ITAT slams AO & CIT(A) for Unwarranted litigation, incompetence & casual approach 

Nikunj Kaushik Shah Vs ITO (ITAT Mumbai)

Introduction: The case of Nikunj Kaushik Shah vs Income Tax Officer (ITO) before the Income Tax Appellate Tribunal (ITAT) Mumbai has garnered attention due to its scrutiny of additions made on the sale of shares. The ITAT’s decision highlights the lack of substantiated evidence and the consequences of unwarranted litigation.

Detailed Analysis: The appeal contested the addition of Rs. 4,60,497 under Section 68 of the Income Tax Act, alleging money laundering through share transactions. The ITAT noted the absence of corroborative evidence and the genuine intra-day trading nature of the transactions, questioning the basis for the addition.

Moreover, the addition of Rs. 13,815 under Section 69C was also disputed, emphasizing the lack of evidence supporting the assumption of commission payment without basis.

The reopening of assessment under Section 147 faced criticism for its timing and lack of reasonable belief in income escapement, challenging the validity of the proceedings.

In the judicial analysis, the ITAT referenced administrative instructions emphasizing fair treatment and assistance to taxpayers. The tribunal condemned the casual handling of the case by tax authorities, citing violations of citizens’ rights and the need for responsible adjudication.

Conclusion: The ITAT’s decision in Nikunj Kaushik Shah vs ITO case underscores the importance of evidence-based assessment and fair treatment of taxpayers. The verdict serves as a reminder for tax authorities to uphold procedural integrity and avoid unnecessary litigation, ultimately promoting trust and compliance in the tax system.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by assessee is directed against the order of National Faceless Appeal Centre (NFAC), Delhi dated 16.06.2023 u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2011-12. The assessee has raised the following grounds of appeal:-

Addition of Rs. 4, 60,497/- u/s. 68

1) The learned Hon’ble Commissioner of Income-tax (A) (the Id. CIT (A)) erred in confirming the addition of Rs. 4, 60,497 being sale value of the shares of Vas Infrastructure Ltd. u/s. 68 of the Act merely based on the receipt of information from the DDIT without having any corroborative evidence though the assessee had disclosed the profit of Rs. 5,183/- earned on intra-day trading of the said shares under the head “Profits and gains of business or profession”.

2) The Id. CIT (A) erred in confirming the addition of Rs. 4, 60,497 made by the AO on the wrong presumption that the assessee had claimed exemption of long term capital gain on shares of Vas Infrastructure Ltd. u/s. 10(38) though in reality the assessee has offered profit earned on intra-day trading of the said shares under the head “Profits and gains of business or profession” and paid appropriate tax.

3) The Id. CIT(A) erred in confirming the addition without taking into consideration the contract notes of the broker, global report and other evidences submitted during the assessment/appeal proceeding confirming the genuineness of the transaction of intra-day trading in shares of Vas Infrastructure Ltd.

4) The Id. CIT(A) erred in confirming the addition of Rs. 4,60,497 though the Id. AO erred in not giving the various reports/statements relied for making addition of Rs. 4,60,497/- for rebuttal or cross examination.

Addition of Rs. 1 3,815/- u/s. 69C

5) The Id. CIT(A) erred in confirming the addition of Rs. 13,815/- being 3% of the sale value of the shares of Vas Infrastructure Ltd. u/s. 69C based on the assumption that the commission is paid for arranging the said profit without any corroborative evidence.

Reopening of Assessment

6) Without prejudice to above, the learned assessing officer (‘Ld. AO’) erred in reopening the assessment under section 147 of the Act, issuing notice under section 148 of the Act and, thereafter, passing the assessment order dated 10th December 2018 without appreciating that the reassessment proceedings were barred by limitation.

7) Without prejudice to above, the Id. AO erred in initiating reassessment proceedings after a period of four years from the end of the assessment year even though the requirement of section 149(1)(b) of the Act were not satisfied in the facts of the present case.

8) The Id. AO erred in reopening the assessment u/s. 147 and issuing notice u/s. 148 of the Income Tax Act, 1961 merely based on the receipt of some information about money laundering in the garb of exempted long term capital gain in shares of Vas Infrastructure Ltd. without verifying the correctness of the information or without even establishing any link between information received and escapement of income chargeable to tax.

9) The Ld. AO erred in reopening the assessment under section 147 of the Income tax Act, 1961 (the Act) without having any reasonable belief that income has escaped assessment.

The Appellant craves, leave to add to, amend, alter or withdraw any of the above grounds of appeal before or at the time of hearing of the appeal, if necessary.

2. The brief facts of the case are that assessee is an Individual filed his return of income on 11.07.2011 declaring total income at Rs. 61,52,220/-. Case of the assessee was processed u/s. 143(1) of the Act. Subsequently, an information has been received from the office of DDIT(Inv.), Unit-6(2), Mumbai, wherein in was informed that shares of a listed company M/s. VAS Infrastructure Ltd. is a penny stock and has been used by beneficiaries to launder money in the Garb of Long‑Term Capital Gains while claiming exemption u/s. 10(38) of the Act. This information was supported by share price movement price graph available in public domain vis-à-vis financial fundamentals of the listed company. It’s an unchallenged fact on record that assessee dealt with shares with a total sale value of Rs. 4, 60,497/-

3. Considering the above facts cased of the assessee was re-opened u/s. 147 of the Act and notice u/s. 148 of the Act was issued on 29.03.2018, i.e. after 6 years from the end of relevant assessment year. In response to this notice assessee filed his reply and requested to treat the earlier return filed u/s. 139(1) of the Act to be treated the return filed in response to section 148 of the Act and also requested to supply the reasons for re-opening of the case. Reasons for re­opening were supplied to the assessee vide para 6, page 5 of the assessment

4. In the reasons supplied it was stated that case has been re-opened on the premise that assessee has dealt with the shares of M/s. VAS Infrastructure Ltd., a penny stock and assessee has involved in the laundering of its unaccounted money in the garb of exemption provided in section 10(38) of the Act. We have gone through the reasons supplied by the AO and observed that as per his information, assessee has claimed exemption on theses listed shares u/s. 10(38) of the Act. AO, accordingly made an addition of Rs. 4, 60,497/- being total sales value of shares. Assessee being aggrieved with this order of AO preferred an appeal before the Ld. CIT (A), who in turn confirmed the order of AO. Assessee being further aggrieved preferred this appeal before us.

5. We have gone through the order of AO passed u/s. 143(3) r.w.s. 147 of the Act, order of the Ld. CIT (A) passed u/s. 250 of the Act and submissions of the assessee alongwith ground raised before us. We have gone through the bill details issued by the broker of the assessee M/s. Hornic Investment Pvt. Ltd. vide page no. 2 of the factual paper book, wherein it is crystal clear that assessee entered into the transactions on Intra-Day basis, earned profit of Rs. 5182.95/- and declared the same under the head income from “Business and Profession”. Rather, assessee has not claimed any long-term capital gain exempted u/s. 10(38) of the Act, vide computation of total income sheet attached as per page no. 113 of the factual paper book.

6. This fact was very much there on record before the AO, making assessee’s case eligible for dropping the proceedings-initiated u/s. 148 of the Act itself, instead of proceeding further. But AO opted to proceed further without any cogent reason and that too he added back the whole amount of sales proceed from the shares of M/s. VAS Infrastructure Ltd. whereas basic amount invested by assessee was not under challenge. The whole premise on which addition was made is wrong and unsustainable. The whole action of AO was without application of mind and a fit case of either incompetence or biased intentions. Even if it is assumed that assessee was involved in spurious activities to claim exemption u/s. 10(38) of the Act, addition can’t exceed Rs. 5182.95/-. We have gone through the order of Ld. CIT (A) also and found that Ld. CIT (A) simply brushed aside the explanations of the assessee alongwith evidences adduced and pronounced the order by cut and paste of what AO has done.

7. The above-mentioned facts clearly establish that the whole proceeding by Revenue at the level of AO as well as Ld. CIT (A) was frivolous and without any basis and application of mind. Both the orders are clear violation of Citizen’s Charter issued by the Central Board of Direct Taxes and Board’s Circular No. 14(XL-35) of 1955, Dated: 11-04-1955 reproduced as under:

“Administrative instructions for guidance of Income-tax Officers on matters pertaining to assessment

1. The Board have issued instructions from time to time in regard to the attitude which the Officers of the Department should adopt in dealing with assessees in matters affecting their interests and convenience. It appears that these instructions are not being uniformly followed.

2. Complaints are still being received that while Income-tax Officers are prompt in making assessments likely to result into demands and in effecting their recovery, they are lethargic and indifferent in granting refunds and giving reliefs due to assessees under the Dilatoriness or indifference in dealing with refund claims (either under section 48 or due to appellate, revisional, etc., orders) must be completely avoided so that the public may feel that the Government are actually prompt and careful in the matter of collecting taxes and granting refunds and giving reliefs.

(3) Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessee on whom it is imposed by law, officers should—

(a) Draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;

(b) Freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.

3. Public Relation Officers have been appointed at important centres, but by the very nature of their duties, their field of activity is bound to be limited.

4. The following examples (which are by no means exhaustive) indicate the attitude which officers should adopt:

(1) Section 17(1) of the 1922 Act [section 113 of the 1961 Act] – While dealing with the assessment of a non-resident assessee the officer should bring to his notice that he may exercise the option to pay tax on his Indian income with reference to his total world income if it is to his advantage.

(2) Section 18(3), (3A), (3B) and (3D) of the 1922 Act [sections 193, 197(1), 195(1), 195(2) and 194 of the 1961 Act] – The officer should in every appropriate case bring to the assessee’s notice the possibility of obtaining a certificate authorising deduction of income-tax at a rate less than the maximum or deduction of super tax at a rate lower than the flat rate, as the case may be.

(3) Section 25(3) and 25(4) of the 1922 Act – The mandatory relief about exemption from tax must be granted whether claimed or not; the other relief about substitution, if not time barred, must be brought to the notice of a taxpayer.

(4) Section 26A of the 1922 Act [sections 184 to 186 of the 1961 Act] – The benefit to be obtained by registration should be explained in appropriate cases. Where an application for registration presented by a firm is found defective, the officer should point out the defect to it and give it an opportunity to present a proper application.

(5) Section 33A of the 1922 Act [section 264 of the 1961 Act] – Cases in which the Income-tax Officer or the Assistant Commissioner thinks that an assessment should be revised, must be brought to the notice of the Commissioner of Income-tax.

(6) Section 35 of the 1922 Act [sections 154 and 155 of the 1961 Act] – Mistakes should be rectified as soon as they are discovered without waiting for an assessee to point them out.

(7) Section 60(2) of the 1922 Act [sections 89(1) and 103 of the 1961 Act] – Cases where relief can properly be given under this sub-section should be reported to the Board.

5. While officers should, when requested, freely advice assessees the way in which entries should be made in various forms, they should not themselves make any in them on their behalf. Where such advice is given, it should be clearly explained to them that they are responsible for the entries made in any form and that they cannot be allowed to plead that they were made under official instructions. This equally applies to the Public Relation Officers.

6. The intention of this circular is not that tax due should not be charged or that any favour should be shown to anybody in the matter of assessment, or that where investigations are called for, they should not be made. Whatever the legitimate tax it must be assessed and must be collected. The purpose of this circular is merely to emphasise that we should not take advantage of an assessee’s ignorance to collect more tax out of him than is legitimately due from him.

Circular: No. 14(XL-35), dated 11-4-1 955.

JUDICIAL ANALYSIS

EXPLAINED IN: The above circular was referred to in Parekh Bros. v. CIT [1984] 150 ITR 105 (Ker.), with the following observations:

‘We are referring to this circular only to highlight the spirit behind this circular. In our opinion, the circular envisages that “Officers of the Department”—which will certainly take in the Head of the Department—the Commissioner of Income-tax (1st respondent herein) should bear in mind the spirit of the said circular in affording relief to the assessee, as indicated therein. At least when the matter is brought to their notice, without raising technical objections, the matter should receive attention. The circular have got the force of law. The circular, at any rate, are binding on the Department. The assessee is entitled to the benefit of such circular. It is unnecessary to refer to the scope and enforceability of such circular in view of the fact that we are not resting our decision on the above circular. But we are referring to that circular only to highlight the spirit behind the circular in the approach to be made by the departmental officials, when a claim for deduction or relief is claimed. The binding nature of the circulars has been considered in the decisions reported in CIT v. B.M. Edward, India Sea Food [1979] 119 ITR 334 (FB) (Ker.), CIT v. Venkiteswaran [1979] 120 ITR 675 (Ker.) and CWT v. Gammon (India) (P.) Ltd. [1981] 130 ITR 471 (Bom.).’ (p. 118)

EXPLAINED IN – In Dattatraya Gopal Shette v. CIT [1984] 150 ITR 460 (Bom.), the above circular was referred to with the following observations:

“It is now well settled that even if the contents of a circular may amount to a deviation on a point of law, a circular of the Central Board of Revenue which confers some benefit on the assessee is binding on all officers concerned with the execution of the I. T. Act; and they must carry out their duties in the light of the circular. In the present case, therefore, it was, in the first place, the duty of the ITO to have drawn the attention of the assessee-firm to the defect in the application for renewal of registration. The ITO, however, granted registration to the firm. In such a situation it was equally the duty of the CIT to have given an opportunity to the assessee-firm to remedy the defect in their application. The CIT, in view of this circular, clearly should not have cancelled the renewal of registration of the assessee-firm without giving an opportunity to the assessee-firm to remedy the defect in the application.

The attention of any of the officers concerned as well as of the Tribunal does not appear to have been drawn to this circular. We have no doubt that had the circular been pointed out to the CIT or to the Tribunal, the directions contained in the circular would have been carried out.” (pp. 463-4 64)

The above circular was quoted and relied on, in Smt. Gopi Devi v. ITO [1989] Taxation 92(4) – 101 (ITAT – Delhi), pp. 104-1 05.”

8. In view of the above facts and relying on the circular issued by the Board, it is established that both the authorities act in a casual manner and dragged the assessee towards an unwarranted litigation on their whims and fancies. Assessee is facing this litigation since last 5 years because of incompetence of AO and casual approach of the Ld. CIT (A). Having given thoughtful consideration to the entire matter, on the facts and circumstances of the present case where, as against the impugned order of AO and Ld. CIT (A), it is found that whole proceeding in this matter carried out in an entirely irresponsible manner or that the authorities should be penalized in monetary terms on that count.

9. In the totality of circumstances, grounds taken by the assessee is allowed on merits without discussing about the grounds taken on limitation and on the facts and circumstances of the case, we are of the opinion that this is a fit case to levy cost. The assessee had to undergo needless litigation and had to remit appeal fees of Rs. 1000/- before Ld. CIT (A) and Rs. 10,000/- before ITAT. Both the authorities have not applied their mind on the issue and had casually handled the matter, which is not befitting a quasi-judicial authority. As noted (supra), this was a fit case for levy of cost on both authorities, but we refrain from doing so. But we expect the concerned senior officers to advice their officials to be careful in future.

10. with above directions, appeal of the assessee is allowed on merits.

Order pronounced in the open court on 29^th of January 2024.