VARSHA DUDHERIA ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-7(1)(2), BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER: These appeals filed by assessee are directed against different orders of CIT(A) dated 7.1.2019 for the assessment year 2012-13 to 2015-16. Since grounds in these appeals are common in nature, these are heard together and dispose of in common order for the sake of convenience. The assessee’s grounds are as follows:-

ITA Nos.507 to 510/Bang/2022 Varsha Dudheria, Bangalore

Page 2 of 17 3. The authorities below erred in not providing sufficient and adequate opportunity to the appellant as required under law, thereby violating the principles of natural justice, hence the order requires to be cancelled.

ITA Nos.507 to 510/Bang/2022 Varsha Dudheria, Bangalore

Page 3 of 17 14. That the Learned authorities below erred in not providing complete details before calling for objections from the assessee.

ITA Nos.507 to 510/Bang/2022 Varsha Dudheria, Bangalore

Page 4 of 17 27. For the above and other grounds and reasons which may be submitted during the course of hearing of the appeal, the assessee requests that the appeal be allowed as prayed and justice be rendered.”

AYs Taxable Assessed Demand Date of Date of Date of Filing Income Income by raised Order u/s Service as of appeal Declared the AO 144 r.w.s per 147 Form-35 2012-13 33,17,770 2,38,68,968 1,07,66,490 27.12.2017 30.12.2017 24.01.2018 2013-14 19,77, 560 24.01.2018 2,68,15,756 1,27,00,958 27.12 .2017 27.12.2017 2014-15 26,78,350 .6,14,01,351 3,16,24,990 27.12.2017 30.12.2017 24.01.2018

ITA Nos.507 to 510/Bang/2022 Varsha Dudheria, Bangalore

Page 5 of 17 3. On appeal by the assessee before Ld. CIT(A), the Ld. CIT(A) observed that the AO has analyzed the entire chain of activities leading to generation of bogus LTCG and has discussed the same cogently in the assessment order. As already mentioned, the modus operandi adopted was purchase of shares at a very nominal price by the beneficiary of predetermined penny stock company where the price of the shares of the penny stock companies, are rigged and are raised subsequently through circular trading. These operators provide accommodation entries for bogus LTCG and arrange the same using the scrips of these penny stock companies. The AO has issued a detailed show cause notice to the assessee giving a complete picture of the modus operandi and giving reasons as to why the claim of capital gain by the assessee was not genuine. The response of the assessee to the show cause notice has been considered by the AO and the reasons for not accepting the same have been advanced in the order. The assessee has been confronted about the findings and observations by way of recording the statement of the father of the assessee u/s 131. The AO has recorded that the rise in share value of these companies is totally disproportionate to their financial profile and market standing. Therefore, the AO brought to tax LTCG claimed at Rs. 1,99,52,625/-, Rs 2,41,14,754/- and Rs 5,70,12,623/- respectively for AYs 2012-13, 2013-14 & 2014-15 u/s 68 of the Act. Considering all the aspects in the case, the decision of the AO was upheld by the Ld. CIT(A). 4. Against this assessee is in appeal before us. The Ld. A.R. relied on earlier order of the Tribunal in the case of Sarita Dudheria in ITA No.882/Bang/2020 dated 15.3.2022, wherein the Tribunal confirmed the reopening of assessment. However, on merit remitted the issue to the file of AO to re-examine the case of the assessee afresh. He submitted that similar direction may be given in these appeals also.

ITA Nos.507 to 510/Bang/2022 Varsha Dudheria, Bangalore

Page 6 of 17 4.1 On the other hand, Ld. D.R. submitted that issue may not be remitted to the AO for fresh consideration in view of the judgement of Hon’ble Kolkata High Court in the case of PCIT Vs. Swathi Bajaj and others in ITA Nos.6 of 2022 dated 14.6.2022 and submitted that the assessee has not shown any prejudice caused to the assessee for not giving opportunity of cross examination of the parties whose statements are relied upon and more so, all the documents relied by the AO are already in public domain and need not be confronted to the assessee.

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Page 7 of 17 5.1(i) The subject matter in the matters before Calcutta High Court (Cal HC) did not involve the transactions in the case of the scrips Blue Circle Services Ltd and PSIT Infrastructure & Services Ltd, thus factually the case before Calcutta High Court and the impugned case are materially different.

(ii) The Calcutta High Court in para 4 and para 63 has made elaborate reference to the report of the Directorate of Investigation Kolkata dated 27.04.2015 and 03.07.2015 whereas in the present case since reasons have not been furnished, it is not clear as to what was the material before AO for issue of notice u/s 148.

(iii) The case before Calcutta High Court was regular assessment and revision u/s 263 whereas the case herein is reopening u/s 148 and non-adherance to the procedure prescribed by Hon’ble Supreme Court in GKN Driveshaft case.

(iv) In the assessment order in para 3 it is mentioned that the AO had received information from Directorate of Income Tax (I&CI) and DGIT(Inv)-Kolkata based on which survey was conducted in the assessee's premises on 12.05.2015 and 20.09.2016. Ld. A.R. stated that the factual matrix obtaining in this case is different from that was before Calcutta High Court . Further there was nothing incriminating found against the assessee in the aforesaid survey. When the survey was conducted in the assessee's premises itself there is no need to rely on the general report of the DGIT(Inv),Kolkata.

(v) The Calcutta High Court has said that the Investigation report need not be furnished to the assessee and further in para 63 page 100 made a reference to recommendation of SIT on Black money dt.27.04.2015, which was placed in the public domain.

ITA Nos.507 to 510/Bang/2022 Varsha Dudheria, Bangalore

Page 8 of 17 The conjoint reading of para 4 and para 63 gives rise to a confusion and overlapping reference to DGIT report and SIT Report. Even though the Calcutta High Court has said that copy of the report need not be furnished still in para 59 page 99 it is stated as extracted hereunder: "59. We are conscious of the fact that there may be exceptions however nothing has been brought before us to show that there was an exception in any of these appeals heard by us...."

5.2 Thus factually Calcutta High Court with the above observation has carved out the cases before it as separate from other cases and thus the decision of the Calcutta High Court has no value as a precedent being peculiar to the case before it.

5.3 The Calcutta High Court has said there is no need to furnish the material based on which the AO has made the addition and it has also held that there is no need for examination/cross examination. While doing so, the Calcutta High Court could not consider the decision of Hon’ble Supreme Court in Suraj Mall Mohta & Co. vs. Visvanatha Sastri & Anr. in 26 ITR 1:

"When an assessment on escaped or evaded income is made under the provisions of s. 34 of the Indian IT Act, all the provisions for arriving at the assessment provided under s. 23(3) come into operation and the assessment has to be made on all relevant material and on evidence and the assessee ordinarily has the fullest right to inspect the records and all documents and materials that are to be used against him. Under the provisions of s. 37 of the Indian IT Act the proceedings before the ITO are judicial proceedings and all the incidents of such judicial proceedings have to be observed before the result is arrived at. In other words, the assessee would have a -right to inspect the record and all relevant documents before he is called upon to lead evidence in rebuttal."

5.4 Thus, the procedure outlined by the Hon’ble Supreme Court is binding on all Courts, Tribunals and authorities in India including Calcutta High Court as per Article 141 of the

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Page 9 of 17 Constitution, however it is seen that the said decision has not been considered by the Calcutta High Court and to that extent the decision of Calcutta High Court is at variance with decision of Hon’ble Supreme Court. Hence Calcutta High Court decision cannot be relied on.

5.5 The ratio laid down by the Hon’ble Supreme Court in Kishinchand chellaram (125 ITR 713) and Andaman Timber Industries (281 CTR 241) though reference has been made in page 50 para 23 of the Calcutta High Court , the Calcutta High Court has not discussed the binding ratio of the above decisions and has charted a ratio different from that of the Hon’ble Supreme court.

5.6 The Calcutta High Court was considering the decision of the ITAT wherein the entire addition was deleted and the assessment was thus vacated whereas in the 'present case the issue is about applicability of 148 of the Act, non-furnishing of reasons and also a case of best judgment assessment u/s 144 of the Act, wherein the assessee was not given an opportunity as required under law.

5.7 The Calcutta High Court decision being a non-jurisdictional one is not binding in the impugned case especially when it is contrary to the decision of the Hon’ble Supreme Court in GKN Driveshaft- 259 ITR 19 and Suraj Mall Mohta 26 ITR 1. Moreover, Calcutta High Court had no occasion to consider cases involving reopening/reassessment.

5.8 The Ld. A.R. stated that great prejudice is caused to the assessee by not following the established principles of law and fastening huge tax liability. If opportunity as required in law is not

ITA Nos.507 to 510/Bang/2022 Varsha Dudheria, Bangalore

Page 10 of 17 given assessee will not be in a position to offer its objections and also discharge onus if any.

5.9 The Ld. A.R. lastly stated that the decision of Calcutta High Court is contrary to decision of jurisdictional High Court in Suresh Kumar Kothari (111.1F) vs ITO in WP' 39373/2014 dt. 29.01.2015. When the decision of jurisdictional High Court and non- jurisdictional High Court is staring on a given issue, the decision of the jurisdictional High Court would bind on the Tribunal and authorities in the state in which such a jurisdictional High Court decision is given. Hence, Ld. A.R. alleged that Calcutta High Court decision is not applicable.

ITA Nos.507 to 510/Bang/2022 Varsha Dudheria, Bangalore

Page 11 of 17 search had been conducted by the income tax authorities at Mumbai on M /s. Mahasagar Securities and Mukesh Choksi Group. At that time,, Mr. Mukesh Choksi had admitted to have made accommodation entries in his books to enable the clients to declare speculation profit/loss, shorter gains, etc., and had identified the petitioner herein and certain others as some of the beneficiaries of the fraudulent entries/transactions by giving a sworn statement in that regard and it is based on the said sworn statement of Mukesh Choksi, respondent has re- opened the proceedings. It is in this background, petitioner had made a request to the respondent on 31.01.2014 to provide a copy of the sworn statement, so that petitioner could take further course of action.

ITA Nos.507 to 510/Bang/2022 Varsha Dudheria, Bangalore

Page 12 of 17 be held that the impugned order is passed without providing any fair and reasonable opportunity of being heard to the petitioner.

“5.1. The Ld.AR challenged the issuance of notice under section 147 of the Act, on the ground that the reasons do not mention about any new/ tangible material/ information against the assessee based on which the Ld.AO had reason to believe to reopen the concluded assessment. It is argued that the materials based on which the assessment has been reopened does not contain the name of assessee and hence irrelevant.

ITA Nos.507 to 510/Bang/2022 Varsha Dudheria, Bangalore

Page 13 of 17 5.2. We note that no assessment under section 143(3) was passed in the case of assessee for assessment year 2013-14. Hence the argument of the Ld.AR that the issue of notice under section148 amounts to change of opinion cannot be accepted. Explanation 2 to Section 147 clarifies that, following shall be deemed to be cases where income chargeable to tax has escaped assessment namely: a. Where no return of income has been furnished by the assessee and no assessment has been made although: i. His total income, or ii. ithe total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income tax; b. where a return of income has been furnished by the assessee but no assessment (scrutiny/ best judgment assessment) has been made and it is noticed by the Assessing Officer that the assessee: i. has understated the income; or ii. has claimed excessive loss, deduction, allowance or relief in the return; 5.3. In the present facts of the case assessee falls under situation (b) above. We also place reliance on the decision of Hon'ble Supreme Court in case of ACTT vs. Rajesh Jhaveri Stock Brokers reported in (2007) 291 ITR 500, wherein Hon'ble court held that Section 147 authorises and permits the Ld.AO to assessee or reassess income chargeable to tax if he has reason to believe that income for assessment year has escaped assessment. The word 'reason' in the phrase, 'reason to believe', would mean cause or justification. If the Ld.AO has cause or justification to know or support that income had escaped assessment, it can be said to have reasons to believe that income had escaped assessment. The expression cannot be read to mean that the Ld.AO should have finally ascertained the fact by legal evidence or conclusion. The function of the Ld.AO is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayer. Hon'ble Delhi High Court in case of Central Manganese Ore Co.Ltd. Vs.ITO reported in (1991) 191 ITR 662, observed that, for initiation of action under section /471-ara-.it stood at the relevant time}, fulfillment of two requisite conditions in that regard is essential as at that stage the final outcome of the proceedings is not relevant. 5.4. In other words, at the initiation stage, what is required is `reason to believe', but not the established fact of escapement of income. We also rely on the decisions of Hon'ble Supreme Court in case of ITO vs. Selected Dalutband Co.Pvt.Ltd., reported in (1996) 2171TR 597 and Raymond Wollen Mills Ltd. vs. ITO reported in (1999) 236 ITR 34. Hon'ble Supreme Court in these cases held that, so long as the ingredients of section 147 are fulfilled, the Ld.AO is free to initiate proceeding under section 147 and failure to take steps under 143(3) will not render the Ld.AO powerless

ITA Nos.507 to 510/Bang/2022 Varsha Dudheria, Bangalore

Page 14 of 17 to initiate reassessment proceedings even when intimidation under section 143(1) had been issued. 5.5. In present facts of the case we note that, the Ld.AO received information from investigation wing regarding the company Blue Circles Services Ltd being penny stock. And it is an admitted fact that assessee had sold the shares in Blue Circles Services Ltd and had earned LTCG. Therefore in order to investigate regarding the purchase/sale of shares in Blue Circles Services Ltd., by assessee, the assessment was reopened by the Ld.AO. The decisions by Ld.AR by Hon’ble Courts on challenge of the validity of reopening in the paper book are distinguishable on facts based on the above discussions. We therefore do find any infirmity in the reopening of the assessment. Accordingly grounds 3 – 10 on legal issue stands dismissed.

On Merits: 6. Both sides submit that the arguments advanced by both sides are common for all the assessment years under consideration.

6.1. Perusal of assessment order it is observed that Ld.AO carried out detailed investigation/verification in respect of scrips of alleged companies sold by assessee during the year under consideration and found them to be lacking sound financials. Various' queries raised by Icl.A0 has not been answered with supporting cogent and uncontrovertable documents by assessee. Enquiries carried out by Ld.AO reveal these companies to be mere paper companies, without having any activities/business. View taken by Ld.AO was upheld by Ld.CIT(A) against which assessee filed present appeal.

6.2. It is the submission of the Ld.AR that the LTCG earned by assessee on sale of shares in the alleged companies were through recognised stock exchange and banking channels. It is also submitted that both receipt and payments are done through account payee cheques. He thus submitted that the statement of third parties has been relied on for making addition in the hands of assessee.

6.3. Whereas the Ld.Sr.DR submits that the statements and materials are only circumstantial regarding the alleged companies to be shell companies and that these companies were,.-used in providing accommodation entries and that they were many by the persons whose statements were recorded by investigating wing.

6.4. In present facts of the case, the statements recorded of third parties only reveal that the alleged companies involved in providing bogus LTCG/STCG or LTCL/STCL and provide accommodation entries by beneficiaries. We note that the Ld.AO in para 7.11- for AY 2013-14 raised serious doubts on capacity of assessee to purchase shares of these companies in such huge volumes, which has not been satisfactorily/reasonably established by assessee to be genuine.

ITA Nos.507 to 510/Bang/2022 Varsha Dudheria, Bangalore

Page 15 of 17 Assessee thus did not establish genuineness of purchase and source of investment of this company during the relevant period.

6.5. Ld.AO upon verifying credentials of these companies and other attending circumstances, observed that alleged companies were included in list of penny stock companies, in enquiries conducted by SEBI/BSE, as well as in Investigation Report issued by Investigation Wing, Kolkata. The Assessee having purchased shares of this company in huge volumes, should have possessed all required documents, as a prudent investor. The Assessee thus did not establish activities/business of companies, financial statements, annual income tax returns etc., in respect of alleged companies.

6.6. In the above list of decisions, relied by the Ld.AR, we note that the Hon'ble Mumbai Tribunal deleted the addition on the basis that the assessee therein established the sale of shares to be genuine and therefore the disallowance of LTCG is unwarranted for. However in the present facts of the case, the Ld. AO has doubted the capacity of assessee in making such huge investment in the alleged companies during the year in which they were purchased.

6.7. The decision of Hon'ble Delhi, Bombay and Madras High Courts is also on distinguishing facts. In those cases, the statements. of third person recorded were direct evidence against the assessed person and cross examination was denied by the revenue. Under such circumstances, Hon’ble Courts held that there was violation of natural justice. 6.8 Therefore in our view, none of the decisions are of any help to assessee on merits in the present facts of the case. The Ld.AR relied heavily on the decision of coordinate bench of this Tribunal in Shri.Lxmipat Dudheria Vs.ACIT in 1TA no.2373 to 2376/ Bang/ 2018 by order dated 09/ 04/ 2019, wherein investment in Bule circles Services Ltd by the assessee therein and the there assessment was reopened which was struck down by this Tribunal. We note that in the decision by this Tribunal nothing is decised on merits but the entire decision was on the validity of reopening where there the assessment order was passed under section144 of the Act. We therefore are of the opinion that the decision is of no rescue to assessee.

6.9. We are conscious of principle laid down by Hon'ble Supreme Court in case of M/s Andaman Timber Industries vs CCE, Kolkata-II, reported in (2015) 127 DTR 241, in support of his contention as well as decision of Hon'ble High Courts relied by the LdA.R. All these decisions lay down that, without opportunity of cross-examination, statements cannot be relied upon against any assessee. However, such right, as held in various decisions by Hon'ble Supreme Court, is not an absolute right and depends on circumstances of the case and the statute concerned, as held in State of J&K Vs. Bakshi Gulam Mohd. AIR 1967 (SC)

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Page 16 of 17 122, and Nath International Sales Vs. UOI reported in AIR 1992 D81 295. Similar is the view taken by Hon'ble Allahabad High Court in case of In case of Prem Castings Pvt.Ltd. Vs. CIT (Supra).

6.10. At this juncture we referred to decision of T.Devasahaya Nadar V. CIT reported in (1964) 51 I7'R 20 (Mad), wherein, it has been held that; "We are of opinion that it cannot be said as a general proposition of law that any evidence upon which the department might rely should have been subjected to cross-examination. The procedure for assessment is indicated in. section 23 (3) of the Act."

6.11. Further Hon'ble Murnbai Tribunal in case of GTC Industries Ltd. V. Asstt. CIT reported in (1998) 60 TTJ 308 , held that, where statement and report of third parties are only secondary and subordinate material which were used to buttress the main matter connected with the quantum of addition, denial of opportunity to cross examine third parties did not amount to violation of natural justice. 6.12. Therefore, each case has to be decided on facts and circumstances of that case. In our considered opinion, relevant factors to be considered are surrounding circumstances, objective facts, evidence adduced, presumption of facts based on common human experience in life and reasonable conclusions. 6.13 Under such circumstances, the assessee was liable to discharge onus regarding purchase of shares by way of cogent documentary evidences. We note that assessee has not placed anything on record regarding the source of investments and capacity to invest such huge monies during the year in which the investments were made. Be that as it may, we also note that, the assessee having invested huge monies in these alleged companies, has not been able to provide any documents to establish sound financial of these companies and that, the fluctuation in price was market driven. Assessee is therefore directed to provide all relevant documents to establish source of investment and capacity to invest in the alleged companies in the year of investment. Ld.AO shall take all evidences into consideration and then decide the issue as per law. 6.14. At the outset we also hold that the statements recorded are secondary and subordinate evidence, and therefore cross examination is not relevant. Ld.AO is directed to re-examine the case of assessee in the light of aforestated direction in accordance with law. Needless to say that proper opportunity shall be granted to assessee to represent its case as per. Accordingly we allow grounds on merits raised by assessee for statistical purposes for all the years under consideration. In the result, all the three appeals filed by assessee stands partly allowed for statistical purposes for all the years under consideration.”

ITA Nos.507 to 510/Bang/2022 Varsha Dudheria, Bangalore

Page 17 of 17 7.1 In view of the above discussion, following the earlier order of Tribunal in the case of Sarita Dudheria cited (supra), the issue in dispute relating to the reopening is decided against the assessee. However, on merit, the issue is remitted to the file of AO for fresh consideration on similar directions as in the case of Sarita Dudheria cited (supra)

Sd/- Sd/- (N.V. Vasudevan) (Chandra Poojari) Vice President Accountant Member

Bangalore, Dated 1st Sept, 2022. VG/SPS

Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order

Asst. Registrar, ITAT, Bangalore.