The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) has quashed the reopening of assessment, ruling that the notice issued under Section 148 of the Income Tax Act, 1961 was held to be wholly without jurisdiction and bad in law.
The assessee V. K. Nanavaty Share and Stock Brokers Pvt. Ltd is engaged in share broking and related services on Bombay Stock Exchange (BSE) and filed its return of income on 30.09.2012 declaring loss of Rs.47,77,007. Later, it filed revised computation of income declaring total loss of Rs.45,84,419 which was scrutinized by AO and assessment under Section 143(3) of the Income Tax Act was passed on 23.03.2015 assessing total loss of Rs.45,84,419.
The case was reopened by issue of notice under Section 148 of the Act dated 30.03.2019. The AO noted that during the year under consideration, the assessee had sold the shares of “M/s. VAS Infrastructure Ltd ” (earlier known as Vas Anima and Entertainment Ltd) for a consideration of Rs.12,50,027/- which shares were “Penny Stock”. And the assessee had claimed long term capital loss (LTCL) of Rs.6, 46,334/- against sale of 10,000 units of the scrip and short term capital loss (STCL) of Rs.4, 17,109/- on sale of 13,449 shares. According to AO, this penny stock was subjected to circular trading; and accordingly, the scrip prices were manipulated.
Hence, through this process, both the quantity and rate of the scrip was increased/decreased manifold in a pre-designed manner, so as to create a profitable exit route in the guise of exempted long term capital gains or loss in the hands of investors. And since the assessee had made transactions in the above mentioned scrip, the A.O. held on the strength of the investigation wing report in the case of M/s VAS infra Ltd. that the entities purchasing the shares had merely acted as exit entry providers to the sellers from booking of exempt LTCG/STCG or losses.
Therefore, the A.O. asked the assessee to explain why sale proceeds of VAS Infrastructure Ltd. of Rs.12, 50,027.70 should not be added to the total income of the year under consideration. The assessee filed a reply before the A.O. The A.O. concluded that short term capital loss and long term capital loss booked by assessee in its books were pre-arranged methods to evade taxes and launder money. According to AO, the assessee had no logical explanation for the rise in price of the scrip of VAS INFRA.
After considering the findings of search/survey, inquiries conducted in the case of assessee, brokers, operators and the entry providers and the nature of transaction entered into by the assessee, the sale consideration of Rs.12,49,225/- was added back to the total income of the assessee under Section 68 of the Income Tax Act. The long term capital loss of Rs.6,46,334/- against sale of 10,000/- units of the scrip was disallowed. The short term capital loss of Rs.4, 17,109/- on sale of 13,449/units was also disallowed and not allowed to be carry forward.
The bench noted that the assessee was engaged in share broking and related services on Bombay Stock Exchange and had filed its return of income on 30.03.2012 declaring total loss of Rs.47,77,007/- which was revised by assessee declaring total loss of Rs.45,84,419/-. The ITR filed by assessee had undergone scrutiny assessment under Section 143(3) of the Act dated 23.03.2015 wherein the AO acknowledged that he had verified the relevant details and documents and accepted the income/loss of the assessee as per the revised computation of income.
Further noted that assessee had already undergone scrutiny assessment wherein it had shown all the relevant documents before the AO who had taken a plausible view, therefore, without a tangible material in the hands of the present AO to show that the assessee was involved in taking accommodation entry, the AO could not have reopened the assessment only on suspicion, when the fact remains that the transaction in question have taken place undisputedly in Bombay Stock Exchange through online platform and assessee is engaged in the business of share trading and is a regular investor & trader and had purchased & sold the shares in question through on-line platform.
Therefore, the two member bench of the tribunal comprising Pathmavathy S (Accountant member) and Aby.T. Varkey (Judicial member) relied on the decision of the High Court in the case of M/s. Aditi Construction v DCIT (supra), the re-opening was held to be invalid in the eyes of law. Thus, the notice issued under Section 148 of the Income Tax Act was held wholly without jurisdiction and bad in law and is quashed. Accordingly, the appeal of the assessee was allowed.
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