2020 (9) TMI 338 - AT - Income Tax

Tribunal quashes Income Tax reassessment citing lack of independent verification and denial of cross-examination rights.

Shri Sanjay Singhal (HUF) Versus The DCIT Central Circle-1 Chandigarh

Shri Sanjay Singhal (HUF) Versus The DCIT Central Circle-1 Chandigarh - [2020] 81 ITR (Trib) 377 (ITAT [Chand]) Issues Involved:1. Validity of initiation of proceedings under section 148 of the Income Tax Act, 1961.2. Addition of Rs. 22,37,80,889/- under section 68 of the Act.3. Treatment of transactions relating to purchase and sale of equity shares as ingenuine.4. Addition of Rs. 1,40,77,758/- on account of alleged commission expenses under section 69C of the Act.5. Denial of opportunity to cross-examine persons whose statements were relied upon.Detailed Analysis:1. Validity of Initiation of Proceedings under Section 148:The assessee challenged the validity of the initiation of proceedings under section 148 of the Income Tax Act, 1961. The facts revealed that a search and seizure operation was conducted on the Bhushan Power & Steel Group, leading to the discovery of incriminating documents indicating bogus Long Term Capital Gain (LTCG) entries. The Assessing Officer (A.O.) issued a notice under section 153A but later dropped the proceedings due to the absence of the assessee's name on the warrant of authorization. Subsequently, the A.O. issued a notice under section 148 based on information from the Investigation Wing, alleging that the assessee had received accommodation entries in the garb of exempt LTCG.The Tribunal found that the A.O. acted solely on the basis of information received from the Investigation Wing without independent verification, thus failing to form a 'reason to believe' that income had escaped assessment. The Tribunal cited several case laws, including the Hon'ble Delhi High Court's judgment in Principal Commissioner of Income Tax Vs. G And G Pharma India Ltd., emphasizing that the basic jurisdictional requirement for reopening an assessment is the application of mind by the A.O. to the materials produced prior to reopening the assessment.2. Addition of Rs. 22,37,80,889/- under Section 68:The A.O. treated the LTCG claimed by the assessee as exempt as sham transactions and added Rs. 22,37,80,889/- to the income of the assessee under section 68 of the Act. The Tribunal observed that the reopening of the assessment was based on borrowed satisfaction from the cases of other individuals in the Bhushan Power & Steel Group without any independent application of mind by the A.O. The Tribunal held that the action under section 147 was not justified as it was based solely on borrowed satisfaction and unsupported by independent verification.3. Treatment of Transactions Relating to Purchase and Sale of Equity Shares as Ingenuine:The A.O. treated the transactions relating to the purchase and sale of equity shares as ingenuine based on the information received from the Investigation Wing. The Tribunal found that the A.O. had not conducted any independent verification of the transactions and relied entirely on third-party information. The Tribunal emphasized that the assessment should have been framed under section 153C if any material was found during the search on third parties, and the indirect action under section 147 was not justified.4. Addition of Rs. 1,40,77,758/- on Account of Alleged Commission Expenses under Section 69C:The A.O. made an addition of Rs. 1,40,77,758/- on account of alleged commission expenses paid for arranging the LTCG entries. The Tribunal noted that the addition was based on the same borrowed satisfaction and unsupported by independent verification. The Tribunal held that the addition under section 69C was not sustainable as it was based on unverified third-party information.5. Denial of Opportunity to Cross-Examine Persons Whose Statements Were Relied Upon:The assessee contended that the A.O. relied on statements of various persons without affording an opportunity to cross-examine them, thereby violating the principles of natural justice. The Tribunal agreed with the assessee's contention, noting that the denial of the opportunity to cross-examine violated the basic principles of natural justice. The Tribunal cited the ITAT Delhi Bench's decision in Shri Brij Bhushan Singal & Ors Vs. ACIT, which held that documents seized from third parties cannot be used for making additions without granting an opportunity of cross-examination.Conclusion:The Tribunal quashed the reassessment proceedings initiated under section 147 r.w.s 148 of the Act, holding that the A.O. acted on borrowed satisfaction without independent verification and denied the assessee the opportunity to cross-examine persons whose statements were relied upon. Consequently, the additions made by the A.O. were also quashed. The appeals for the assessment years 2011-12, 2012-13, and 2013-14 were allowed in favor of the assessee.