of reassessment - Onus on assessee under section 68 to prove genuineness of share transactions - Requirement of departmental investigation and confrontation before making additionReason to believe for reopening assessment under section 147 - Application of mind by Assessing Officer in forming belief for reassessment - Investigation report as actionable material for initiation of reassessment - Validity of reassessment proceedings initiated by issuance of notice under section 148 (reopening of assessment). - HELD THAT: - The Tribunal held that the assessing officer had prima facie reason to believe that income chargeable to tax had escaped assessment on the basis of an exhaustive investigation report from the Directorate of Investigation identifying beneficiaries, PANs, transaction details and the penny-stock modus operandi. The material was not fanciful, speculative or mere rumour and there existed a direct nexus between that material and the assessee's return showing the same long term capital gain claimed as exempt. The AO applied his own mind to the information, examined ITD records and the return and formed a tentative inference of escapement of income; such tentative, honest and reasonable belief suffices at the stage of issuing notice under section 148. The request for supply of the entire investigation report did not invalidate reopening where the AO had furnished to the assessee the specific information relating to him, and there was no evidence that the AO mechanically or blindly acted on the investigation report. Consequently, reopening was held valid. [Paras 23, 24, 25, 26, 27]Reopening of assessment was valid and the grounds challenging initiation of reassessment were rejected.Onus on assessee under section 68 to prove genuineness of share transactions - Requirement of departmental investigation and confrontation before making addition - Sustenance of addition of the sale proceeds/claimed LTCG (treated as unexplained income) on merits. - HELD THAT: - Although the AO and CIT(A) concluded that the LTCG was bogus and added the sale proceeds as unexplained income, the Tribunal found that the assessee had produced contemporaneous documentary evidence: contract notes, broker ledger entries, demat account statements showing receipt and holding of shares, bank payments for purchase and receipts on sale, and securities transaction taxes paid. The Tribunal noted that, despite forming a prima facie belief, the AO did not carry out basic investigations available under departmental procedure (for example, obtaining depository and exchange time stamp data, counterparty details, broker examination or depository verification) to verify whether the trades were with identified exit/entry providers. In absence of departmental investigation to controvert the assessee's documentary proof and given that the AO made the addition by rejecting the assessee's explanations without confronting them by available enquiries, the addition of the full sale consideration was not sustainable. The Tribunal relied on the principle that when an assessee furnishes complete particulars and supporting documents, the AO must investigate contradictory material in his possession before making an addition; failure to do so warranted relief to the assessee. [Paras 30, 31, 32, 33, 34]Addition was deleted; ground challenging the addition was allowed and the appeal was partly allowed on merits.Final Conclusion: Reassessment notice under section 148 was validly issued and upheld, but the addition treating the claimed long term capital gain/sale proceeds as unexplained income was deleted because the AO failed to verify and confront available documentary material and to undertake basic investigations before making the addition; appeal partly allowed. Issues Involved:1. Validity of reopening of assessment.2. Addition of Rs. 56,43,084 on account of sale consideration of equity shares under section 68 of the Income Tax Act.Detailed Analysis:1. Validity of Reopening of AssessmentThe assessee challenged the reopening of the assessment on multiple grounds, including lack of specific, relevant, reliable, and tangible material to form a reason to believe that income had escaped assessment. The assessee argued that the material relied upon by the Assessing Officer (AO) was not provided, and the reopening was based on borrowed satisfaction without independent application of mind.The Tribunal referred to the Supreme Court's decision in ACIT v. Rajesh Jhaveri Stock Brokers P Ltd, which clarified that the AO needs a 'reason to believe' and not conclusive evidence of income escapement at the initiation stage. The Tribunal found that the material available with the AO, including the investigation report from the Directorate of Investigation, Kolkata, provided sufficient cause for reopening the assessment. The AO had applied his mind to the material and formed a belief that income had escaped assessment. The Tribunal rejected the argument that the reopening was based on borrowed satisfaction and found no infirmity in the AO's action.2. Addition of Rs. 56,43,084 on Account of Sale Consideration of Equity SharesThe AO made an addition of Rs. 56,43,084 under section 68 of the Income Tax Act, considering the sale of shares of Nouveau Global Ventures Ltd. as bogus long-term capital gain (LTCG). The AO noted that the assessee had purchased the shares at an abnormally high price from paper companies controlled by entry operators and sold them at a significantly higher price, claiming exemption under section 10(38).The assessee provided evidence of the purchase and sale of shares through recognized stock exchanges, payment through banking channels, and maintenance of shares in a Demat account for three years. The Tribunal observed that the AO did not conduct any further investigation to substantiate the claim of bogus LTCG. The Tribunal emphasized that the AO should have examined the brokers, obtained details from the stock exchange, and verified the Demat account transactions to establish the link between the assessee and the alleged entry operators.The Tribunal found that the AO's addition was based on mere rejection of the assessee's explanation without any supporting investigation. The Tribunal noted that the financials of Nouveau Global Ventures Ltd. did not indicate it as a penny stock company, and there was no evidence of wrongdoing against the company. The Tribunal concluded that the assessee had discharged the onus of proving the genuineness of the transactions, and the AO failed to bring any cogent material to counter the assessee's evidence.Conclusion:The Tribunal upheld the validity of the reopening of the assessment but deleted the addition of Rs. 56,43,084 made by the AO under section 68 of the Income Tax Act. The appeal of the assessee was partly allowed.