Pending assessments abate as per Section 153A when a search takes place: ITAT Delhi

Rajender Agarwal Vs ACIT (ITAT Delhi)

The appeal filed by Rajender Agarwal against the order of the ld. CIT(A)-24, New Delhi dated 14.03.2019 for the Assessment Year 2014-15 revolves around the confirmation of an addition of Rs. 78,85,851 as non-genuine long-term capital gain. The key contention of the assessee is that the assessment should have been made under Sections 153A and 153C of the Income Tax Act, rather than under Section 143(3). Additionally, the appellant questions the validity of the addition, citing lack of evidence and violation of natural justice.

Background:

• The appellant declared income of Rs. 14,48,100, which was processed under Section 143(1).
• The case was selected for scrutiny assessment, and an order was passed on 30.12.2016, assessing the income at Rs. 94,12,810 with an addition of Rs. 79,64,709 on account of alleged bogus long-term capital gains.
• The appellant challenges the assessment, arguing that it should have been framed under Sections 153A and 153C.

Grounds of Appeal:

The appellant’s grievances include:

• Confirmation of the addition of Rs. 78,85,851 as non-genuine long-term capital gain.
• Alleged lack of evidence supporting the addition.
• Violation of principles of natural justice in confirming the addition based on investigations without providing relevant material or cross-examination opportunity.
• The confirmation of a commission of Rs. 78,858 on presumptive grounds.

Additional Grounds Raised:

The appellant, through a letter dated 15.05.2023, raised an additional ground questioning the jurisdiction of the assessment under Section 143(3) instead of Section 153A read with Section 153C.

Analysis of Additional Ground:

• The appellant argues that the assessment should have been framed under Sections 153A and 153C, citing the decision in ITO vs. Vikram Sujit Kumar Bhatia (2023) 149 taxmann.com 123 (SC) and Kanwar Singh Saini vs. Delhi High Court 2012 (4) SCC 307.
• The key focus is on the applicability of the Finance Act, 2015 amendment to Section 153C, allowing it to be retrospective, as clarified in Vikram Singh Bhatia.

Judgment and Decision:

• The Income Tax Appellate Tribunal (ITAT) carefully considered the submissions from both sides.
• The ITAT analyzed the Supreme Court’s decision in Vikram Singh Bhatia, emphasizing that even before the 2015 amendment, searches conducted prior to 01.06.2015 were subject to assessment under Section 153C.
• The ITAT rejected the argument that the assessment was based on information received during the scrutiny assessment, stating that the entire addition relied on incriminating material from the search proceedings.
• Quoting the relevant observations of the Assessing Officer, the ITAT held that the assessment should have been framed under Section 153C.
• The ITAT set aside the assessment order as bad in law, emphasizing that pending assessments abate as per Section 153A when a search takes place, and proceedings under Section 153C are an offshoot of Section 153A.

Conclusion:

The ITAT, in the case of Rajender Agarwal Vs ACIT, allowed the appeal, quashing the assessment order. The decision underscores the importance of framing assessments under the appropriate sections, especially in cases involving search and seizure proceedings. The judgment also reaffirms the retrospective applicability of the Finance Act, 2015 amendment to Section 153C, as clarified by the Supreme Court in Vikram Singh Bhatia.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the assessee is preferred against the order of the ld. CIT(A)-24, New Delhi dated 14.03.2019 pertaining to A.Y. 2014-15.

2. The grievances of the assessee read as under:

“1.  The CIT(A) erred in law and on facts in confirming the addition of Rs. 78,85,851/- by holding the long term capital gain declared on sale of shares of a listed company through recognized stock exchange as non-genuine ignoring the submissions and evidences placed on record. Thus the addition so made should be deleted.

2. The CIT(A) erred in law and on facts in confirming the said addition of Rs. 78,85,851/- as bogus capital gain though the same was received in the regular bank account of the assessee and the source of the same was duly declared in his, return of income and nothing has been brought on record by the AO that the assessee paid any consideration or benefit in any form to the purchasers of the shares sold. Thus the addition so made should be deleted.

3. The CIT(A) erred in law and on facts in confirming the said addition of Rs. 78,85,851/- made on the basis of certain investigations carried out by the Investigation Wing of the income-tax department and statements of some persons recorded at the back of the assessee but without giving copies of the material gathered and relied by the revenue and also without allowing an opportunity to the assessee to cross- examine them though specifically asked for.

4. Thus, the addition so made ignoring the principles of natural justice and proper opportunity should be deleted.

5. The CIT(A) erred in law and on facts in confirming the addition of Rs. 78.858/- being commission @ 1% on the amount of long term capital gain merely on surmises and conjectures without any basis. Thus the addition so made on presumptions should be deleted.

3. Vide letter dated 15.05.2023, the assessee raised the following additional grounds:

“6. The assessee submits that the impugned assessment order is without valid and legal jurisdiction as the same has been passed u/s 143(3) of the Act whereas the same should have been passed U/S 153A read with the section 153C of the Act as the impugned addition made therein is allegedly based on some incriminating material found in a search in the premises of a third party. Thus, the same must be quashed as illegal as per ITO vs Vikram Sujit kumar Bhatia (2023) 149 taxmann.com 123 (SC) read with Kanwar Singh Saini vs Delhi High Court 2012 (4) SCC 307 holding that a jurisdictional plea can be taken at any stage during the pendency of the lis even at the time of execution or before the Supreme Court.

4. Since the additional ground goes to the root of the matter, we decided to adjudicate it first.

5. Representatives of both the sides were heard at length. Case records carefully perused. Relevant documentary evidence brought on record duly considered in light of Rule 18(6) of the ITAT Rules.

6. Briefly stated, the facts of the case are that the assessee filed his return of income on 18.07.2014 declaring income of Rs. 14,48,100/-which was processed u/s 143(1) of the Income-tax Act, 1961 [the Act, for short] and subsequently, return was selected for scrutiny assessment. Statutory notices were, accordingly, issued and served upon the assessee and vide order dated 30.12.2016 framed u/s 143(3) of the Act returned income was assessed at Rs. 94,12,810/- after making addition of Rs. 79,64,709/- on account of bogus long term capital gains.

7. The challenge before us is that the impugned assessment order is bad in law in as much as the same should have been framed u/s 153A r.w.s 153C of the Act.

8. It is the say of the ld. counsel for the assessee that the entire assessment is based on the outcome of search and seizure proceedings conducted at the premises of several stock brokers from where the Investigation Wing gathered information that the assessee is also one of the beneficiaries of long term capital gain earned through manipulation of shares.

9. Strong reliance was placed on the decision of the Hon’ble Supreme Court in the case of Vikram Singh Bhatia 149 com 123.

10. Opposing the submissions of the ld. counsel for the assessee, the ld. DR vehemently stated that the return was selected for scrutiny assessment through CASS and during the course of assessment proceedings, information was received from the INV Wing in respect of bogus long term capital gains which was the outcome of search and seizure proceedings u/s 132 of the Act. It is the say of the ld. DR that therefore, the ratio laid down by the Hon’ble Supreme Court do not apply on the facts of the case.

11. Before proceeding further, let us understand the findings of the Hon’ble Supreme Court in the case of Vikram Singh Bhatia [supra]. The relevant findings read as under:

“10.8 Insofar as the submission on behalf of the respective respondents – assessees that by way of amendment to Section 153C by Finance Act, 2015, it brings into its fold, the assessees – persons, who were not so far covered by it and, therefore, it affects the substantive rights of the assessees and, hence, it should not be made applicable retrospectively, is concerned, the submission seems to be attractive but deserves to be rejected. As observed hereinabove, even the unamended Section 153C pertains to the assessment of income of any other person. The object and purpose of Section 153C is to address the persons other than the searched person. Even as per the unamended Section 153C, the proceeding against other persons (other than the searched person) was on the basis of the seizure of books of account or documents seized or requisitioned “belongs or belong to” a person other than the searched person. However, it appears that as in the case of Pepsico India Holdings Private Limited (supra), the Delhi High Court interpreted the words “belong to” restrictively and/or narrowly and which led to a situation where, though incriminating material pertaining to a third party / person was found during search proceedings under Section 132, the Revenue could not proceed against such a third party, which necessitated the legislature / Parliament to clarify by substituting the words “belongs or belong to” to the words “pertains or pertain to” and to remedy the mischief that was noted pursuant to the judgment of the Delhi High Court. Therefore, if the submission on behalf of the respective respondents – assessees that despite the fact that the incriminating materials have been found in the form of books of account or documents or assets relating to them from the premises of the searched person, still they may not be subjected to the proceedings under Section 153C solely on the ground that the search was conducted prior to the amendment is accepted, in that case, the very object and purpose of the amendment to Section 153C, which is by way of substitution of the words “belongs or belong to” to the words “pertains or pertain to” shall be frustrated. As observed hereinabove, any interpretation, which may frustrate the very object and purpose of the Act / Statute shall be avoided by the Court. If the interpretation as canvassed on behalf of the respective respondents is accepted, in that case, even the object and purpose of Section 153C namely, for assessment of income of any other person (other than the searched person) shall be frustrated.

11. In view of the above and for the reasons stated above, the impugned common judgment and order passed by the High Court is held to be unsustainable and the question, i.e., “Whether the amendment brought to Section 153C of the Income Tax Act, 1961 vide Finance Act, 2015 would be applicable to searches conducted under Section 132 of the Act, 1961 before 01.06.2015, i.e., the date of amendment?”, is answered in favour of the Revenue and against the assessees and is answered accordingly. Therefore, it is observed and held that the amendment brought to Secstion 153C of the Act, 1961 vide Finance Act, 2015 shall be applicable to searches conducted under Section 132 of the Act, 1961 before 01.06.2015, i.e., the date of the amendment. The impugned common judgment and order passed by the High Court, therefore, deserves to be quashed and set aside and is accordingly quashed and set aside. However, as before the High Court respective assessment orders were challenged mainly on the aforesaid issue, which is now answered in favour of the Revenue as above, we reserve the liberty in favour of the respective assessees to challenge the assessment orders before CIT (A) on any other grounds which may be available and it is observed that if said appeals are preferred within four weeks from today, the same be considered in accordance with law and on their own merits, on any other grounds.

Present appeals are accordingly allowed in terms of the above. However, in the facts and circumstances of the case, there shall be no order as to costs.”

12. What we gather from the judgment of the Hon’ble Supreme Court [supra] is that, even before the amendment by the Finance Act, 2015, searches conducted prior to 01.06.2015 were also subjected to assessment u/s 153C of the Act. There is no dispute that in the case in hand, the entire addition is based upon the incriminating material/information detected out of search proceedings u/s 132 of the Act conducted at the premises of the stock brokers. The most relevant observations of the Assessing Officer read as under:

“In this regard, the, investigation wing of the department has carried out a comprehensive enquiry and conducted search & seizure and also surveys on many stock brokers and recorded statements of many persons. After ‘the: said enquiry, they have unearthed a big scam of bogus LTCG/Loss to the tune of Rs.38 thousand Crores. In this enquiry, they have found large no of entry operators, promoters of bogus companies which has been named: as .jama kharchi companies, involved this scam. These brokers/promoters’ of the companies were rigging the prices of some very little known stocks’ listed in stock exchanges. The wing has termed these stocks as penny stocks which means that the value of these shares WU8 very low at throwaway :prices; say Rs. 1/- or so. As, in these shares, general investors/ traders usually do not take interest and therefore, in these scrips virtually no trading-made. Therefore; these manipulators have used these stocks to increase the: pride or decrease artificially to generate bogus LTCG/Losses as .per requirements of the beneficiary. This activity was continuing for long time but was at a very low scale, hence same could not be detected earlier by the market :regl1lat~~s or ‘other investigative agencies. But, for some time, the amount of the scam increased to such scale as the department could detect the same: and started the investigation into the same.

3(f) In their report, the wing has mentioned the names and addresses of the key persons involved in the scam. The department has, conducted through enquiry in which they have gathered the evidences to identify the persons/brokers/ companies and other entity involved in the .scam and establish their involvement in the activity of providing accommodation entries. The officers of the department have recorded the statements on oath of many of these persons including the brokers, entry providers promoters/directors of jamakharchi companies. During the statements recorded on oath, these key persons who were brokers/promoters of companies are accepted their involvement in providing the accommodation entries of bogus LTCG/Loss have furnished the modus operandi of the activity, the names of the penny stocks and the companies used to rig the price and to make the payment for the purpose at artificially high/ low prices. The cash trail of the cash received from the beneficiaries has also been detected by the department in some cases. The entry operators have created thousands of companies to make payments and have used multi layering of the payment so as to avoid to detection of the source of the investment. However, the department could’ detect the cash trail 1.0 large extent.

(3(g). On going through the detailed report of the wing on this scam, it is noticed that the name of the stock of M/ s Unno Industries Ltd. also ‘appears. On correlating the details filed by the assessee in respect of the LTCG claim with the findings and the conclusions of the report of the it is found that the case of assessee is very much similar to the characteristics of the stocks found out by the wing, the name of the stock M/s. Unno industries· Ltd. is appearing the report which have been used by the scamsters to generate bogus LTCG/Loss. Even the name of the broker of assessee is also appearing in the report as one of the entry operators. The modus operandi applied by the, key persons to the issue shares and then merge the same with a exiting company which is listed on stock exchanges and reissue shares by new company at unreasonable swap ratio which does not have, any consideration to the, fundamentals of merged company of the new company to increase the no. of shares of the beneficiary then wait for completion of period of 12 months and thereafter rig the price of shares to a artificially high or low price by a set or sellers and purchasers and after the booking of accommodation entries; drop the price of the shares. As the purchasing company are only jamakharchi companies having no real businesses and normally do not file ITRs, these purchasers of shares in the case of assessee have not responded, of the notices.

3(h), It is further found that SMC Global Securities Ltd. the share broker of assessee has been found to be involved in· the activity providing accommodation entries of bogus LTCG/ Loss. During survey’ conducted by the department, the regional office Delhi and Many sub brokers were found to be involved in the syndicate of providing accommodation: entries ‘ of Bogus LTCG Loss. Even the cash of Rs. 90 lacs was found and seized from one sub broker Shri Pawan Kumar Kayan. Many sub brokers of this ‘broking house ·has accepted in the statement on oath recorded, to be actively involved in providing the entry by rigging the prices of M/s Unno industries Ltd. And any other scnps.”

13. On the given facts, r.w. the above mentioned observations of the Assessing Officer, we do not find any merit in the submissions of the ld. DR. Even if the assessments were on going, but when search took place and when information came to the knowledge of the Revenue, pending assessments get abated as per the provisions of section 153A of the Act and proceedings u/s 153C are off shoot of proceedings u/s 153A of the Act. Therefore, the impugned assessment order should have been framed as per the provisions of section 153C of the Act as held by the Hon’ble Supreme Court in the case of Vikram Singh Bhatia [supra].

14. Considering the facts of the case in light of the decision of the Hon’ble Supreme Court [supra], we set aside the assessment order as bad in law.

15. Since we have quashed the assessment order, we do not find it necessary to dwell into the merits of the case.

16. In the result the appeal of the assessee in ITA No. 2631/DEL/2019 is allowed.

The order is pronounced in the open court on 05.12.2023.