ITAT quashed Reassessment based on borrowed satisfaction & without independent application of mind 

Vishal Aggarwal Vs ITO (ITAT Delhi)

ITAT held that Income Tax reassessment initiated on the basis of borrowed satisfaction without any independent application of mind by Assessing Officer is liable to be quashed.

ITAT find that there has been no independent application of mind by the Assessing Officer and the satisfaction is completely based on the input by the Investigation Wing. The facts have not been correlated and there is no linkage between the documents received, sum of the quantity of shares purchased, sum of the trade value as alleged and sum of the quantity of shares purchased, sum of the quantity as entered by the assessee. The AO held that the sum of the trade value of sale was Rs.66.01 lacs whereas the sum of the trade value of sale was only Rs.40.08 lacs. Similarly, the sum of the purchase value of the trade mentioned by the AO of Rs.4.71 lacs is totally different from that of the assessee of Rs.20.32 lacs and same is the case with regard to number of trade while we agree that there has to be minimal sufficiency of the primary satisfaction for reopening of the case, in the instant case, we find that even the minimal sufficiency of the fact is absolutely lacking. The quantity, value and the number of trades are also incorrect the reasons recorded.

Hence, owing to the entire factual content, we hold that the reasons recorded are faulty, incorrect and not based on the facts, we hold that the notice of reopening cannot be held to be sustainable in law. The whole reassessment proceedings and the resultant order of assessment passed under Section 143(3)/148 of the Act have become vitiated entailing in nullifying proceedings and, accordingly, the orders of assessment under Section 143(3)/148 are quashed.

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeal has been filed by the assessee against the order of ld. CIT(A)-8, New Delhi dated 11.11.2019.

2. Following grounds have been raised by the assessee:

“1. On the facts and in the circumstances of the case and in law the CIT(A) was incorrect and unjustified in holding action initiated u/s 147 by the AO is legal and doesn’t suffer from any irregularities or illegality.

2. On the facts and in the circumstances of the case and in law the CIT(A) was incorrect and unjustified in holding that action u/s 147 has been rightly and legally taken.

3. On the facts and in the circumstances of the case and in law the CIT(A) was incorrect and unjustified in holding that Long Term capital Gain on sale of shares of Rs 40,47,573/- was a bogus transactions and was only an accommodation entry.

4. On the facts and in the circumstances of the case and in law the CIT(A) was incorrect and unjustified in holding that the transactions relating to sale and purchase of shares resulted in bogus Long Term capital Gain and was a sham transaction.

5. On the facts and in the circumstances of the case and in law the CIT(A) was incorrect and unjustified in confirming the addition of Rs 40,47,573/- incorrectly and invalidly made by the AO.

6. On the facts and in the circumstances of the case and in law the CIT(A) was incorrect and unjustified in rejecting, the claim of the assessee of earning genuine Long Term capital Gain, only on the basis of doubt, suspicion and human probability.

7. On the facts and in the circumstances of the case and in law the CIT(A) was incorrect and unjustified in rejecting the claim Long Term capital Gain even when the purchase of the shares in earlier years stands approved, accepted and not treated as bogus.”

3. The assessee filed return of income on 26.07.2011 declaring income of Rs.18,28,537/-. The assessee has shown income from salary being Director of M/s Shree Hari Developers P. Ltd., income from house property, income from business, income from capital gains and other sources.

4. The assessee purchased following shares of GCML on recognized stock exchange i.e. Bombay Stock Exchange (BSE) through its broker M/s Adinath Capital Services Ltd. and DSC on payment of Securities Transaction Tax (STT) which were credited to his D-mat a/c with above broker:

5. Payments for the aforesaid purchases were made to broker through assessee’s bank account. The assessee further purchased following shares after sub-Division of Face Value:

6. Post sub-division total number of shares including purchased becomes 3,18,112 shares. The assessee sold following shares of GCML on Bombay Stock Exchange in lots on different dates after holding them for more than 15 months on payment of STT:

7. The Assessing Officer issued notice u/s 148 based on the information received from Investigation Wing in the case of Global Capital Market Ltd., the Assessing Officer alleged that the assessee has entered into the following transactions:

8. The Assessing Officer has also held that the detailed enquiries conducted by the Income Tax Department and the SEBI revealed that this is a penny stock used for introducing the undisclosed income in the books without paying taxes. The AO held that the shares were transferred to the beneficiaries at a very nominal price mostly offline through preferential allotment or offline sale to save STT. The Assessing Officer has also held that the analysis of the information available on record shows that the assessee has purchased share through stock exchange and the balance capital gain (shares) are not traded through stock exchange. The AO has also theorized that the prices of the shares are manipulated at 20 to 25 times of the face value. The AO has also held that the operators rig the price of these stocks and gradually rise its price many times, often 500 to 1000 times. Hence, he had reasons to believe that it is a fit case to issue notice u/s 148.

9. Before us, a number of arguments have been taken up with regard to purchase and sale of the shares, the nature of the investor, the regular business of the assessee, objections of the reopening, detailed arguments with regard to invocation to Section 68, discharge of onus, non-confrontation of the material relied upon by the AO to make the additions, the issue of preponderance of probability relied upon by the revenue to treat the transactions as non-genuine, non-conducting of any enquiry by SEBI and non-implicating of the said shares or broker by SEBI etc.

10. On the other hand, the ld. DR has succinctly relied upon the report of the revenue, investigations conducted at Calcutta and the order of the Assessing Officer.

• At the outset, we have examined the veracity of reasons recorded and allegations of the revenue vis-à-vis the facts on record.
• The AO alleged that the assessee has purchased 29112 shares whereas the fact remains that the assessee has purchased 30,000 shares on 07.12.2009.
• The AO alleged that the assessee has purchased the shares in cash whereas the assessee has purchased shares @Rs.67.50 per share and paid an amount of Rs.20,32,312/- settled on 10.12.2019 vide cheque no. 657619.
• The AO alleged that the shares have been purchased off the market whereas the purchase of the shares were through the stock exchange online at the prevalent market rate on BSE.
• The AO alleged that the assessee made 25 times and sometimes theoretically 500 to 1000 times of the face value whereas the assessee sold the shares on online through stock exchange at the prevalent market rate.
• The AO alleged that the shares are generally obtained by preferential allotment whereas the shares have been purchased by the assessee from the open market.
• The AO alleged that enquiries have been conducted by SEBI in Global Capital Market Ltd. shares whereas the revenue could not prove to the fact that such enquiries were indeed conducted by SEBI.
• The assessee is also found to have purchase shares at Rs.18.76 and sold at Rs.18.47 and some scrips purchased at Rs.14.81 and sold at Rs.18.71 shows the regularity of transactions and earning of profits and incurring of losses as well.
• No enquiries have been conducted by the Assessing Officer before issue of the notice u/s 148.

12. Thus, we find that there has been no independent application of mind by the Assessing Officer and the satisfaction is completely based on the input by the Investigation Wing. The facts have not been correlated and there is no linkage between the documents received, sum of the quantity of shares purchased, sum of the trade value as alleged and sum of the quantity of shares purchased, sum of the quantity as entered by the assessee. The AO held that the sum of the trade value of sale was Rs.66.01 lacs whereas the sum of the trade value of sale was only Rs.40.08 lacs. Similarly, the sum of the purchase value of the trade mentioned by the AO of Rs.4.71 lacs is totally different from that of the assessee of Rs.20.32 lacs and same is the case with regard to number of trade while we agree that there has to be minimal sufficiency of the primary satisfaction for reopening of the case, in the instant case, we find that even the minimal sufficiency of the fact is absolutely lacking. The quantity, value and the number of trades are also incorrect the reasons recorded.

13. Hence, owing to the entire factual content, we hold that the reasons recorded are faulty, incorrect and not based on the facts, we hold that the notice of reopening cannot be held to be sustainable in law. The whole reassessment proceedings and the resultant order of assessment passed under Section 143(3)/148 of the Act have become vitiated entailing in nullifying proceedings and, accordingly, the orders of assessment under Section 143(3)/148 are quashed.

14. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 14/09/2022.