Facts of the Case

The assessee filed its return of income for Assessment Year 2019-20 on 31.10.2019 declaring income under normal and MAT provisions. A search under Section 132 was conducted on 17.09.2021 on the Agarwal Group and its associate concerns, including the assessee. Pursuant to the search, reassessment proceedings were initiated under Section 147 by issuing notice under Section 148 dated 06.09.2022. The assessment was completed on 15.01.2024 making, inter alia, an addition of ₹42,43,50,000 under Section 68 by treating part of the sale proceeds of investments in unlisted equity shares as unexplained cash credit. The assessee had sold investments aggregating to ₹68,94,40,000 to nine companies, out of which sales amounting to ₹26,50,90,000 were accepted as genuine by the Assessing Officer, while the balance ₹42,43,50,000 relating to sales to the same group of companies was treated as bogus. The CIT(A) upheld both the reopening and the addition, leading to the appeal before the Tribunal.

Issues Involved

Whether reassessment under Section 148 after a post-01.04.2021 search was valid even in the absence of incriminating material found during the assessee’s search, whether sale proceeds of long-standing investments could be taxed under Section 68, whether reliance on third-party statements and seized documents without cross-examination violated principles of natural justice, and whether partial acceptance and partial rejection of identical transactions was legally sustainable.

Petitioner’s Arguments

The assessee contended that no incriminating material was found during the search conducted on it and therefore reopening was invalid. It was further argued that the additions were based on materials and statements relating to searches on third parties conducted in earlier years and that proceedings, if any, ought to have been under Section 153C. On merits, it was submitted that Section 68 applies only to fresh unexplained credits and not to realization from sale of existing investments which were acquired in earlier years and accepted in scrutiny assessment under Section 143(3). It was emphasized that the same purchasers were partly accepted and partly rejected by the Assessing Officer, that all purchaser companies confirmed the transactions in response to notices under Section 133(6), and that reliance on third-party statements without granting cross-examination rendered the addition unsustainable.

Respondent’s Arguments

The Revenue argued that under the new search regime, Explanation 2 to Section 148 mandates reopening for specified assessment years irrespective of incriminating material being found. On merits, it was contended that the sale transactions were accommodation entries unearthed during search on entry operators and that the assessee failed to establish genuineness and creditworthiness, justifying addition under Section 68.

Court Order / Findings

The ITAT Kolkata held that for searches conducted on or after 01.04.2021, Explanation 2 to Section 148 creates a statutory deeming fiction and the Assessing Officer is required to reopen the assessment for the specified years, even in the absence of incriminating material. Accordingly, the challenge to the validity of reopening was rejected. On merits, the Tribunal found that the investments sold during the year were acquired in earlier years out of share capital and premium which had already been examined and accepted in scrutiny assessment for Assessment Year 2010-11. The Tribunal observed that Section 68 cannot be applied to sale proceeds of existing investments. It was further held that the Assessing Officer adopted an arbitrary and inconsistent approach by accepting sales to certain companies and rejecting sales to the very same companies in the assessee’s case, while accepting identical transactions in the hands of other group entities. The Tribunal also held that reliance on third-party statements and seized documents without confronting the assessee or allowing cross-examination violated principles of natural justice and that such material constituted “dumb documents” without corroborative evidence.

Important Clarification

The Tribunal clarified that while reopening under Section 148 post-01.04.2021 operates on a statutory deeming fiction in search cases, additions must still withstand scrutiny on merits. Sale proceeds of investments held for several years and accepted in earlier scrutiny assessments cannot be taxed as unexplained cash credits. Arbitrary selective acceptance of transactions and reliance on third-party statements without cross-examination are impermissible in law.

Final Outcome

The appeal filed by the assessee was partly allowed. The reassessment proceedings under Sections 147 and 148 were upheld as valid. However, the addition of ₹42,43,50,000 made under Section 68 on account of alleged bogus sale of investments was deleted in full.

 Source Link- https://itat.gov.in/public/files/upload/1767344828-NnsCE6-1-TO.pdf

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