DAMAYANTI RAMESH GADA,BHIWANDI vs. DCIT 1, KALYAN

In this appeal, the solitary dispute relates to the action of the income tax authorities in treating the sale consideration of shares of Rs.1,70,422/- as ‘income from other sources’ as against the assessee’s claim of the same being liable to be taxed under the head capital gains as sale and purchase of shares.

Before me, the Ld. Representative for the assessee has made two fold arguments. Firstly, according to him, the initiation of proceedings under section 147/148 of the Act by issuance of notice was bad in law and, therefore, the impugned assessment was liable to be quashed. Secondly, it has been also contended that on facts, the action of the Assessing Officer is not sustainable.

In brief, the relevant facts are that in the return of income filed by the assessee on 27/01/2004, total income of Rs.1,46,560/- was declared which, inter-alia, included long term capital gain of Rs.1,63,697/-, which was claimed as exempt u/s. 54F of the Act. Subsequently, a notice under section 148 of the Act was issued by the Assessing Officer on 26/03/2010 for reopening the assessment on the ground that a search action conducted in the case of M/s. Mahasagar Securities Pvt. Ltd. revealed that the said concern was carrying out fraudulent billing activities and providing bogus speculation profits, long term and short term capital gains, etc. The name of the assessee was found to be appearing in the said transactions. In response to the notice issued under section 148 of the Act, assessee stated that the return filed by him originally on 27/01/2004 be treated as a return filed in response to notice under section 148 of the Act. In the ensuing assessment, the Assessing Officer referred to the investigations carried out in the case of one Mr. Mukesh Choksi, who was stated to be controlling various concerns engaged in fraudulent billing activities, including, M/s. Mahasagar Securities Pvt. Ltd. The assessee had declared long term capital gain of Rs.1,63,697/- on purchase and sale of shares of two concerns, namely, M/s. Buniyad Chemicals Ltd.& M/s. N.E. Electronics Ltd. It was observed that the purchase of said shares was through M/s. Mahasagar Securites Pvt. Ltd. On being asked to justify the transactions, assessee made detailed submissions by pointing out that the delivery of the shares was physically taken and the investee companies transferred the shares in the name of the assessee and subsequently the shares were sold after a period of more than 12 months and accordingly, justified the declaration of long term capital gain. The statement of the assessee was also recorded by the Assessing Officer in the course of the assessment proceedings. The Assessing Officer considered the statement of Mr. Mukesh Choksi, one of the directors of M/s. Mahasgar Securities Pvt. Ltd., which was recorded by the Investigation Wing. The Assessing Officer primarily relied on the report of the Investigation Wing in the case of Mr. Mukesh Choksi, whereby it was concluded that fraudulent transactions were carried out by the said group. On this basis, assessee’s transaction of purchase and sale of shares were held to be fictitious accommodation entries and thus, sale consideration of the shares of Rs.1,70,422/- was added to the returned income as ‘ income from other sources’. The CIT(A) has also affirmed the said action of the Assessing Officer.

Before me, the Ld. Representative for the assessee pointed out that under identical circumstances, the Mumbai Tribunal in the case of Shri Hirachand Kanuga vs. DCIT, dated 27/02/2015 has found the initiation of proceedings under section 147/148 of the Act to be bad in law. The Ld. Representative for the assessee pointed out that similar proceedings in the case of assessee’s other family member, Shri Ramesh Prechand Gada vide ITA No.3872/Mum/2015 dated 30/11/2015 for assessment year 2003-04 has also been quashed by the Tribunal under identical circumstances.

On the other hand, Ld. Departmental Representative appearing for the Revenue defended the orders of the authorities below while not disputing any of the factual matrix brought out by the Ld. Representative for the assessee.

I have considered the rival submissions carefully. In so far as the initiation of the proceedings under section 147/148 of the Act is concerned, I find that the reasons recorded for reopening dated 26/03/2010, in the present case are identical to those recorded by the Assessing Officer in the case of Shri Hirachand Kanuga(supra) as well as in the case of Shri Ramesh Premchand Gada (supra). In the present case too, the original return was only subject to a processing under section 143(1) of the Act, which was the fact situation in the case of Shri Hirachand Kanuga (supra) also. Section 147/148 of the Act was invoked in the present case under identical circumstances to that considered in the case of Shri Hirachand Kanuga(supra). The Tribunal found that the initiation of proceedings under section 147/148 of the Act was bad in law. Secondly, the Tribunal also found that the approval granted by the Addl. Commissioner of Income Tax dated 26/3/2010 was also not within the prescription of section 151(2) of the Act. The relevant discussion in this regard, contained in the order of the Tribunal dated 27/02/15(supra) is as under:-

In the present case the letter which is placed on record shows that the Addl. Commissioner has simply sanctioned the proposal for initiating proceedings u/s. 147 in group cases of beneficiaries of Mahasagar Securities P. Ltd. Nowhere the Addl. CIT has recorded his dissatisfaction. The Hon’ble Supreme Court in the case of Chhugamal Rajpal Vs S.P. Chaliha & Others 79 ITR 603 observed that the important safeguards provided in Sec. 147 and 151 were lightly treated by the Income-Tax Officer as well as the Commissioner.

In the light of the above mentioned reasons, in our considerate view, Section 147 and 148 are charter to the Revenue to reopen earlier assessments and are, therefore protected by safeguards against unnecessary harassment of the assessee. They are sword for the Revenue and shield for the assessee. Section 151 guards that the sword of Sec. 147 may not be used unless a superior officer is satisfied that the AO has good and adequate reasons to invoke the provisions of Sec. 147. The superior authority has to examine the reasons, material or grounds and to judge whether they are sufficient and adequate to the formation of the necessary belief on the part of the assessing officer. If, after applying his mind and also recording his reasons, howsoever briefly, the Commissioner is of the opinion that the AO’s belief is well reasoned and bonafide, he is to accord his sanction to the issue of notice u/s. 148 of the Act. In the instant case, we find from the perusal of the order sheet which is on record, the Commissioner has simply put “approved” and signed the report thereby giving sanction to the AO. Nowhere the Commissioner has recorded a satisfaction note not even in brief. Therefore, it cannot be said that the Commissioner has accorded sanction after applying his mind and after recording his satisfaction.

Hon’ble Delhi High Court in the case of United Electrical Co. Pvt. Ltd. Vs CIT 258 ITR 317 has held that “the proviso to sub-section (1) of section151of the Act provides that after the expiry of four years from the end of the relevant assessment year, notice under section 148 shall not be issued unless the Chief Commissioner or the Commissioner, as the case may be, is satisfied, on the reasons recorded by the Assessing Officer concerned, that it is a fit case for the issue of such notice. These are some in-builts safeguards to prevent arbitrary exercise of power by an Assessing Officer to fiddle with the completed assessment”. The Hon’ble High Court further observed that “what disturbs us more is that even the Additional Commissioner has accorded his approval for action under section 147 mechanically. We feel that if the Additional Commissioner had cared to go through the statement of the said parties, perhaps he would not have granted his approval, which was mandatory in terms of the proviso to sub-section (1) of section 151 of the Act as the action under section 147 was being initiated after the expiry of four years from the end of the relevant assessment year. The power vested in the Commissioner to grant or not to grant approval is coupled with a duty. The Commissioner is required to apply his mind to the proposal put up to him for approval in the light of the material relied upon by the Assessing Officer. The said power cannot be exercised casually and in a routine manner. We are constrained to observe that in the present case there has been no application of mind by the Additional Commissioner before granting the approval”.

The observations of the Hon’ble High Court are very much relevant in the instant case as in the present case also the Commissioner has simply mentioned “approved” to the report submitted by the concerned AO. In the light of the ratios/observations of the Hon’ble High Court mentioned hereinabove, we have no hesitation to hold that the reopening proceedings vis-à-vis provisions of Sec. 151 are bad in law and the assessment has to be declared as void ab initio.”

Since I have held that the proceeding initiated under section 147/148 of the Act is bad in law, there is no requirement for going into the merits of the impugned addition.

In the result, appeal filed by the assessee is allowed, as above. Order pronounced in the open court on 29/02/2016