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Facts
The assessee claimed exemption for Long Term Capital Gains (LTCG) of Rs. 2,60,46,279/- on sale of shares. The Assessing Officer (AO) reopened the assessment based on information that the LTCG transactions were bogus and made an addition. The Principal Commissioner of Income Tax (PCIT) initiated revision proceedings under section 263, alleging the AO's order was erroneous and prejudicial to revenue, focusing on cost of acquisition and commission expenses.
Held
The Tribunal held that the PCIT's revision proceedings under section 263 were initiated based on borrowed satisfaction from audit objections, not an independent application of mind. The Tribunal also noted that the larger issue of LTCG was pending before the CIT(A), making the revision on smaller issues unsustainable. The PCIT's observations were based on assumptions rather than factual findings.
Key Issues
Whether the PCIT validly invoked jurisdiction under section 263 based on audit objections when the AO had already applied his mind to the issue? Whether revision proceedings under section 263 on smaller issues are sustainable when the main issue is pending before the appellate authority?
Sections Cited
10(38), 68, 69C, 147, 148, 263, 115BBE, 271(1)(c)
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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI ANIKESH BANERJEE, JM &
(Assessment Year: 2013-14) Jaishree Ravi Sancheti, PCIT-20, 418, 4th Floor, 501, Swastik Pride, D.K. Sandu Marg, Above Union Bank of India, Vs. Piramal Chamber, Lalbaug, Chembur (East)-400071. Parel, Mumbai-400012. PAN : AHWPS0787P Appellant) : Respondent) Appellant /Assessee by : Shri Prakash Jhunjhunwala, AR Revenue / Respondent by : Ms. Rajeshwari Menon, Sr. DR Date of Hearing : 26.09.2024 : 27.09.2024 Date of Pronouncement O R D E R
Per Padmavathy S, AM:
This appeal by the assessee is against the order of the Principal Commissioner of Income Tax, Mumbai-400020 [in short 'the PCIT'] passed under section 263 of the Income Tax Act, 1961 (the Act) dated 30.03.2024 for Assessment Year (AY) 2013-14. The assessee raised the following grounds of appeal:
1.0 On facts and circumstances of the case and in law, the revision order passed u/s 263 is bad in law since the re-assessment order passed u/s 147 itself was invalid and non-est; 2.0 On facts and circumstances of the case and in law, the Pr. CIT erred in passing the revision order u/s.263 though the re-assessment order passed u/s 147 is not erroneous and in so far is not prejudicial to interest of the revenue and further erred to set-aside the understated issues to the AO, being; a) Addition u/s 68 of Cost of acquisition of listed shares Rs.35,31,934/-; b) Addition u/s 69C of commission paid on sale of shares- Rs. 8,87,346/-; 3.0 The Pr. CIT, before passing the revision order u/s.263, erred seriously in not considering the under stated vital facts, being; a) The revision order of smaller and consequential issues cannot be passed by Pr. CIT, when the larger issue is pending before the 1 Appellate Authority; b) There does not exist any contrary material of alleged unexplained commission paid of Rs.8,87,346/- for earning long term capital gain and the revision order cannot be passed on the basis of assumption and presumption; c) The AO, on due application of mind, had not made the addition of the cost of acquisition of listed shares acquired/ paid in earlier year of Rs 35,31,934/-; d) It is not a case of lack of enquiry, since the AO upon conducting adequate enquires and investigation, had made the addition of entire long term capital gain on sale of shares of Rs.2,60,46,279/-, which is subject matter of the appeal; e) The AO, on due application of mind and on analyzing the facts, had adopted one of the 2 legally sustainable views, thus the reassessment order cannot be held as erroneous; f) The revision order cannot be passed to conduct deeper enquiries, since the appellant, as per directions of the AO, had made true and complete disclosure of all material facts on assessment record.
2. The assessee is an individual and filed the return of income for AY 2013-14 on 10.02.2014 admitting a total income of Rs. 4,46,361/- after claiming exemption towards Long Term Capital Gains (LTCG) to the tune of Rs. 2,60,46,279/-. The Assessing Officer (AO) received information from DDIT (Inv.), Kolkata alleging that the assessee has entered into bogus LTCG transactions pertaining shares of M/s JRI Industries and Infrastructure Ltd. which has been claimed as exempt under section 10(38) of the Act. The AO reopened the assessment on the basis of the said information and issue notice to the assessee under section 148 of the Act. The assessee filed various details pertaining to the impugned transactions before the AO. The AO after perusing the details furnished by the assessee treated the LTCG as bogus and made addition of the net capital gain u/s 68 of the Act. The assessee is in appeal before the CIT(A) against the order of the AO. In the meantime the PCIT based on the audit objections held the order of the AO to be erroneous and prejudicial to the interest of the Revenue for the reason that the AO has instead of taxing the entire sale consideration under section 68 of the Act has made the addition after deducting the cost of purchase of shares to the tune of Rs. 33,62,400/-. The PCIT also held the order to be erroneous and prejudicial for the reason that the assessee ought to have incurred commission expense @ 3% which the AO failed to make an addition towards. The PCIT issued a show-cause notice to the assessee in this regard. The assessee submitted that the appeal against the order of the AO on the issue of LTCG being treated as unexplained under section 68 is pending before the CIT(A) and once the main issue is pending adjudication consequential issue on allowing the purchase price and commission on impugned transactions cannot be reviewed under section 263 of the Act. The assessee placed reliance in this regard on the decision of the Hon'ble Madras High Court in the case of Smt. Renuka Philip Vs. ITO [101 taxmann.com 119 (Mad.)]. The assessee further submitted that the PCIT has issued the show-cause notice under section 263 based on audit observations without any independent enquiry and that the revision based on audit observations is not sustainable. The assessee relied on the decision of the Jurisdictional High Court in the case of CIT Vs. Ballarpur Industries Ltd. (85 taxmann.com 37 (Bom). The PCIT after considering the submissions of the assessee held that “The contention of the assessee is not correct because in the present case the Assessing Officer has not taken any view or rather forgot through oversight to take any view on the purchase price that he has allowed of a bogus transaction or that of the expenses not considered for addition in respect of the accommodation entry arranged. Thus, it is definitely not a case where any view whatever is possible, was taken. Two views can only be possible if the Assessing Officer had already taken a view and that could only be sustainable if such view was one of the two possible legal options. The Assessing Officer is not at liberty to entertain a view which is not legal or a view that tantamount to oversight or error. In the present case, the assessment order is passed where an issue now being raked under section 263 of the Income-tax Act, 1961 has neither been examined at all nor any view has been expressed on the same Thus, this contention of the assessee is not maintainable, 7. The other case laws relied upon by the assessee are all distinguishable on facts. Thus, there is an apparent contradiction in the assessment order, where on the one hand, the Assessing Officer treats the share transaction as an accommodation entry arranged through an entry operator, but on the other hand, ends up allowing the purchase as expenditure and not making any addition for the expenditure incurred for arranging such transactions. The assessment order to this extent of allowing the purchase and not adding the expenditure on account of arranging the accommodation entry, is treated as erroneous and prejudicial to the interest of revenue u/s. 263 of the Income-tax Act, 1961.
8. On perusal of the case records, it is seen that the assessee is benefitted by accommodation entry in the form of exempt long term capital gains and the Assessing Officer has made the addition it was but natural that commission part for providing such entries is inherent therein and the same should be considered at the time of passing the assessment order. The quantum in this regard is always seen into the range of 3% to 5% of the total transactions and the same is always paid in cash. The same has remained to be added at the time of finalising the assessment u/s.69C to the total income, which will amount to Rs 8,87,346/- (3% of the total sale consideration of Rs.2,95,78.213/-). Further, once the sale consideration received itself is a bogus transaction and has been added u/s 68 of the Income Tax Act, 1961 as a bogus long term capital gain, there is no question to consider the purchase price as genuine as the same is also part of the accommodation entry. The Assessing Officer has added only Rs.2.60,46,279/- However, the bogus entry in the form of LTCG is Rs.2.95,78,213/-. Therefore, the Assessing Officer failed to add the sum of Rs.35,31,934/- under section 68 of the Act. Thereby, Rs.35.31,934/- remained to be added to the total income u/s 68 of the Income-tax Act, 1861. It is also pertinent to mention here that both amounts will be taxed applying provisions of section 115BBE to tax both the amounts at a higher tax rate. This has resulted into escapement of income of Rs.44,19,280/- (Rs.35.31.934/- Rs.8.87.346/-), and is required to be disallowed. The escaped amount of accommodation entry is required to be taxed as income from other sources.
In view of the above discussion the assessment order u/s 147 r.wis 144 read with section 144B of the Income Tax Act 1951 for the A Y 2013-14 dated 31.03.2022 is set aside to the file of JAO as per provisions of section 263 of the Act. The Assessing Officer is directed to the limited extent, to enhance and modify the assessment order with reference to commission expenses and purchase price as discussed above, after giving due opportunity of being heard to the assessee.”
3. The ld. Authorized Representative (AR) submitted that during reassessment proceedings, the AO called on various details pertaining to the alleged bogus LTCG and after perusing all the details made the addition of the net capital gain claimed by the assessee as exempt under section 10(38) of the Act. Accordingly, the ld. AR submitted that the AO has applied his mind while deciding to make an addition of the net capital gain during reassessment proceeding. The ld. AR took the bench through the show-cause notice issued by the PCIT (page 1 & 2 of PB) to submit that the PCIT has assumed the jurisdiction under section 263 based on audit objections without making any independent findings. The ld. AR further submitted that the larger issue of the alleged bogus LTCG is pending before the CIT(A) and therefore, other related issues such as cost of acquisition and commission on the impugned issues cannot be a subject matter of revision under section 263 of the Act.
The ld. Departmental Representative (DR) on the other hand submitted that audit findings are part of the record and the PCIT after perusing the records has invoked the powers of revision under section 263 of the Act which cannot be held as incorrect. The ld. DR further submitted that the PCIT has derived the satisfaction that the order of the AO is erroneous and prejudicial based on the assessment records. The ld. DR also submitted that the AO though held the entire transaction of sale of shares as bogus failed to make addition of the entire sale consideration and erred in allowing the cost of acquisition of shares as a deduction. Accordingly, the ld. DR supported the order of the PCIT(A).
5. We heard the parties and perused the material on record. The assessee's case was reopened under section 147 of the Act on the basis of information obtained from DDIT (Inv.), Kolkata alleging that the LTCG transactions entered into by the assessee on sale of shares of M/s JRI Industries and Infrastructure Ltd. is bogus. The AO called on the assessee to furnish various details pertaining to the impugned transactions. The assessee furnished the relevant documents which were perused by the AO. It is relevant to take notice of the below observations of the AO in this regard.
12. As explained earlier, the assessee has acquired 2,40,000 [48,000 shares is converted into 2,40,000 preferential shares for face value Rs 2 of M/s. JRI Industries & Infrastructure Limited, during financial year 2012-13 at a face value of Rs for a total cost of Rs.33,62,400/- The assessee sold the 2,40.000 (48,000 shares is converted into 2,40,000 preferential shares for face value Rs.2] shares during financial year 2012-13 for total consideration of Rs.2,95,78,213/- with a resulting gain of Rs. 2,60,46,279/-, Thus, within a period of 13 months on an investment of 33,62,400/- the assessee has reaped a gain of Rs.2,60,46,279/-. This abnormality itself shows that it is an axiomatic truth that there exists a systematic and artificial manipulation of the scrip. The Investigation Wing, Mumbai has conducted enquiries in this case as a part of the investigation carried out country wide to unearth the organized racket of generating bogus entries for claiming deduction u/s. 10(38) on LTCG and providing accommodation entries. In view of the above, it is proved that the Long Term Capital Gain shown by the assessee is not a genuine one and therefore the exemption claimed u/s. 10(38) of Rs.2,60,46,279/- is rejected and the said amount is assessed to tax as income from other source as cash credit u/s 68 and brought to tax. This addition is liable for tax u/s 115BBE. Penalty proceedings u/s.271(1)(c) is initiated for furnishing inaccurate particulars of income.
The AO did not accept the submissions made by the assessee and proceeded to treat the LTCG claimed as exempt under section 10(38) of the Act to the tune of Rs. 2,60,46,279/- as addition under section 68 of the Act. The assessee preferred appeal before the CIT(A) against the order of the AO passed under section 147 of the Act. The PCIT issued a notice under section 263 of the Act stating that “2. In your case, an assessment order u/s 147 rws 144 read with section 1446 of the IT Act, 1961 for A.Y 2013-14 was passed on 31.03.2022 assessing the total income at Rs.2,64,92,640/-.
In the case, Internal Audit Party has raised objection vide audit memo dated 20.10.2022 that while passing the assessment order the AO has failed to add Rs.35,31,934/-as been accommodation entry of penny stock (Out of sale consideration). Further the Audit officer also pointed out that for taking accommodation entry in penny stock. You have incurred expenditure for commission/brokerage at the rate of 3% to 5% however, the AO has not added any income with regard to that. Therefore, the audit officer has estimated further proposed addition of Rs.8,87,346/- (3% of total sale consideration of Rs.2,95,78,213/-). By this the total escapement of income has been pointed out of total of Rs.44,19,280/- with the tax effect of Rs.30,37,381/- 4. In the light of the above, the undersigned proposes to revise the assessment u/s.253 as the said assessment order passed u/s 147 rws 144 r.w.s 144B of the 1.T Act, 1961 for AY 2013-14 was passed on 31.03.2022 is 'erroneous' and 'prejudicial to the interest of the revenue in the light of the facts mentioned above..
In this regard, you are hereby given an opportunity to file your written submission in this office on 20.10.2023, In case, there is no compliance till the given date, it will be presumed that you did not wish to avail this opportunity and order u/s. 263(1) of the I.T. Act, 1961 will be passed, as above.”
The main contention of the ld. AR is that the PCIT is not correct in exercising jurisdiction under section 263 of the Act merely based on the audit observations. In this regard, we notice that the Co-ordinate Bench in the case of Grasim Industries Ltd. Vs. PCIT (2024) 158 taxmann.com 686 (Mum. Trib.) has considered a similar issue and held that - "8.2**** Hence it could be safely concluded that the revision proceedings has been invoked by the ld PCIT u/s 263 of the Act based on audit objection, which is nothing but borrowed satisfaction. Hence the said revision proceedings u/s 263 of the Act need to be construed as bad in law. Reliance in this regard has been rightly placed by the ld AR on the decision of Hon'ble Jurisdictional High Court in the case of CIT v. Maharashtra Hybrid Seeds Co. Ltd. [2019] 102 taxmann.com 48 (Bom.). The relevant operative portion of the said judgement is reproduced hereunder:- "9. As rightly held by the Tribunal, this note firstly shows that all the explanations and arguments of the Assessee have been considered by the Assessing Officer and secondly that the action taken under section 263 is only on the basis of the audit party's note or report, who it would appear, ultimately did not approve of the Assessing Officer's view regarding the allowability of the deduction. Admittedly, the CIT has not referred to any audit objection but in the light of the note, the Tribunal held that it would be a fair inference that his action under section 263 was consequent upon the audit objection. Be that as it may, this office note clearly shows that the Assessing Officer had taken all explanations and arguments of the Assessee into consideration before allowing deduction. This being the case, the CIT could not have merely substituted his own views for that of the Assessing Officer by invoking Section 263 of the I. T. Act.
In this factual backdrop, therefore, we have no hesitation in answering the substantial question of law referred to and reproduced by us earlier in the affirmative and in favour of the Assessee and against the Revenue." 9 & 10.*** 11. In view of the aforesaid elaborate observations and respectfully following the various judicial precedents relied upon hereinabove, we hold that – (a) & (b) **** (c) The ld. AO had defended his original assessment order before the Revenue Audit Party by accepting the contentions of the assessee and by stating that there was no misrepresentation of facts by the assessee. The evidences in this regard are already on record and already reproduced elsewhere in this order. Hence it could be safely concluded that the revision proceedings u/s 263 of the Act had been apparently triggered only based on borrowed satisfaction i.e Audit Objection and not based on independent application of mind by the ld PCIT. Infact the show cause notice issued by the ld PCIT u/s 263 of the Act also uses the same language used by the Revenue Audit Party in its Audit Objection. Hence revision proceedings could not be invoked by the ld PCIT based on borrowed satisfaction.
We also notice that similar view has been expressed by the Hon'ble Calcutta High Court in the case of PCIT Vs. Sinhotia Metals and Minerals Pvt. Ltd. (ITA No. GA/1/2019 dated 07.01.2022) where it has been held that the PCIT cannot assume jurisdiction under section 263 at the instance of the AO / JCIT which is against the provisions of the law. We further notice that a similar view has been held by the Delhi Bench of the Tribunal in the case of Ahlcon Parenterals India Ltd. Vs. PCIT [(2024) 162 taxmann.com 759 (Del. Trib.) ] where it has been held that “10. After taking into consideration the aforesaid submissions, we find that the Hon'ble Calcutta High Court in the case of Senkotia Metals and Minerals Pvt. Ltd. (supra) has, by order dated 7th January, 2022, categorically upheld the conclusion of the Tribunal that PCIT has not exercised his jurisdiction u/s. 263 of the Act himself but only on proposal of AO. This is a question of fact which was appreciated by the Hon'ble High Court to hold that there was irregular exercise of jurisdiction u/s. 263 of the Act. The Tribunal in the case of Stewarts & Lloyds of India Ltd. (supra) had thoroughly gone on the facts of the case and in that case, independently the AO had made a proposal. In the case in hand before us even the AO made a proposal on the basis of audit report objections. Further, as we examine the notice u/s 263 available at page 84 of the paper book, it appears that the contents of the notice in a tabular form are similar to the proposal dated 27.09.2018 of the AO. The audit report is provided by Revenue at page no 1 to 9 of PB and same only seems to be the foundation of all the reasons quoted by the PCIT, for giving a finding that assessment order is erroneous. Thus, though not mentioned specifically in the order of the PCIT, that the jurisdiction is being invoked on the basis of the audit objections and the proposal thereof, the manner in which the PCIT has approached the issues by issuing show-cause notice and the discussion made upon the issue establish non- application of independent mind. It appears that based upon the audit objections and proposal only the jurisdiction u/s. 263 was invoked and exercised to hold assessment order to be erroneous so far as prejudicial to Revenue 11. Thus, the grounds raised
are sustained. The impugned order u/s 263 of the Act is set aside and the appeal of the assessee is allowed.”
9. The alternate argument of the ld. AR is that when larger issue is pending before the CIT(A) other smaller issues pertaining to the same cannot be a subject matter of revision under section 263 of the Act. In this regard, we notice that the Co-ordinate Bench in the case of Shri Anil Goyal Vs. PCIT (ITA No. 370/Mum/2024 dated 26.08.2024 has considered a similar issue where it has been held that “5. We have heard the parties and perused the material available on record. Admittedly, the appeal against the main addition of Rs.4,52,57,410/- on account of disallowance of LTCG is pending before the CIT(Appeals) and therefore in view of the decision rendered by the Hon'ble High Court in the case of Smt. Renuka Philip (supra) wherein it was held that the assumption of jurisdiction u/s 263 of the Act on a smaller issue, based on the larger issue is un-sustainable, the impugned order is un-sustainable. 5.1 Even from the statement and relevant answers given by the Assessee, it clearly appears that the Assessee is well acquainted with the investment in shares and regularly investing in the share market and sold the shares when the price of the shares were increased substantially. Nowhere from the statement recorded u/s 131 of the Act, it appears that the Assessee has ever paid any commission/expenses as alleged by the PCIT for obtaining the said bogus LTCG. 5.2 Considering the aforesaid peculiar facts and circumstances in totality specifically the statement of the Assessee recorded by the AO u/s 131 of the Act as re-produced in the original assessment order dated 29.11.2017 and the fact that the main/larger issue/addition on the basis of which the Ld. PCIT has alleged that the Assessee has paid commission, is pending for adjudication before the Ld. CIT (A), we are inclined to set aside the impugned order, consequently the same is set aside.”
10. From the perusal of the show cause notice, it is clear that the PCIT initiated the proceedings under section 263 of the Act based on the audit objections. Further from the observations of the AO which is extracted in the earlier part of this order (refer para 5 above) it is clear that the details with regard to the cost of acquisition was part of examination conducted by the AO who still proceeded to bring to tax the net capital gain as addition under section 68 of the Act. The Co-ordinate Bench in the case of Shri Anil Goyal (supra) has considered the decision of the Hon'ble Madras High Court in the case of Smt. Renuka Philip (supra) wherein it was held that assumption or jurisdiction under section 263 of the Act on a small issue based on the larger issue is unsustainable. In assessee's case the assessee is in appeal before the CIT(A) on the addition made by the AO towards alleged bogus LTCG and the revision under section 263 of the Act is exercised by the PCIT on allowing cost of acquisition and commission pertaining to the same alleged bogus LTCG. Further the PCIT has held that in alleged bogus transactions the commission in the range of 3% to 5% is always paid and that the AO failed to make the addition towards the same which is erroneous. In our view the said observations of the PCIT is not based on any factual finding and merely based assumptions. In view of these discussions and respectfully following the decision of the Hon'ble High Court and the decisions of the Co-ordinate Bench, we hold that the order of the PCIT under section 263 is without jurisdiction and is to be quashed accordingly.
In the result, the appeal of the assessee is allowed.