Sonal Snehal Shah Vs ITO (ITAT Mumbai)
Income Tax Appellate Tribunal (ITAT), Mumbai Bench, recently ruled in favour of assessee Sonal Snehal Shah, quashing reassessment proceedings initiated against her for the Assessment Year 2012-13. The appeal challenged an order by the National Faceless Appeal Centre (NFAC), which had upheld the Assessing Officer’s (AO) reassessment order passed under Section 143(3) read with Section 147 of the Income Tax Act. The AO had made additions totalling over Rs. 4 crore, treating Long Term Capital Gains (LTCG) from the sale of shares of Banas Finance Ltd. as unexplained cash credit under Section 68 and adding an estimated commission paid for the alleged bogus transaction.
The reassessment was initiated based on information received from the Deputy Director of Income Tax (Investigation) unit, alleging that Banas Finance Ltd. was a “penny stock” company used for providing accommodation entries of bogus LTCG. The investigation report suggested manipulation of share prices and provided details from a search action and statements, including one from the assessee’s father-in-law. Based solely on this report, the AO formed a “reason to believe” that income had escaped assessment, issued a notice under Section 148, and subsequently passed the reassessment order, disallowing the claimed LTCG exemption under Section 10(38).
The assessee challenged the validity of the reopening proceedings primarily on the grounds of “borrowed satisfaction.” It was argued that the AO did not apply independent mind or conduct any independent inquiry before recording reasons, merely reproducing the information from the investigation wing’s letter. The assessee pointed out factual inaccuracies in the recorded reasons and procedural errors, including a mechanical approval (“Yes I am satisfied”) granted by the Principal Commissioner of Income Tax under Section 151. Reliance was placed on judicial precedents like Principal Commissioner of Income-tax-5 V Shodiman Investments (P.) Ltd (Bombay High Court) and Well Trans Logistics India (P.) Ltd V Addl. Commissioner of Income-tax (Delhi High Court), which held that reopening based merely on investigation reports without independent verification or application of mind by the AO is invalid.
On the merits of the addition, the assessee submitted extensive documentation proving the genuineness of the transactions, including details of share purchase via preferential allotment, payments made, dematerialisation records, sale through a registered broker on a recognised stock exchange, receipt of consideration via banking channels, payment of Securities Transaction Tax (STT), and broker confirmations. It was contended that the AO ignored all this evidence and the fact that a related SEBI penalty order against Banas Finance Ltd. had been quashed by the Securities Appellate Tribunal (SAT), relying entirely on the investigation report to make the addition under Section 68.
The ITAT accepted the assessee’s contentions on both the validity of reopening and the merits. The Tribunal found it a clear case of borrowed satisfaction, noting the AO recorded reasons verbatim from the DDIT letter received just a day prior, indicating no time or effort for independent verification. The mechanical approval further vitiated the process. Citing Shodiman Investments and Well Trans Logistics, the ITAT quashed the reassessment proceedings as void ab initio. Furthermore, the Tribunal held that even on merits, the addition was unsustainable as the assessee had furnished comprehensive evidence to prove the identity, creditworthiness, and genuineness of the transaction, thereby discharging the initial onus under Section 68. The AO failed to conduct any inquiry to rebut this evidence, making the addition purely based on the investigation report untenable. The appeal was accordingly allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
