2024 (11) TMI 1298 - AT - Income Tax

Reopening assessment under section 147 invalid for legitimate IPO share transactions with proper documentation and STT payment

ITAT Delhi held that reopening assessment under section 147 was invalid as the assessee had legitimately purchased shares through IPO via cheque, held ... Reopening of assessment under section 147 - Formation of belief and live link between reasons and belief - Exemption under section 10(38) for long term capital gains where STT is paid - Quashing of reassessment for incorrect assumption of facts - Addition under section 69A for unexplained cash credits - Assessment of cash deposits during demonetisation and burden of explanation Reopening of assessment under section 147 - Formation of belief and live link between reasons and belief - Exemption under section 10(38) for long term capital gains where STT is paid - Quashing of reassessment for incorrect assumption of facts - Validity of reopening assessment for AY 2015-16 and consequential treatment of claimed exemption under section 10(38). - HELD THAT: - The Tribunal found that the reasons recorded for reopening relied on information from the Insight portal alleging that shares of SRDL were used as accommodation entries to generate bogus LTCG. On the facts, the assessee had purchased the SRDL shares in the IPO by account payee cheque from disclosed bank accounts, dematerialised them, held them for more than a year and sold them in the secondary market through a registered broker, suffering STT; sale proceeds were credited through banking channels and demat reductions matched the sales. The AO's reasons invoked a modus operandi (heavy trading to inflate price, routing of unaccounted money) which did not pertain to the assessee's factual matrix and included irrelevant facts (share split in 2015) when the assessee had sold in June 2014. Because the recorded reasons did not have a live link to the assessee's specific facts and rested on an incorrect assumption of fact, the formation of belief under section 147/148 was held to be fallacious and the reopening was quashed. As reassessment was quashed, the Tribunal did not adjudicate the merits of the exemption claim. [Paras 5] Reopening under section 147/148 for AY 2015-16 quashed; appeal of the assessee allowed. Addition under section 69A for unexplained cash credits - Assessment of cash deposits during demonetisation and burden of explanation - Sustainability of addition under section 69A for cash deposits made during demonetisation in AY 2017-18. - HELD THAT: - The Tribunal upheld the learned CIT(A)'s deletion of the addition. The assessee, engaged in trading, showed substantial cash sales and submitted sale bills and VAT returns corroborating cash turnover; a fresh business arrangement from June 2016 explained a large increase in cash sales. The assessee also had cash deposits prior to and during the demonetisation period, supported by VAT returns and bills, and thus had sufficient explained cash to account for the bank deposits. The AO's view that the deposits represented conversion of unaccounted income was not borne out in light of the documents and the CIT(A)'s appreciation of material, and the Tribunal found no infirmity in deleting the addition under section 69A. [Paras 9, 10] Addition under section 69A for AY 2017-18 deleted; appeal of the Revenue dismissed. Final Conclusion: Reassessment for AY 2015-16 under section 147/148 quashed for lack of a live link between the recorded reasons and the assessee's facts; the claimed longterm capital gains exemption need not be adjudicated. For AY 2017-18, the Tribunal affirms deletion of the addition under section 69A, finding the assessee's explanation and supporting records adequate to account for cash deposits made during the demonetisation period. Issues:1. Jurisdiction for reopening of assessment under section 147 of the Income-tax Act.2. Denial of claim of exemption under section 10(38) of the Act in respect of Long Term Capital Gain (LTCG) on sale of shares.3. Addition made on account of cash deposits during demonetization period.Analysis:Issue 1:The case involved challenges to the assumption of jurisdiction for reopening of assessment under section 147 of the Income-tax Act and denial of exemption under section 10(38) for Long Term Capital Gains (LTCG) on the sale of shares. The assessee had bought shares in an IPO and later sold them in the secondary market after holding them for more than a year. The Assessing Officer (AO) sought to reopen the assessment based on information received regarding alleged bogus capital gains involving the shares of a specific company. However, it was found that the reasons recorded for reopening did not have a live link to the facts of the case. The Tribunal held that the basis of the AO's belief that income had escaped assessment was fallacious, as the assessee's transactions did not align with the alleged modus operandi. Consequently, the reassessment was quashed.Issue 2:Regarding the denial of exemption under section 10(38) for LTCG on the sale of shares, it was established that the assessee had purchased the shares legitimately, held them for a significant period, and sold them through a registered share broker in compliance with tax regulations. The Tribunal concluded that the AO's suspicions based on unrelated information did not hold, and the denial of the exemption was unjustified. As a result, the appeal for the assessment year 2015-16 was allowed in favor of the assessee.Issue 3:The second part of the judgment addressed the addition made on account of cash deposits during the demonetization period. The assessee, engaged in the trading business, had made substantial cash deposits during the specified period. The AO questioned the source of these deposits, suspecting an attempt to convert unaccounted income into accounted income due to demonetization. However, the assessee provided detailed explanations and evidence to justify the cash deposits, including legitimate business growth and agreements with suppliers. The Tribunal concurred with the CIT(A)'s decision to delete the addition under section 69A of the Act, as the cash deposits were adequately explained and supported by documentation. Consequently, the appeal for the assessment year 2017-18 was dismissed in favor of the assessee.In conclusion, the Tribunal allowed the appeal for the assessment year 2015-16 and dismissed the appeal for the assessment year 2017-18, resolving the issues related to jurisdiction for reopening assessment, denial of exemption for LTCG, and addition on account of cash deposits during demonetization.