2012 (11) TMI 1114 - AT - Income Tax

Reopening of assessment - Held that - Proper course of action available before the AO was notice u/s.153C and not 148 - We accordingly quash the re-assessment proceedings initiated u/s.147/148 by the AO and upheld by the CIT(A). The legal ground raised by the assessee is accordingly allowed.

Summary

Issues Involved:
1. Validity of the re-assessment proceedings initiated under Section 147/148.
2. Merits of the case regarding the addition of income based on alleged sham transactions and bogus capital gains.

Issue-wise Detailed Analysis:

1. Validity of the Re-assessment Proceedings Initiated Under Section 147/148:

Facts of the case, in brief, are that a search and seizure operation was conducted in the assessee's group of cases on 17-03-2006. During the course of search action, documents, books, loose papers etc. were seized from the residential and business premises of the various assessees. The AO thereafter issued notice u/s.153A(a) dated 16-01-2007 to the assessee. Subsequently, notice u/s.142(1) dated 11-09-2007 was also issued to the assessee. Thereafter, the AO noted that there was no warrant issued in the name of the assessee. Therefore, after recording the following reasons the AO initiated proceedings u/s.148 of the Income Tax Act:

"The assessee has entered into sham transaction in M/s. Database Finance Ltd. and Media Matrix Ltd. to book bogus long term capital gain of Rs. 11.33 lakhs. Key persons of the group Shri Moti Panjabi and Shri Ram Udharam Panjabi have admitted additional income in the hands of the entire group in this regard. The assessments u/s.153A of these persons were completed on 31-12-2007 and transactions in the shares done by the assessee were found bogus and additions were made accordingly. Hence, I have reason to believe that taxable income of Rs. 2,26,794/- has escaped assessment. Issue notice u/s.147".

The assessee challenged the validity of the re-opening before the CIT(A), arguing that the proper course of action should have been the issue of notice u/s.153C and not u/s.148, as the name of the assessee was not appearing in the search warrant. The CIT(A) dismissed the legal ground, stating that the provisions of sec.153C could not be applied as the appellant had not brought on record any material to show the satisfaction of the AO of the persons searched to the effect that the assets and documents belong to the appellant.

The Tribunal, however, found that certain documents/materials pertaining to the assessee were seized during the course of the search in the assessee's group of cases. It was noted that the proper course of action available before the AO was notice u/s.153C and not 148. The Tribunal referred to the decision of the Amritsar Bench of the Tribunal in the case of ITO Vs. Arun Kumar Kapoor, which held that the provisions of section 153C supersede the applicability of sections 147 and 148 when documents are seized during a search.

Respectfully following the decision cited (Supra), the Tribunal held that the learned CIT(A) was not justified in upholding the re-assessment proceedings initiated u/s.147/148 of the Income Tax Act. The re-assessment proceedings initiated u/s.147/148 by the AO were quashed.

2. Merits of the Case Regarding the Addition of Income Based on Alleged Sham Transactions and Bogus Capital Gains:

The AO noted that the assessee has entered into sham transactions which were disclosed as capital gain. He discussed the evidences contained in the seized materials and other evidences with the assessee from time to time and gave the opportunity of being heard to the assessee. He provided the copies of the seized material, statements, and other relevant information/evidences gathered during the course of the search. The AO came to the conclusion that the transactions involving the purchase and sale of shares are sham and long term capital gains reflected in the returns are not genuine. He, therefore, treated the entire sale proceeds received on account of said sale transactions as undisclosed income and added an amount of Rs. 73,762/- being commission on brokerage @6%. The AO accordingly determined the total income at Rs. 13,03,130/-.

Before the CIT(A), it was submitted that the submission made in the lead case Shri Moti Panjabi is applicable to the facts of the present case. The CIT(A) following his order in the case of Moti Panjabi for A.Y. 2003-03 held that the AO is justified in treating the sale proceeds and the commission in respect of shares (other than shares of Media Matrix Ltd.) as undisclosed income of the assessee.

Since the assessee succeeded on the legal ground, the Tribunal did not decide the issue on merit, which became academic.

Conclusion:

In the result, the appeal filed by the assessee is allowed. Following the same reasons, the re-assessment proceedings initiated by the AO in the other appeals are also quashed.

Pronounced in the open court on this the 21st day of November 2012.