2026 (1) TMI 250 - AT - Income Tax

Reassessment for alleged bogus s.10(38) exempt share-sale LTCG in tainted scrip upheld; s.68 addition remanded for fresh review

Reassessment under s.147 was challenged as void for want of action under s.153C on the premise that material emanated from a third-party search. The ... Validity of reassessment proceedings u/s 147 v/s 153C - as contended by Assessee that the reassessment proceedings were bad in law since the same have been initiated u/s 147 whereas the AO ought to have initiated proceedings under Section 153C - as per assessee reassessment proceedings have been initiated on the basis of information/material discovered during the search proceedings conducted on a third party - treating share sale proceeds as unexplained cash credit under section 68 HELD THAT:- We note that in the present case the relevant conditions precedent for invoking provisions contained in Section 153C of the Act were not satisfied. It is not the case of the Assessee that the Assessing Officer had taken recourse to Section 153C of the Act and despite having done the same, proceeded to initiate reassessment proceedings under Section 147 of the Act in the case of the Assessee. It is admitted position that no satisfaction note was prepared and/or forwarded by the AO of the searched person to the AO of the Assessee. Therefore, the AO could not have taken recourse to the provisions contained in Section 153C of the Act. We reject the contention of contention of the Assessee that the AO was precluded from initiating reassessment proceedings u/s 147 of the Act in the facts and circumstances of the present case. Also there is neither any material on record to suggest nor has there been any allegation that assessing officer of the searched person or Other Person had acted in any malafide or arbitrary manner. Assessee contended that the proceedings should have been u/s 153C instead of Section 147 of the Act. In our view accepting the aforesaid contention advanced in behalf of the Assessee would amount to substitution of opinion of appellate authority in place of opinion of the AO of the Assessee but also the opinion of AO of the searched persons (to not prepare the aforesaid satisfaction note) and that too without examining the relevant material which does not form part of the record. Therefore, for this reason also the contention raised by the Assessee cannot be accepted. AO had formed the belief that income chargeable to tax had escaped assessment on the basis of fresh tangible material. It is admitted position that the Assessee had claimed long term capital gains exemption u/s 10(38) of the Act in respect of sale of shares of KGN Enterprises, a script in relation to which adverse findings were recorded in the report of the Investigations Wing as well as the orders passed by SEBI which prima facie showed that the trades undertaken in the said script were pre-arranged transactions undertaken to take advantage of provision of Section 10(38) of the Act. In view of the aforesaid, we do not find any merit in the contention advanced on behalf of the Assessee in relation to Ground No.1 and therefore, the same is dismissed. Addition u/s 68 - onus to prove - As identified various infirmities in the documentary evidence furnished by the Assessee to arrive at the conclusion that the even by filing the documents/details forming part of the record, the Assessee has failed to discharge the onus case upon the Assessee under Section 68 of the Act. At the same time was have also noted that some of the material/data relied upon by the Assessing Officer was not put to the Assessee. Therefore, keeping in view the overall facts and circumstances of the present case, we deem the opportunity to the Assessee to place on record the complete bank statement to establish that the consideration for acquiring shares of KGN Enterprises was made through the banking channel as well as to bring on record relevant material to discharge the onus cast under Section 68 of the Act and to meet the infirmities pointed out by this Tribunal. At the same time the Assessing Officer is also directed to confront the Assessee with the relevant data gathered from BSE and relied upon during the assessment proceedings, including the names of the exit providers and copy of orders passed by SEBI. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether reassessment initiated under section 147/148 was invalid on the ground that, since information was linked to a third-party search, proceedings ought to have been initiated only under section 153C; and whether such plea could be admitted as an additional ground for the first time before the Tribunal. (ii) Whether the reassessment notice under section 148 lacked valid 'reason to believe' due to alleged factual mismatch in the recorded reasons and absence of jurisdictional preconditions for section 147. (iii) Whether the additions treating share sale proceeds as unexplained cash credit under section 68 (and consequential denial of exemption claimed on long term capital gains) were sustainable on merits; and whether lack of confrontation of certain material required setting aside for fresh adjudication. 2. ISSUE-WISE DETAILED ANALYSIS (i) Reassessment under section 147 vs. alleged mandatory resort to section 153C; admissibility of additional ground Legal framework (as discussed by the Tribunal): The Tribunal examined the operational preconditions of section 153C, namely satisfaction by the searched person's Assessing Officer that seized material belongs/pertains to the other person, recording of such satisfaction, handing over of material to the other person's Assessing Officer, and the latter's satisfaction before issuance of notice. It emphasized that section 153C is triggered only when these jurisdictional steps occur, and otherwise reassessment under section 147 is not automatically barred. Interpretation and reasoning: The Tribunal held that the assessee's contention that reopening was 'pursuant to search' required determination whether the reopening was founded solely on search-seized incriminating material or on post-search investigation information. This was disputed and would require examination of records not forming part of the assessee's record (including searched person's records). The Tribunal found no material showing any satisfaction note by the searched person's Assessing Officer or handing over of seized material to the assessee's Assessing Officer. In absence of these events, the section 153C mechanism would be 'unworkable' on the facts and accepting the plea would lead to 'absurdity.' Conclusions: The additional ground was rejected as not a pure question of law and as requiring investigation into fresh facts/material not on record. On merits as well, the Tribunal held that section 147 was not barred because section 153C conditions were not shown to be satisfied and no jurisdiction had been assumed under section 153C. (ii) Validity of reopening under section 147/148: existence of tangible material and effect of mismatch in recorded reasons Legal framework (as applied): The Tribunal applied the standard that at notice stage the Assessing Officer must form a prima facie belief on fresh tangible material; adequacy/correctness is not tested conclusively at that stage. It also noted the return had only been processed under section 143(1), hence regular scrutiny considerations were not determinative. Interpretation and reasoning: The Tribunal found the investigation report and the Assessing Officer's verification/inquiry constituted sufficient fresh tangible material. The recorded reasons referenced information that an identified group was providing bogus long term capital gain entries and that the assessee was a beneficiary, coupled with verification of beneficiary list and the assessee's claim of exemption in the relevant scrip. The Tribunal rejected the argument that reopening was invalid merely because the reasons mentioned sale of a larger number of shares/value than those sold in that specific year, since in aggregate the assessee had sold the stated number of shares across the two years and the core allegation related to the same scrip and claimed exemption. Conclusions: Reopening was upheld for both years; the plea that notice was without jurisdiction or vitiated by factual mismatch was rejected, and the ground challenging reassessment validity was dismissed. (iii) Additions under section 68 in respect of share sale proceeds and denial of exemption: whether sustainable or to be remanded Legal framework (as applied): The Tribunal treated the sale proceeds credited as requiring explanation under section 68 and evaluated whether the assessee discharged the onus regarding nature and source, considering documentary substantiation of purchase, holding, and sale, and the surrounding circumstances indicating pre-arrangement/manipulation. Interpretation and reasoning: The Tribunal found significant infirmities in the assessee's evidence on purchase/holding: the shares were claimed to be purchased off-market when the scrip was not listed, and only a confirmation letter was produced without corroborating contemporaneous bank evidence of payment. On sale, the Tribunal noted contract note data showing negligible gaps between order time and trade time across multiple trades, supporting the Revenue's case of pre-arranged trades. It also accepted that investigation material indicated the company was operationally dysfunctional and that the scrip price was manipulated during the relevant period, undermining the genuineness explanation. However, the Tribunal also found partial procedural deficiency: the Assessing Officer relied on certain data obtained from the stock exchange regarding trades/exit providers without confronting the assessee with it, and the appellate order had relied on some irrelevant discussion relating to another entity. Conclusions: While holding that the assessee had not discharged section 68 onus on the existing record, the Tribunal set aside the section 68 additions for both years and remanded the issue to the Assessing Officer with directions: (a) permit the assessee to file complete bank statements and further material to establish purchase consideration through banking channels and otherwise discharge the onus; (b) require the Assessing Officer to confront the assessee with the stock exchange data relied upon, including exit provider details, and relevant regulatory orders; and (c) allow the Assessing Officer to conduct further enquiry as needed. The section 68 grounds were treated as allowed for statistical purposes, and reassessment grounds were dismissed for both years.