BISHWA NATH KHARAKIA,KOLKATA vs. I.T.O.,WARD-34(1), KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH ‘(SMC)’, KOLKATA [BEFORE SHRI P.M. JAGTAP, VICE PRESIDENT (KZ)] [THROUGH VIRTUAL COURT] I.T.A. No. 1487/Kol/2019 Assessment Year: 2010-11 Bishwa Nath Kharakia......................................……………………………………………………Appellant 39, Strand Road, Room – 68, Kolkata – 700 001. [PAN: AFOPK 1288 D] Vs ITO, Ward – 34(1), Kolkata...................……………………………………………….............Respondent Appearances by: Shri S.M. Surana, Advocate appearing on behalf of the Assessee. Shri Jayanta Khanra, JCIT, Sr. DR appearing on behalf of the Revenue. Date of concluding the hearing : April 19, 2021 Date of pronouncing the order : April 23, 2021 ORDER This appeal filed by the assessee is directed against the order of Ld. Commissioner of Income Tax (Appeals)-10, Kolkata dated 26.04.2019 and the grounds raised by the assessee therein read as under: “i. That the ld. CIT (Appeals) erred in confirming the action of the learned Income Tax Officer in making an addition of Rs. 8,30,797/-, as alleged cash credit, in place of treating the same as Long Term Capital Gain earned by the appellant on sale of shares exempt u/s 10(38) of the I.T. Act, 1961. The learned CIT(A) has confirmed the said addition on the alleged ground that the transactions looked to him as unnatural and suspicious in nature. He should have appreciated that the shares were in the Demat account of the appellant for more than 4 (four) years and there was no specific adverse information against the appellant from DIT (Inv.) ii. That the learned CIT (Appeals) erred in confirming an addition of Rs. 4154/- u/s 69C of the I.T. Act as alleged

2 I.T.A. No. 1487/Kol/2019 Assessment Year: 2010-11 Bishwa Nath Kharakia unexplained expenditure for procuring the above mentioned alleged bogus income.” 2. The assessee in the present case is an individual who is engaged in trading business. The return of income for the year under consideration was filed by him on 08.12.2010 declaring a total income of Rs. 1,86,620/-. Although, the said return was initially processed u/s 143(1) of the Act, the assessment was subsequently reopened by the AO and the notice u/s 148 was issued by him to the assessee on 28.03.2017. During the course of the assessment proceedings, the issue relating to the claim of the assessee for exemption on account of long term capital gain arising from the sale of shares of M/s. Concrete Credit Ltd. amounting to Rs. 8,30,797/- was examined by the AO in the light of the report prepared by DIT(Inv.) Kolkata on the basis of detailed enquiry made in this regard. On such examination, the AO treated the long term capital gain claimed to be exempt by assessee as bogus and the amount of Rs. 8,30,797/- was added by him to the total income of the assessee u/s 68 by treating the same as unexplained cash credit. He also made a further addition of Rs. 4,154/- u/s 69C of the Act by treating the commission allegedly paid by the assessee for obtaining the bogus entry for claiming long term capital gain as unexplained expenditure. Accordingly, the total income of the assessee for the year under consideration was determined by the AO at Rs. 10,20,520/- in the assessment completed u/s 147/143(3) of the Act vide an order dated 27.12.2017.

3 I.T.A. No. 1487/Kol/2019 Assessment Year: 2010-11 Bishwa Nath Kharakia

4 I.T.A. No. 1487/Kol/2019 Assessment Year: 2010-11 Bishwa Nath Kharakia 5. In order to support and substantiate the case of the assessee on the preliminary issue raised in additional ground challenging the validity of the assessment made by the AO u/s 147/143(3) of the Act on the ground that the reopening itself was invalid, the learned counsel for the assessee has invited our attention to the reasons recorded by the AO for reopening of the assessment which are as under: “The assessee filed his return of income for the relevant assessment year on 08.12.2010 declaring a total income as Rs.1,86,620/-. As per the information the assessee has traded to Concrete Credit Ltd. for Rs.8,53,620/- in Calcutta Stock Exchange. Information was received from the Pr DIT(Inv.), Kolkata vide his letter bearing No.35/2014-15/5053 dated 07.01.2015 that the investigation carried out by the Directorate revealed that a very large number of persons had taken entries of huge bogus Long Term Capital Gain in an organized manner through share transactions of penny stock companies listed with Calcutta Stock Exchange with the involvement of the promoters of the penny stock companies, unscrupulous brokers and entry operators. The letter is accompanied by a CD which contains investigation report, the details of transactions and other related information. The investigation focussed on 9 penny stock companies listed with Calcutta Stock Exchange. A close view of price movement of these 9 scrips revealed that there was common pattern in the trading of all such scrips. At first their prices start from a low range, then they are raised rapidly, stays there for a while then it decreases more rapidly. The investigation revealed that various persons had subscribed to the shares of these penny stock companies for the purpose of claiming long term capital gain to bring unaccounted money into their books without payment of tax. As per the modus operandi discussed in the investigation report, those who wants to book bogus capital gain are asked to buy shares when the price is low and sell the shares at a pre-determined particular date and time to avail the bogus entry of desired capital gain.

5 I.T.A. No. 1487/Kol/2019 Assessment Year: 2010-11 Bishwa Nath Kharakia Investigation carried out by the Directorate of Income Tax (Investigation), Kolkata revealed that the share price of Concrete Credit Ltd., one of those penny stock companies listed with Calcutta Stock Exchange was also artificially rigged to provide entry of bogus long term capital gain. As per the information furnished in the report, the assessee had transacted in shares of Concrete Credit Ltd. during the financial year 2009-10. On perusal of the return, it is seen that the assessee has also claimed LTCG of Rs.8,30,797/- during the relevant financial year. But as per the information the assessee had transactions in the scrips of Concrete Credit Ltd. during the financial year 2009-10 and traded for Rs. 8,53,125/- The impugned transactions cannot be considered genuine merely for the reason that they were carried out on the exchange platform with the involvement of registered broker through banking channel in a known sequence with no apparent aberrations. The Hon'ble Supreme Court in the case of CIT Vs. Durga Prasad More [1971] 82 ITR 540 (5C) ruled that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the fest of human probabilities. The same view was also expressed by the Hon'ble Supreme Court in the case of Sumati Dayal Vs. CIT [1995] 214 ITR 801 (SC). The Hon’ble Supreme Court in the case of CIT Vs. P Mohankala [291 ITR 278] held that the money came by cheque and was paid through the process of banking transactions was not by itself of any consequences. In view of the above, I have reason to believe that the assessee had availed of bogus entry of Rs.8,53,125/- by way of transacting in shares and thus income to that extant had escaped assessment in terms of clause (b) of explanation 2 to section 147 of the Income Tax Act, 1961.”

6 I.T.A. No. 1487/Kol/2019 Assessment Year: 2010-11 Bishwa Nath Kharakia Tribunal in favour of the assessee vide its order dated 03.05.2019 passed in ITA No. 799/Kol/2018. He has also placed on record a copy of the said order, perusal of which shows that the assessment made by the AO in that case u/s 147/143(3) was held to be invalid by the Tribunal as the reopening of the assessment for the similar reasons as recorded in the present case itself was found to be bad in law for the following reasons given in paragraph no. 17 and 18 of its order: “17. From the aforesaid understanding of law governing the issue at hand, we have to examine the reasons already set out above and test whether the condition precedent necessary to usurp the re-opening jurisdiction can be discerned from perusal of the reasons recorded by the AO in the instant case (supra). From the gist of the reasons recorded by the AO, we understand that the AO received information from DIT (Inv.), Kolkata dated 21.09.2015 that the investigation carried out by the Directorate revealed that a very large number of persons had taken entries of huge bogus long term capital gain in an organized manner through share transactions of penny stock companies listed with Calcutta Stock Exchange with the involvement of the promoters of the penny stock companies, unscrupulous broker and entry operators. In the reasons recorded it was also stated that the aforesaid letter was accompanies by CD which contains Investigation Report, details of transaction and other related information. In the reasons recorded, the AO noticed that the investigation by the DIT(Inv.) focused on nine penny stock companies which were listed with the Calcutta Stock Exchange and then after narrating the general modus operandi of these unscrupulous people the AO notes that the investigation carried out by the DIT(Inv.) revealed that the share price of M/s. Bakra Pratisthan Ltd. (hereinafter “BPL”) is one of the penny stock companies listed with the Calcutta Stock Exchange which was also artificially rigged to provide entry of bogus LTCG and as per the information of DIT, the assessee had transacted in shares of M/s. BPL during AY 2012-13 and accordingly the assessee is one of the beneficiary. According to investigation by the DIT the AO notes that there was a total sale of shares of M/s. BPL by the assessee involving trade value of Rs.2,38,54,750/- and according to AO, this information suggests long term capital gain by the assessee for this amount. After taking note of the information from DIT (Inv.), the AO in the reasons recorded opines his suspicion in his own words states “moreover, the transactions cannot be considered genuine merely for the reason that they were carried out on

7 I.T.A. No. 1487/Kol/2019 Assessment Year: 2010-11 Bishwa Nath Kharakia the Exchange Platform with the involvement of registered broker through banking channel in a known sequence with no apparent aberrations.” Thereafter, in the reasons recorded he refers to Hon’ble Apex Court decision in CIT Vs. Durga Prasad More (1971) 82 ITR 540 (SC) and express his opinion the taxing authorities are entitled to look into the surrounding circumstances to find out the reality (which means the AO has not formed the belief that there is reason to believe escapement of income, however needs further probe) and thereafter the AO observes that the matter is to be considered by applying the test of human probabilities. Thereafter referring to the Hon’ble Supreme Court decision in the case of Sumati Dayal Vs. CIT (1995) 214 ITR 801 (SC) and in the case of CIT Vs. P. Mohankala 291 ITR 278, he concludes that in view of the above facts and after analysing the information available on record, the AO says that he has reason to believe that the assessee has suppressed his income by using LTCG treating it as exempt to the tune of Rs.2,38,54,750/- which is/are reported as bogus by the Directorate. (which means that as per the report of directorate LTCG claim of assessee is bogus) And thereafter, he concludes that he has reason to believe that income to the extent of Rs.2.38 cr. has escaped assessment. Thus, from a reading of the reasons recorded by AO to justify re-opening of assessment, clearly show that the AO has taken note of the information from the DIT(Inv.) and taken the contents of the information given by DIT (inv) as gospel of truth against the assessee [without any verification or enquiry] to form a conclusion about escapement of income without independent application of mind by himself is nothing but an action taken by AO based on the strength of borrowed belief of DIT (inv) and not that of AO, which vitiates the very assumption of jurisdiction by AO to re-open the assessment, which finding of us will be clear when we analyze the reasons recorded in detail infra. 18. From the aforesaid reasons recorded by AO it is evident that other than the general information given by DIT (inv) there is no other material the AO collected himself after preliminary enquiry which could have enabled him at the time of recording reasons to come to a conscious independent conclusion that “income of the assessee has escaped assessment”. According to us, the information given by DIT(Inv) can only be a basis to ignite/trigger and be the starting point to enquire; and at that stage the information of DIT (Inv.) can be termed as a foundation only to form “reason to suspect” and not reason to believe escapement of income which is the jurisdictional fact & law required to enable the AO to successfully assume jurisdiction to reopen as envisaged u/s. 147 of the Act. And the reason to suspect cannot be the basis for usurping

8 I.T.A. No. 1487/Kol/2019 Assessment Year: 2010-11 Bishwa Nath Kharakia jurisdiction to reopen u/s. 147 of the Act, for conducting roving/further examination to be resorted by him in order to strengthen the suspicion to an extent which can later transform the suspicion to create the belief in his mind that income chargeable to tax has escaped assessment. Merely on an allegations levelled by DIT (Inv.), as in this case explaining the general modus operandi carried out by un-scrupulous persons in suspected transactions to earn bogus LTCG, can only raise suspicion in the mind of the AO (which fact we have pointed out earlier) which is not sufficient/requirement of law for reopening of assessment. It has to be kept in mind that the ‘reasons to believe’ is not synonymous to ‘reason to suspect’. ‘Reason to suspect’ based on an information can trigger an enquiry so that it can be found out whether there is any substance or material to substantiate that there is merit in the information adduced by the DIT(Inv.) and after post enquiry the AO has to take an independent decision whether to re-open the assessment or not. And at the cost of repetition we say that the AO should not act on dictate of any other authority like in this case from DIT (Inv.) because then it would be borrowed satisfaction of the jurisdictional fact & law which is not permitted by law and consequently vitiate the assumption of jurisdiction by AO to reopen u/s. 147 of the Act. In this case, as discussed above, we note that the AO after referring to the investigation report concludes that the information given by the DIT (Inv.) need to be looked into from the surrounding circumstances to find out the reality from the angle of human probability. Thereafter, the AO says that he has reason to believe that the assessee had suppressed its income by using LTCG treating it as exempted to the tune of Rs.2,38,54,450/-; which is/are reported as bogus by the directorate. So it is clear from the aforesaid averments that AO based on directorate’s report (DIT Investigation’s Report) has taken a view that LTCG claim of assessee is bogus, and not as per his independent view after a preliminary enquiry. Because the AO himself records in the reasons to re-open that the claim of assessee (LTCG) need to be looked into from the surrounding circumstances to find out the reality, which admission of AO goes on to show that “AO had reason to suspect” only and not reason to believe. This statement of AO clearly shows that the information given by DIT(Inv.) need further probe to find out the reality. So the AO admits that the information given by DIT(Inv.) has not rendered him to make up his mind to believe that income chargeable to tax has escaped assessment. At the cost of repetition we say that an adverse information against an assessee may trigger “reason to suspect”, as in this case was, and it was incumbent on his part pursuant to the information reaching his hand (AO), to make reasonable enquiry and collect material which could make him believe, that there is in fact an

9 I.T.A. No. 1487/Kol/2019 Assessment Year: 2010-11 Bishwa Nath Kharakia escapement of income, which exercise AO admittedly did not do and has blindly copied the contents of the DIT(Inv) report and proceeded to reopen the assessment/ intimation passed u/s. 143(1) which action of AO cannot be countenanced. In other words, when the AO was in receipt of the information from the DIT(Inv.) he ought to have made reasonable enquiry and collect materials which would make him believe, that there is escapement of income. As stated earlier, it has to be remembered that information is not synonymous to truth. At the cost of repetitions, we note that AO simply on the basis of the investigation report of DIT (Inv.) has jumped into conclusion that there is an escapement of income which is erroneous since it does not satisfy the jurisdictional fact and law for reopening as envisaged u/s. 147 of the Act. The AO simply taking note of the DIT(Inv.) letter has borrowed the satisfaction without independent application of mind to form reason warrant holding a belief that income chargeable to tax has escaped assessment. Just because a letter has been received from the DIT(Inv.) the AO cannot reopen the assessment even if original assessment was u/s. 143(1) of the Act. In the light of the above, the AO based on the reasons recorded as set out above could not have initiated a fishing enquiry to find out the veracity of the information given by the DIT(Inv.). The reasons recorded by AO does not stand the test as laid by plethora of judicial precedence as discussed above which is sine qua non to assume jurisdiction u/s 147 of the Act, therefore, in the light of the aforesaid facts and circumstances of the case as discussed, we find that the reasons recorded by the AO to justify reopening the assessment u/s. 147 fails and, therefore, the very assumption of jurisdiction to reassess the assessee falls. Since the AO failed to validly assume jurisdiction u/s. 147 of the Act, the assumption of jurisdiction by him to re-open the assessment itself is qorum non judice and, therefore, all subsequent action is null in the eyes of law and therefore, we quash the reopening and consequent reassessment order framed by him.”

10 I.T.A. No. 1487/Kol/2019 Assessment Year: 2010-11 Bishwa Nath Kharakia follow the said decision of the Tribunal and quash the assessment made by the AO in the present case u/s 147/143(3) of the Act by holding the same as invalid as reopening of the said assessment itself was not in accordance with law. Additional ground raised by the assessee is accordingly allowed.

Sd/- (P.M. JAGTAP) VICE PRESIDENT Dated: 23/04/2021 Biswajit, Sr. PS Copy of order forwarded to: 1. Bishwa Nath Kharakia, 39, Strand Road, Room – 68, Kolkata – 700 001. 2. ITO, Ward – 34(1), Kolkata. 3. The CIT(A) 4. The CIT 5. DR True Copy, By order, Assistant Registrar ITAT, Kolkata