Pradeep Dattatraya Bangirwar Vs PCIT (ITAT Nagpur)
The Income Tax Appellate Tribunal (ITAT), Nagpur Bench, allowed the appeal filed by Pradeep Dattatraya Bangirwar for Assessment Year 2011-12, challenging the revisionary order dated 24 February 2021 passed by the Principal Commissioner of Income Tax, Nagpur-2, under Section 263 of the Income Tax Act, 1961. The assessee had originally filed his income tax return on 18 October 2011, declaring a total income of ₹27,86,400. Subsequently, the Assessing Officer reopened the assessment under Section 147 on the basis of information suggesting that the assessee had claimed bogus exempt long-term capital gains of ₹14.75 lakh from the sale of 1,00,000 shares of Comfort Intech Ltd., described as a penny-stock company. A notice under Section 148 was issued, and the assessee filed his return declaring the same income as originally reported. The assessee also challenged the recorded reasons for reopening, maintaining that the allegation of exempt long-term capital gains was factually incorrect.
During the reassessment proceedings, the assessee explained that he had never claimed exempt long-term capital gains of ₹14.75 lakh from the sale of Comfort Intech Ltd. shares. Instead, he had disclosed taxable short-term capital gains of ₹10,69,635 from transactions involving the same shares, and the amount had already been credited to his profit and loss account and offered to tax in the original return. After examining the explanation and assessment records, the Assessing Officer accepted the assessee’s position and completed the reassessment under Section 147 read with Section 143(3) on 1 December 2018 without making any addition concerning the alleged bogus long-term capital gains. However, the Principal Commissioner subsequently examined the reassessment records and concluded that the Assessing Officer had failed to conduct adequate inquiries into the purchase and sale of shares, demat account statements, dates of receipt of shares, transactions with the broker, source of investment and genuineness of the share transactions.
The Principal Commissioner considered the reassessment order erroneous and prejudicial to the interests of the Revenue and invoked By order dated 24 February 2021, he set aside the reassessment and directed the Assessing Officer to examine the relevant transactions afresh after conducting proper inquiries. The assessee challenged this revision before the Tribunal, contending that the reassessment itself was founded on an incorrect assumption of jurisdiction. The Tribunal examined the recorded reasons for reopening and found that the allegation of bogus exempt long-term capital gains was demonstrably incorrect because the assessee had actually declared taxable short-term capital gains. It observed that the very foundation of the reopening proceedings was therefore misconceived and non-existent. Although the assessee had not separately appealed against the reassessment order because his returned income had been accepted, its jurisdictional validity could still be examined when determining whether the Principal Commissioner could lawfully revise it.
The Tribunal held that an assessment order founded on an invalid assumption of jurisdiction cannot be validated or revived through revisionary proceedings under Section 263. It observed that once the original reason for reopening was found to be factually incorrect, the Assessing Officer could not have proceeded to conduct further inquiries into unrelated aspects of the share transactions on the strength of that defective reopening. Consequently, the Principal Commissioner could not treat the absence of such inquiries as a valid basis for exercising revisionary jurisdiction. In reaching this conclusion, the Tribunal relied on the coordinate bench decisions in Charbhuja Marmo (India) Pvt. Ltd. Vs PCIT, ITA No. 4749/Del/2019, order dated 31 December 2019, and Supersonic Technologies Pvt. Ltd. Vs PCIT-8, New Delhi, 69 ITR 585 (ITAT Delhi). These decisions supported the proposition that a reassessment lacking a valid jurisdictional foundation could not form the basis of a sustainable revision under Section 263.
Accordingly, the ITAT Nagpur set aside the Principal Commissioner’s revisionary order dated 24 February 2021 and allowed the assessee’s appeal. The Tribunal held that the reassessment order dated 1 December 2018, having originated from factually incorrect reasons to believe, was not legally sustainable and therefore could not support the subsequent revisionary proceedings. Having decided the jurisdictional issue in favour of the assessee, the Tribunal refrained from adjudicating the remaining arguments concerning the genuineness of the share transactions and the merits of the proposed inquiries. Ground No. 1 was allowed, Ground No. 2 was left open, and Ground No. 3, being general in nature, was dismissed as not pressed. The order was pronounced on 6 April 2022. The decision establishes, in the context of the facts considered, that Section 263 cannot be invoked to revise a reassessment that was itself initiated without a valid jurisdictional foundation.
Cases Discussed
- Charbhuja Marmo (India) Pvt. Ltd. Vs PCIT — ITA 4749/Del/2019, order dated 31 December 2019 (ITAT Delhi).
- Supersonic Technologies Pvt. Ltd. Vs PCIT-8, New Delhi — 69 ITR 585 (ITAT Delhi).
FULL TEXT OF THE ORDER OF ITAT NAGPUR
The present appeal filed by the assessee is directed against the order passed by the Principal Commissioner of Income Tax, Nagpur-2 (for short “Pr. CIT”) u/s. 263 of the Income-tax Act, 1961 (for short “the Act”), dated 24.02.2021, which in turn arises from the order passed by the A.O under Sec. 147 r.w.s 143(3) of the Act, dated 01.12.2018 for assessment year 2011-12. Before us the assessee has assailed the impugned order on the following grounds of appeal :
“1. Based on the facts and circumstances of the case, order passed by the Learned PCIT-II, Nagpur is bad in law and needs to be set aside.
2. Based on the facts and circumstances of the case and in law, the assessment order passed by the ACIT-Wardha Range, Wardha is neither erroneous nor pre- judicial to the interest of the revenue as the reassessment order u/s. 147 of the I.T. Act, 1961 was passed after the verification of reasons recorded for re-opening of assessment and hence, there is no situation which of invoking provisions of section 263 of the I.T Act, 1961.
3. Assessee craves leave to add, alter or amend any of the grounds of appeal.”
2. Succinctly stated, the assessee had on 18.10.2011 filed his return of income for the assessment year 2011-12, declaring an income of Rs.27,86,400/-. On the basis of information received by the Assessing Officer that the assessee had raised bogus claim of Long Term Capital Gain (LTCG) of Rs. 14.75 lac on sale of one lac shares of M/s Comfort Intech Ltd., a penny stock company, his case was reopened u/s. 147 of the Act. Notice u/s. 148 of the Act was issued to the assessee. In compliance, the assesee filed his return of income declaring an income of Rs.27,86,400/- i.e., as originally returned. On request copy of the ‘reasons to believe’ on the basis of which the case of the assessee was reopened u/s. 147 of the Act were made available to him by the Assessing Officer. Objections were filed by the assessee as regards the validity of the jurisdiction that was assumed by the AO for reopening of his case on the basis of misconceived “reasons to believe”. It was the claim of the assessee that he had not earned any exempt LTCG of Rs. 14.75 lac (supra) on sale of shares of M/s Comfort Intech Ltd., but had rather disclosed an income of Rs. 10,69,635/- on account of Short term capital gain (STCG) from sale of shares of the said scrip which was offered by him for tax in his return of income. Observing, that the aforesaid claim of the assessee was in order, the Assessing Officer vide his order passed u/s. 147 r.w.s 143(3) of the Act, dated 01.12.2018 accepted his returned income and did not make any addition as regards the issue on the basis of which his case was reopened by him.
3. After culmination of the reassessment proceedings the Pr. CIT called for the records of the assessee. Observing, that the Assessing Officer in the course of assessment proceedings had not verified the details of purchase and sale of shares, numbers of shares, copy of de-mat account which would have revealed the date on which shares were received by the assessee in his de-mat account, as well as not examined as to whether or not the assessee had regular dealings with the broker and the source of purchase of shares in question etc., the Pr. CIT was of the view that the summarily accepting of the share transactions of the assessee as genuine by the A.O had rendered his order passed u/s. 143(3) r.w.s 147 of the Act, dated 01.12.2018 as erroneous in so far it was prejudicial to the interest of the revenue u/s. 263 of the Act. Backed by his aforesaid observations the Pr. CIT called upon the assessee to explain as to why the assessment order may not be revised u/s. 263 of the Act. The multi-facet explanation of the assessee i.e, both as regards the validity of the jurisdiction assumed by the Pr. CIT u/s. 263 of the Act, as well as those advanced by him in order to support the genuineness of the share transactions in question, however, did not find favor with the Pr. CIT who vide his order passed u/s. 263 of the Act, dated 24.02.2021 held the assessment order passed by the Assessing Officer as erroneous in so far it was prejudicial to the interest of the revenue u/s 263 of the Act. Accordingly, the Pr. CIT set-aside the assessment order to the file of the AO with a direction to re-assess the income afresh i.e, after examination of the relevant details on the basis of a proper enquiry as may be relevant and necessary.
4. The assessee being aggrieved with the order passed by the Pr. CIT u/s. 263 of the Act, dated 24.02.2021 has carried the matter in appeal before us.
5. We have heard the ld. Authorized Representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. As is discernible from the records, the case of the assessee was reopened by the Assessing Officer u/s. 147 of the Act on the basis of the following ‘reasons to believe’ (as were made available to the assessee by the AO vide an annexure to his Notice u/s 142(1), dated 12.10.2018), which reads as under (relevant extract) :
“You have shown Long Term Capital Gain in penny stock of M/s. Comfort Intech Ltd by showing sale of 1,00,000 shares for Rs.14,75,000/- which is not based on real investment practice.”
6. As observed by us hereinabove, the assessee in his reply had submitted before the Assessing Officer that he had not earned any exempt LTCG of Rs. 14.75 lac (supra) from sale of shares of M/s. Comfort Intech Ltd., but on contrary had disclosed an income of Rs.10,69,635/- (supra) i.e STCG from sale of shares of the said scrip in his original return of income. Observing, that the aforesaid claim of the assessee was in order and STCG on sale of shares of M/s. Comfort Intech Ltd. of Rs. 10,69,635/-(supra) was duly credited by the assessee in his profit & loss account for the year under consideration that was filed a/w his original return of income, the Assessing Officer found favor with the aforesaid claim of the assessee and accepted the income returned by him as such.
7. After having given a thoughtful consideration to the issue in hand, we are of the considered view, that as claimed by the Ld. AR, and rightly so, the very basis for reopening of the case of the assessee by the AO is found to be absolutely misconceived and incorrect. On a perusal of the ‘reasons to believe’ which have purposively being culled out by us hereinabove, the case of the assessee was reopened for the reason that the bogus exempt LTCG of Rs. 14.75 lac (supra) shown by the assessee on sale of one lac shares of M/s. Comfort Intech Ltd., a penny stock company, was not based on real investment practice. However, the aforesaid “reason” on the basis of which the case of the assessee was reopened was absolutely misconceived and fallacious. On a perusal of the assessment record, as observed by the Assessing Officer in the course of the assessment proceedings, the assessee had not claimed any exempt LTCG of Rs.14.75 lac (supra) on sale of shares of M/s. Comfort Intech Ltd., but on the contrary it had disclosed STCG of Rs.10,69,635/- (supra) on the sale of shares of the said scrip and had offered the same for tax in his return of income.
8. Backed by the aforesaid factual position there is no gainsaying that the very basis for reopening the case of the assessee i.e., booking of bogus exempt LTCG of Rs. 14.75 lac (supra) on sale of one lac shares of M/s Comfort Intech Ltd. is not only incorrect, but in the true sense can safely be held as non-existent. Observing, that the “reason to believe” on the basis of which the case of the assessee was reopened was factually incorrect, the Assessing Officer, had therein vide his order passed under Sec. 147 r.w.s 143(3), dated 01.12.2018 accepted the returned income of the assessee as such. At this stage, we may herein observe, that though the reopening of the assesse’s case on the basis of misconceived and fallacious “reasons to believe” would be fatal to the very existence of the order of reassessment that was passed by the AO under Sec. 143(3) r.w.s.147 of the Act, dated 01.12.2018, however, as the income of the assessee as was originally returned by him was accepted by the AO vide his reassessment order, therefore, most probably for the said reason the assessee had not challenged the validity of the same by carrying the matter any further in appeal. Be that as it may, as the reassessment order passed by the AO under Sec. 143(3) r.w.s 147 of the Act, dated 01.12.2018 is in itself based on invalid assumption of jurisdiction by the AO, therefore, the said material fact had rightly been pressed into service by the ld. AR for impressing upon us that a non-est assessment i.e, an assessment which has no sanctity of law could not have been revised by the Pr. CIT vide his order passed under Sec. 263, dated 24.02.2021. In so far the observation of the Pr. CIT that the failure on the part of the Assessing Officer in not carrying out necessary verifications, viz. verifying the details of purchase and sales of shares; number of shares; copy of de-mat account which would have revealed the date on which shares were received by the assessee; as to whether the transaction in question was the only one transaction; as to how the shares offered vide right issues were purchased from the broker; a/w necessary verifications as regards the source of the purchases etc. had rendered the assessment order passed by him u/s. 143(3) r.w.s.147 of the Act, dated 01.12.2018 as erroneous in so far it was prejudicial to the interest of the revenue, we are afraid the same cannot be accepted. We, say so, for the reason that now when the very basis for reopening of the assessee’s case under Sec. 147 of the Act is admittedly found to be incorrect or, in fact non-existent, then, the said fact would continue to remain so qua the jurisdiction assumed by the Pr. CIT to revise the said order in exercise of his revisional jurisdiction u/s 263 of the Act. On the basis of our aforesaid observations, we are of the considered view that now when the very foundation for assumption of jurisdiction by the Assessing Officer is found to be misconceived and fallacious, then, it was not permissible for him to have proceeded any further and gathered the information i.e., details of purchase and sales of shares, numbers of shares, copy of demat account, transactions of the assessee with broker, manner in which the shares offered by right issues were purchased from the broker, genuineness of the transactions etc. Backed by our aforesaid observations, we are unable to persuade ourselves to subscribe to the view taken by the Pr. CIT who bypassing the material fact that the very assumption of jurisdiction by the Assessing Officer for reopening the case of the assessee was mis-conceived, had however held his order to be erroneous in so far it was prejudicial to the interest of the revenue u/s 263 of the Act. Our aforesaid view that an invalid reassessment order cannot be revised by the Pr. CIT in exercise of his jurisdiction u/s 263 of the Act is supported by the orders of the coordinate benches of the Tribunal in the case of, viz. (i). M/s Charbhuja Marmo (India) Pvt. Ltd. Vs. PCIT, ITA 4749/Del/2019; dated 31.12.2019 ; and (ii). M/s Supersonic Technologies Pvt. Ltd. Vs. PCIT-8, New Delhi, 69 ITR 585 (Del). We, thus, in terms of our aforesaid observation that now when the very foundation of the impugned revisional proceedings i.e, the reassessment order passed by the AO under Sec. 143(3) r.w.s.147 of the Act, dated 01.12.2018 is in itself based on an invalid assumption of jurisdiction by the AO and thus, not sustainable in the eyes of law, therefore, the Pr. CIT could not have assumed jurisdiction u/s 263 and validated the said reassessment order by restoring the same to the file of the AO with a direction to reassess the income of the assessee afresh, therefore, set-aside the order passed by the Pr. CIT passed u/s.263 of the Act, dated 24.02.2021. Thus, the Ground of appeal No.1 raised in appeal by the assessee is allowed in terms of our aforesaid observations.
9. As we have quashed the order passed by the Pr. CIT u/s.263 of the Act, dated 24.02.2021 in terms of our aforesaid observations, therefore, we refrain from adverting to and therein adjudicating the other contentions as have been advanced by the Ld. AR as regards the merits of the case. Thus, the Ground of appeal No.2 raised by the assessee is left open in terms of our aforesaid observations.
10. Ground of appeal No.3 being general in nature is dismissed as not pressed.
11. In the result, appeal of the assessee is allowed in terms of our aforesaid observations.
Order pronounced in open court on 06th day of April, 2022.
