Bombay High Court
Gaurang Manhar Gandhi vs Assistant Commissioner Of Income Tax ... on 4 March, 2024
Author: K.R.Shriram
Bench: K. R. Shriram, Neela Gokhale
2024:BHC-OS:3721-DB
Digitally
signed by
SHAMBHAVI
SHAMBHAVI NILESH 1/11 518-oswp-2058-2022-J.doc
NILESH SHIVGAN
SHIVGAN Date:
2024.03.07
09:48:40
+0530
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 2058 OF 2022
Gaurang Manhar Gandhi,
having his office at, 1218,
Maker Chambers V,
Nariman Point,
Mumbai-400 021 ...Petitioner
Versus
1. Assistant Commissioner of Income Tax-3(2)
(1),
having his office at Room No.608, 6th floor,
Aayakar Bhavan,
Maharishi Karve Road,
Mumbai-400 020.
2. Additional/Joint/Deputy/Assistant
Commissioner of Income Tax/Income-tax
Officer,
National E-Assessment Centre,
E Ramp, Jawaharlal Nehru Stadium,
Delhi- 110 003.
3. Principal Commissioner of Income Tax-3,
having his office at Room No.612, 6th floor,
Aayakar Bhavan, Maharishi Karve Road,
Mumbai-400 020.
4. Union of India,
Through the Secretary,
Dept. of Finance, Ministry of Finance,
Government of India, North Block,
New Delhi-110 001 ...Respondents
Mr. P.J.Pardiwalla, Senior Advocate, with Mr. Jeet Kamdar, i/by
Mr. Sameer Dalal, for Petitioner.
Mr. Akhileshwar Sharma, for Respondents-Revenue.
CORAM : K. R. SHRIRAM &
DR. NEELA GOKHALE, JJ.
DATED : 4th March, 2024.
ORAL JUDGMENT: (Per K.R.Shriram, J.)
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1. Petitioner, an individual, works for salaries/remuneration with
one Pioneer Investcorp Ltd. and Pioneer Insurance & Reinsurance
Brokers Private Ltd. Petitioner also used to engage in the business of
trading/investments in shares and securities. For Assessment Year
("AY") 2014-15, Petitioner filed his return of income ("ROI") on 24th
July, 2014 declaring a total income of Rs.88,13,470/-. The ROI was
initially processed under Section 143(1) of the Income Tax Act, 1961
("the Act").
2. Petitioner's case was selected for scrutiny and Petitioner
received a notice dated 28th August, 2015 under Section 143(2) of
the Act. Thereafter, Respondent No.1 issued a notice dated 18 th
February, 2016 under Section 142(1) of the Act calling upon
Petitioner to provide various details/documents including details of
long term capital gains on sale of shares and short term capital gain
of office premises. Petitioner, vide a letter dated 24 th February, 2016,
provided all the documents called for. By another letter dated 10 th
March, 2016, Petitioner provided further details. In the letter dated
10th March, 2016, Petitioner specifically provided details of the
transactions reported in Bombay Stock Exchange for contracts of
Rs.10,00,000/- and above. Petitioner made specific disclosure about
transactions pertaining to sale of shares in Sunrise Asian Limited
("SAL").
3. Subsequently, an assessment order dated 26 th April, 2016 came
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to be passed under Section 143(3) of the Act in which it is expressly
mentioned that the case was selected for scrutiny under CASS
scrutiny, notices under Section 142(1) of the Act was issued and
served on Petitioner and Petitioner not only attended the case from
time to time but also furnished the details called for. The assessment
order also discusses about long-term capital loss, short-term capital
loss, etc. which were carried forward. We should note that in the
computation of total income filed by Petitioner, Petitioner disclosed
long-term capital gain on sale of shares of Rs.6,44,61,215/-.
Petitioner also gave the details of gain on sale of
investments/shares/long term and disclosed that he had purchased
and sold a quantity of 1,33,439 equity shares of SAL. The cost price is
disclosed as Rs.26,68,780/- and the sale price is disclosed as
Rs.6,71,29,994.58 and gain of Rs.6,44,61,214.58 is also disclosed.
4. Following the introduction of Chapter IX dealing with Income
Declaration Scheme, 2016 ("IDS, 2016") by the Finance Act, 2016,
which came into effect from 1st June, 2016 till 30th September, 2016,
Petitioner, to get peace of mind, decided to take advantage of the
IDS, 2016 and filed a declaration under Section 183 of the Finance
Act, 2016. Petitioner declared an amount of Rs.6,84,61,220/- which
consisted of Rs.6,44,61,215/- pertaining to long term capital gains on
shares of SAL and Rs.40,00,000/- pertaining to cash income.
Petitioner's declaration was accepted pursuant to which Petitioner
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paid the amounts payable under the Finance Act, 2016 and Petitioner
was also issued a certificate of declaration under Section 183 of the
Finance Act, 2016.
5. Over three and half years later, Petitioner received a notice
dated 31st March, 2021 issued under Section 148 of the Act, stating
that there was reason to believe Petitioner's income chargeable to tax
for AY 2014-15 has escaped assessment within the meaning of
Section 147 of the Act. Petitioner was also provided with the reasons
recorded for reopening. The reasons indicate that a total amount of
Rs.60,25,280/- had escaped assessment, which needs to be taxed.
This amount is in two parts, i.e., Rs.26,68,780/- paid by Petitioner for
purchase of shares in SAL and Rs.33,56,500/- as assumed
brokerage/commission paid. Reasons do not mention anywhere that
this amount was paid or when it was paid or to whom it was paid. It
proceeds on the assumption that for the kind of transaction Petitioner
had indulged, an operator or broker charges a fixed commission,
which might vary between 0.5% to 5% of the entire sale
consideration and taking into account that the total sale
consideration was Rs.6,71,29,995/-, the brokerage that Petitioner
might have paid would be Rs.33,56,500/-, which needs to be taxed.
This amount of Rs.6,71,29,995/- is the sale consideration, which
Petitioner had disclosed in the computation of income filed along
with the ROI and also during the assessment proceedings in response
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to query raised by the Assessing Officer ("AO").
6. As per the reasons recorded for reopening, Respondent No.1
refers to survey action under Section 133A of the Act conducted at
Petitioner's office and observes that Petitioner has disclosed an
amount of Rs.6,44,61,220/- as net long term capital gain on sale of
shares of SAL and Petitioner claimed long term capital gain as exempt
under Section 10(38) of the Act for AY 2014-15. Respondent No.1
observed that Petitioner had purchased these shares in AY 2012-13
for Rs.26,68,780/- at Rs.20/- per share and sold the shares at
Rs.6,71,29,995/- at an average price of Rs.503/- per share resulting
into net long term capital gain of Rs.6,44,61,220/- and Petitioner had
submitted broker's note, bank statements and documents related to
the acquisition and sale of these shares and Petitioner has disclosed
net long term capital gains under the IDS, 2016 under protest, shares
of SAL is one of the penny shares as identified by the Income Tax
Department and the entire long term capital gains realized by
Petitioner by the purchase and sale of the penny shares should be
taxed in the hands of Petitioner and as Petitioner disclosed the net
long term capital gain, cost of purchase of these shares, i.e.,
Rs.26,68,780/- also needs to be disclosed and taxed. Therefore, there
is an escapement of Rs.26,68,780/- on account of non-disclosure of
the cost of purchase of these penny shares.
7. As regards the second part of brokerage/commission paid to
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the brokers, it is Respondent No.1's case that when Petitioner would
have purchased or sold the penny shares of SAL, some commission
would have been paid and, therefore, 5% of the total consideration of
Rs.6,71,29,995/-, i.e., Rs.33,56,500/- needs to be taxed in the hands
of Petitioner.
8. In response to the notice received under Section 148 of the Act,
Petitioner filed objections vide letter dated 17 th September, 2021 and
the same came to be rejected by an order dated 14 th February, 2022.
Petitioner, therefore, filed this Petition. An affidavit in reply has been
filed through one Nikhil Bansal, Assistant Commissioner of Income
Tax, Circle 3(2)(1), Mumbai affirmed on 8 th June, 2022 opposing the
Petition. Since pleadings are completed, with the consent of the
parties, we decided to dispose of the Petition at this stage itself.
9. Mr. Pardiwalla submitted:-
(i) At the outset, that since admittedly an assessment order under
Section 143(3) of the Act has been passed on 26 th April, 2016 and the
notice under Section 148 of the Act has been issued only on 31 st
March 2021, i.e., more than four years after the expiry of relevant
assessment year, the proviso to Section 147 of the Act would apply
inasmuch as reopening is not permissible unless there has been a
failure on the part of Petitioner to truly and fully disclose material
facts relevant to the assessment;
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(ii) As regards the cost of purchase of the alleged penny shares
amounting to Rs.26,68,780/-, the same is not only disclosed in the
computation of income, but it was also a subject of consideration
during the assessment proceedings and Petitioner had also disclosed
the same in the declaration filed under the IDS, 2016. Therefore,
there can be no failure to disclose;
(iii) As regards the commission expenses of Rs.33,56,500/- being
5% of the total sale consideration of Rs.67,29,995/-, the receipt of
sale consideration has been disclosed in the computation of income,
during the assessment proceedings and also in the IDS, 2016;
(iv) The AO does not even allege in the reasons recorded that
Petitioner has, in fact, paid Rs.33,56,500/- as brokerage/commission.
The entire basis adopted by the AO is purely speculative because the
AO assumes that for doing these bogus transactions and set-up, the
operators/broker charge a fixed commission from the beneficiary
which might vary between 0.5% to 5% of the entire sale
consideration. We agree with the counsel;
(v) Further, under the IDS, 2016, Petitioner had disclosed the cost
price of the shares in SAL, the sale price and capital gains made. If
the AO felt that Petitioner could have paid such commission, which
has not been disclosed in the IDS, 2016, the declaration filed by
Petitioner should have been rejected, which has not been done;
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(vi) Moreover, under the IDS, 2016, and as per the clarifications of
the IDS, 2016 dated 30th June, 2016 issued by the Central Board of
Direct Taxes ("CBDT"), it is stated that the information contained in
the declaration shall not be shared with any other law enforcement
agency and not only that it will not be shared within the Income Tax
Department for any investigation in respect of a valid declaration.
Since the declaration in Petitioner's case was a valid declaration, the
information as contained in the declaration filed by Petitioner could
not have been made available to the AO, who issued the notice under
Section 148 of the Act. We would agree with Mr. Pardiwalla;
(vii) It was also submitted that answer to question no. 5 in the
clarifications, which says "where a valid declaration is made after
making valuation as per the provisions of the scheme read with IDS
Rules and tax, surcharge and penalty as specified in the scheme have
been paid, whether the Department will make any enquiry in respect
of sources of income, payment of tax, surcharge and penalty " is an
emphatic 'NO'. Therefore, submitted, and rightly so, the information
could not have been shared with the AO.
10. Mr. Sharma explained how the modus operandi of the Penny
Shares generally works. He submitted that even the purchase cost of
the Penny Shares is also non-genuine. Further, nobody does any
service for free and, therefore, operator/broker must have been paid
5% of the sale consideration.
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11. To our query as to whether there was any evidence that
Petitioner had paid brokerage, or who was paid and the quantum, it
was met with silence.
We are not happy with the stand of the Revenue or the reasons.
12. We would agree with Mr. Pardiwalla that reliance placed on the
declaration made under the IDS, 2016 is against the principles of
natural justice and is not valid. Moreover, Respondents having issued
a certificate under the IDS, 2016 after verifying the details filed by
Petitioner, the declaration cannot be the basis to reopen the
assessment of Petitioner.
13. The reopening merely by deeming commission expenses of 5%
of total sale consideration of the shares and arbitrarily and in an ad-
hoc manner fixing 5% of the total sale consideration as commission
expenses amounting to Rs.33,56,500/- cannot be accepted. Ad-hoc
disallowances without pointing out any specific defects cannot
accepted. In fact, there is not even an allegation in the reasons to
believe escapement of income that Petitioner had in fact paid any
commission to any broker or operator. The AO proceeds on a surmise
that there was no such free service available and, therefore, Petitioner
would have paid brokerage. The AO having observed that the
brokerage/commission varied between 0.5% to 5% does not even
explain why he takes into account 5% as the brokerage paid and not
0.5% or any other figure in that band.
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14. We are also satisfied that there has been no failure on the part
of Petitioner to disclose any material fact. We say this because in the
computation of income filed by Petitioner, (a) Petitioner has disclosed
long term capital gain on sale of shares of Rs.6,44,61,214.58, (b)
purchase of 1,33,439 equity shares of SAL on 16 th September, 2011
for a total consideration of Rs.26,68,780/-, (c) the sale of those
shares between 30th July, 2013 upto 23rd October, 2014 for a total
consideration of Rs.6,71,29,994.58 and (d) the gain of
Rs.6,44,61,214.58.
By notice dated 18th February, 2016 under Section 142(1) of
the Act, Petitioner was called upon to give details of long term capital
gain on sale of shares and short term capital gain of office premises
and in response, vide letter dated 10 th March, 2016, Petitioner gave
the entire details relating to the transactions in shares of SAL and
even in the assessment order, long term capital loss, short term
capital loss, etc. are discussed. It is also recorded in the assessment
order dated 26th April, 2016 that capital gain was nil.
15. In the circumstances, the subject matter of capital gains in the
shares of SAL was certainly a subject matter of consideration of the
AO during the original assessment proceedings. As held by this Court
in Aroni Commercials Limited v. Deputy Commissioner of Income
Tax-2(1)1 once a query is raised during the assessment proceedings
and Assessee has replied to it, it follows that the query raised was a
1 (2014) 44 taxmann.com 304 (Bombay).
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subject of consideration of the AO while completing the assessment.
It is also not necessary that an assessment order should contain
reference and/or discussion to disclose its satisfaction in respect of
the query raised. Therefore, the reopening of the assessment, in our
view, is merely on the basis of change of opinion of the AO from that
held earlier during the course of assessment proceedings and this
change of opinion does not constitute justification and/or reason to
believe that income chargeable to tax has escaped assessment.
16. In the circumstances, in our view, the impugned notice dated
31st March, 2021 issued under Section 148 of the Act cannot be
sustained. Consequently, the order dated 14th February, 2022 rejecting
Petitioner's objections also cannot be sustained. Ordered accordingly.
17. Petition disposed.
(DR. NEELA GOKHALE, J.) (K. R. SHRIRAM, J.)
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