2025 (8) TMI 843 - AT - Income Tax

Reopening of Assessment Valid Under Section 147; Bogus LTCG and Commission Additions Deleted Due to Lack of Evidence

Income Tax Officer, Ward – 5 (3) (1), Ahmedabad Versus Harsha Asheshbhai Patel

Income Tax Officer, Ward – 5 (3) (1), Ahmedabad Versus Harsha Asheshbhai Patel - TMI 1. ISSUES PRESENTED and CONSIDERED Validity and correctness of reopening assessment under Section 148 of the Income Tax Act, 1961. Whether additions on account of alleged bogus Long-Term Capital Gains (LTCG) under Section 69A were justified. Whether additions on account of alleged bogus Short-Term Capital Gains (STCG) were justified. Whether addition of commission paid for accommodation entry under Section 69C was justified. Whether transactions with an alleged accommodation entry provider entity justified additions and reassessment. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of Reopening Assessment under Section 148 Legal Framework and Precedents: Section 148 allows reopening of assessment if the Assessing Officer (AO) has reason to believe that income has escaped assessment. Approval by the competent authority is mandatory, and the reasons for reopening must be valid and specific. Court's Interpretation and Reasoning: The appellate authority initially held the reopening notice as invalid because of a perceived discrepancy in the name of the entity involved (M/s. Kushal Limited vs. M/s. Kushal Tradelink Limited) and alleged lack of application of mind by the approving authority. Upon review, the Tribunal found that the two names referred to the same entity, with a formal name change effective 17.10.2017. Therefore, the AO's reasons for reopening were not flawed on this ground. Regarding the approval, the Tribunal noted that the approving authority had examined the AO's proposal and recorded his satisfaction that reopening was justified. The approving authority is not required to independently establish escapement of income but to ensure the AO's reasons are adequate. Key Evidence and Findings: Evidence of official name change of the company and approval comments by the Joint Commissioner of Income Tax (JCIT) were considered. Application of Law to Facts: The reopening was based on information from the Investigation Wing and was approved after due consideration by the competent authority. Treatment of Competing Arguments: The Revenue's argument on the validity of reopening was accepted; the assessee's argument based on the name discrepancy and alleged mechanical approval was rejected. Conclusion: The reopening notice under Section 148 was valid and not void ab initio. Ground No. 1 of the Revenue appeal was allowed. Issue 2 & 3: Additions on Account of Bogus LTCG and STCG Legal Framework and Precedents: Section 69A deals with unexplained investments or income and allows addition of income if the assessee fails to satisfactorily explain the nature and source of such income. Capital gains arising from genuine transactions are exempt or taxable as per law. Court's Interpretation and Reasoning: The AO alleged that the LTCG and STCG derived from transactions in shares of a penny stock company were accommodation entries, thus bogus gains. The CIT(A) deleted these additions, holding that the assessee had disclosed the transactions and gains in the return, and no evidence was brought to prove the entries were accommodation entries. Key Evidence and Findings: The assessee's return disclosed STCG of Rs. 1,46,50,449/- and LTCG of Rs. 42,00,597/- from transactions in shares of the relevant company. Demat account statements showed genuine purchase and sale transactions through a recognized broker. No material was produced by the AO to substantiate the claim of accommodation entries. Application of Law to Facts: Since the transactions were disclosed, supported by demat account evidence, and taxes were paid accordingly, the gains could not be treated as unexplained income under Section 69A. The burden to prove accommodation entries rested on the Revenue, which was not discharged. Treatment of Competing Arguments: The Revenue contended that the transactions were accommodation entries facilitating unaccounted income. The assessee argued the transactions were genuine and part of normal investment activities. The Tribunal favored the assessee due to lack of evidence from the Revenue. Conclusion: Additions on account of bogus LTCG and STCG were rightly deleted. Grounds No. 2 and 3 of the Revenue appeal were dismissed. Issue 4: Addition of Commission Paid for Accommodation Entry under Section 69C Legal Framework and Precedents: Section 69C allows addition of unexplained expenditure if the assessee fails to explain the nature and source of such expenditure, often applied to accommodation entries involving commission payments. Court's Interpretation and Reasoning: The AO added Rs. 9,52,607/- as commission paid for accommodation entries. The CIT(A) deleted this addition due to absence of any evidence substantiating the claim. Key Evidence and Findings: No documentary or material evidence was produced by the Revenue to prove that the commission was paid for accommodation entries. Application of Law to Facts: Without evidence, the addition under Section 69C could not be sustained. Treatment of Competing Arguments: Revenue relied on general allegations; assessee denied the claim and pointed to lack of proof. Conclusion: Addition under Section 69C was rightly deleted. Ground No. 4 of the Revenue appeal was dismissed. Issue 5: Transactions with Alleged Accommodation Entry Provider Legal Framework and Precedents: Transactions with entities known to provide accommodation entries may attract scrutiny and additions if evidence supports such transactions are not genuine. Court's Interpretation and Reasoning: The Revenue alleged that the assessee transacted with an accommodation entry provider. However, no direct evidence was produced to establish that the assessee's transactions were not genuine or were accommodation entries. Key Evidence and Findings: The assessee's transactions were through recognized brokers, disclosed in returns, and supported by demat account statements. Application of Law to Facts: Mere association with an entity alleged to be an accommodation entry provider does not justify additions without evidence of the nature of specific transactions. Treatment of Competing Arguments: Revenue relied on the status of the entity; assessee relied on evidence of genuine transactions. Conclusion: The allegation was not substantiated; related grounds were dismissed. Other Grounds General and miscellaneous grounds raised by the Revenue were dismissed due to lack of specific merit or evidence.