2025 (5) TMI 440 - AT - Income Tax

Revision u/s 263 - Validity of reassessment proceedings - Addition u/s 68 on bogus LTCG - HELD THAT - We on going through the reasons recorded by the AO for carrying out the re-assessment proceedings note that the same were based on two facts firstly the addition made in the hands of another assessee Rajendra Babulal HUF u/s. 68 of the Act for the bogus long term capital gain claimed u/s. 10(38) of the Act from sale of Equity shares of Greencrest Financial Services Private Limited. Secondly information was received from the DDIT (Investigation) Kolkata about the beneficiaries of bogus long term capital gain which involved the name of the assessee also. When these informations were received by the AO and after proper application of mind and also examining the facts of the case from its income-tax return it was found that it is a fit case for issue of notice u/s. 148 of the Act. We therefore are of the considered view that reopening was not based on any borrowed satisfaction rather ld. AO has reason to believe that there is possible escapement of income in the form of bogus long term capital gain. He therefore issued notice u/s. 148 of the Act and carried out the re-assessment proceedings. Therefore the first ground raised by the assessee that the re-assessment proceedings are invalid and bad in law and could not have been a subject matter of revision u/s. 263 of the Act has no merit and the same is hereby dismissed. Whether ld. PCIT was justified in invoking section 263 and holding that the order of the AO is erroneous in so far as prejudicial to the interest of the Revenue ? - There was no sufficient time available with the FAO to conduct enquiry and also to give opportunity to the assessee for the cross examination request of all the persons involved. This shows that had the sufficient time available with the AO a detailed enquiry would have been carried out to reach one of the permissible view. However due to time constraint no proper enquiries could be conducted by the AO nor proper time was given to the assessee to respond to the outcome of such enquiry if it had been conducted. The re-assessment proceedings have been concluded just for the sake of completion before they gets time barred and necessary enquiries could not be conducted by the AO for the alleged transaction of long term capital gain u/s. 10(38) of the Act. We therefore find merit in the finding of ld. PCIT observing that the re-assessment order dated 29.03.2022 is erroneous in so far as it is prejudicial to the interest of Revenue and thus has been rightly set aside so that proper re-assessment proceedings can be carried out after giving proper and reasonable opportunity to the assessee and then to decide the issue under consideration. Thus the finding of ld. PCIT passed in the impugned order u/s. 263 of the Act is confirmed. Decided against assessee.

Summary

The core legal questions considered by the Tribunal in this appeal arising from the revisionary order under section 263 of the Income-tax Act, 1961 (the Act) are twofold: first, whether the reassessment proceedings initiated under section 147 read with section 144B of the Act were valid or invalid due to being based on borrowed satisfaction; and second, whether the Principal Commissioner of Income-tax (PCIT) was justified in invoking revisionary powers under section 263 of the Act by holding the reassessment order erroneous and prejudicial to the interests of the Revenue.

Regarding the first issue, the Tribunal examined the validity of the reassessment proceedings initiated by the Assessing Officer (AO) under section 147 read with section 144B of the Act. The reassessment was prompted by information received from the Deputy Director of Income-tax (Investigation), Kolkata, and the addition made in the case of another assessee involving alleged bogus long-term capital gains from transactions in shares of Greencrest Financial Services Private Limited. The AO issued notice under section 148 of the Act after forming a reason to believe that income had escaped assessment. The Tribunal noted that the AO's reasons were based on independent information and facts, not borrowed satisfaction from other cases, and that the AO had applied mind to the materials before issuing the notice. Consequently, the Tribunal held that the reassessment proceedings were valid and not bad in law, dismissing the contention that the reassessment could not be the subject matter of revision under section 263 of the Act.

The second issue pertained to the correctness of the PCIT's invocation of revisionary powers under section 263 of the Act. The PCIT had set aside the reassessment order dated 29.03.2022 on the ground that it was erroneous and prejudicial to the interests of the Revenue. The PCIT's primary reasoning was that the Faceless Assessing Officer (FAO) had not conducted adequate enquiries into the genuineness of the long-term capital gains claimed by the assessee, particularly failing to verify whether the purchase of shares was a sham transaction used for accommodation entries, as confirmed by the Securities and Exchange Board of India (SEBI) in its order dated 05.06.2020. The PCIT emphasized that the FAO had merely accepted the assessee's contentions without proper verification, rendering the assessment order erroneous under section 263.

In analyzing this issue, the Tribunal examined the sequence of events during the reassessment proceedings. The reassessment was transferred to the Faceless Assessment Unit (FAU), which faced severe time constraints due to the impending time bar on assessment completion. The FAO's note accompanying the assessment order explicitly acknowledged that due to limited time, it was not feasible to conduct cross-examination of persons involved in the transactions or to follow the standard operating procedures fully. The FAO accepted the returned income primarily because of the lack of time to disprove the assessee's claims and to provide the assessee with an opportunity to respond to further enquiries.

The Tribunal found that the FAO's acceptance of the returned income was made under compulsion of time constraints rather than on a thorough investigation of facts. The FAO recognized that further enquiries, including cross-examination of alleged entry operators and verification of documents, were necessary but could not be completed before the time bar. The Tribunal observed that this incomplete enquiry amounted to a defective assessment order, which was rightly characterized as erroneous and prejudicial to the Revenue's interests.

The Tribunal also noted that the PCIT's order was supported by the SEBI's findings regarding the sham nature of the transactions and corroborated by judicial precedents upholding similar findings in related cases. The PCIT's invocation of section 263 was thus a valid exercise of revisionary jurisdiction to ensure proper verification and reassessment of the disputed capital gains. The Tribunal rejected the assessee's argument that the reassessment order represented a permissible view of the AO, emphasizing that the order was passed without adequate enquiry and opportunity to the assessee, which is a fundamental requirement of fair assessment proceedings.

In conclusion, the Tribunal upheld the PCIT's order setting aside the reassessment order under section 263 of the Act and directed that the AO conduct proper verification of facts and re-examine the issues afresh, ensuring that the assessee is afforded reasonable opportunity to present evidence and respond to enquiries.

Significant holdings of the Tribunal include the following:

"We therefore are of the considered view that reopening was not based on any borrowed satisfaction rather ld. AO has reason to believe that there is possible escapement of income in the form of bogus long term capital gain. He therefore issued notice u/s. 148 of the Act and carried out the re-assessment proceedings."

"All these observations of the FAO clearly indicate that there was no sufficient time available with the FAO to conduct enquiry and also to give opportunity to the assessee for the cross examination request of all the persons involved. This shows that had the sufficient time available with the AO a detailed enquiry would have been carried out to reach one of the permissible view."

"The re-assessment proceedings have been concluded just for the sake of completion before they gets time barred and necessary enquiries could not be conducted by the AO for the alleged transaction of long term capital gain u/s. 10(38) of the Act. We therefore find merit in the finding of ld. PCIT observing that the re-assessment order dated 29.03.2022 is erroneous in so far as it is prejudicial to the interest of Revenue and thus has been rightly set aside so that proper re-assessment proceedings can be carried out after giving proper and reasonable opportunity to the assessee and then to decide the issue under consideration."

Core principles established include that reassessment proceedings must be based on independent reasons and not borrowed satisfaction; that the AO must conduct proper enquiries and provide reasonable opportunity to the assessee before completing assessment; and that an assessment order passed without adequate enquiry and opportunity, especially under time constraints, can be held erroneous and prejudicial to the Revenue, justifying revision under section 263 of the Act.

Ultimately, the Tribunal dismissed the appeal of the assessee, confirming the revisionary order under section 263 and directing fresh reassessment with full opportunity and proper verification of facts.