Bogus LTCG Claim: Section 263 Revision Not Tenable When High Court Approved Amalgamation and Statements Not Confronted

Issue:

Whether the Principal Commissioner of Income-tax (PCIT) was justified in invoking revisionary jurisdiction under Section 263 of the Income-tax Act, 1961, to set aside an assessment order, when the Assessing Officer (AO) had accepted the assessee’s claim for exemption of long-term capital gains (LTCG) under Section 10(38), despite information from the Investigation Wing suggesting the LTCG was bogus, particularly when the alleged paper company involved in the transaction had undergone a High Court-approved amalgamation and the statements relied upon were not recorded in the assessee’s presence or confronted with the assessee.

Facts:

For the assessment year 2012-13, the assessee claimed exemption of LTCG under Section 10(38) from the sale of shares of “Company T.” The Assessing Officer (AO) received information from the Investigation Wing indicating that Company T was a “paper company” providing bogus LTCG. Consequently, a reopening notice was issued. Subsequently, the AO passed an order accepting the assessee’s return.

The Principal Commissioner (PCIT) invoked revisionary jurisdiction under Section 263, asserting that the AO had not adequately investigated the exemption claim under Section 10(38 in light of the Investigation Wing’s information. The PCIT set aside the assessment order.

It was noted that the allegation against the assessee was that an investment was made in shares of a paper company, which later amalgamated with another paper company (Company T), leading to bogus LTCG upon sale of these shares. Crucially, the amalgamation of the alleged companies into Company T had been approved by the High Court. Furthermore, the PCIT believed the assessee should have been confronted with a statement given by the proprietor of the alleged paper company. Additionally, a statement recorded from one A.K.K., who admitted to providing bogus LTCG to numerous clients through a syndicate, was not recorded by the Investigation Wing in the assessee’s presence.

Decision:

Yes, the revision under Section 263 was not tenable.

Key Takeaways:

High Court Approved Amalgamation: The fact that the amalgamation of the alleged paper companies into Company T was approved by the High Court significantly weakens the claim of a “bogus” transaction. A High Court approval lends legitimacy to the corporate restructuring.
Lack of Proper Investigation by PCIT/AO (Procedural Flaws): The PCIT’s invocation of Section 263 was deemed untenable because the information relied upon (statements from the proprietor and A.K.K.) was not confronted with the assessee. For a valid revision under Section 263, the PCIT must demonstrate that the AO’s order was erroneous and prejudicial to the revenue due to a lack of inquiry or incorrect application of law. When new information is introduced, the assessee has a right to confront and respond to it.
Absence of Opportunity to Cross-Examine/Confront: Statements recorded behind the assessee’s back, without providing an opportunity for cross-examination or confrontation, cannot form the sole basis for denying an exemption or invoking revisionary powers. This violates principles of natural justice.
Scope of Section 263: This case reinforces that Section 263 cannot be invoked merely because the PCIT holds a different opinion or desires a deeper inquiry after the AO has applied their mind. There must be demonstrable error and prejudice to the revenue due to the AO’s failure to conduct proper inquiry. The fact that the AO accepted the return after the reopening implies some level of application of mind.

IN THE ITAT CHANDIGARH BENCH ‘B’

Vikram Jain

PCIT

Manoj Kumar Aggarwal, Accountant member
and Rajpal Yadav, Vice president

IT Appeal No. 428 (CHD) of 2024
[Assessment Year 2012-13]

MAY 19, 2025

Ashwani Kumar and Ms. Deepali Aggarwal, CAs for the Assessee. Smt. Kusum Bansal, CIT DR for the Revenue.

ORDER

Rajpal Yadav, Vice President. – The assessee is in appeal before the Tribunal against the order of the ld. PCIT dated 20.03.2024 passed under Section 263 of the Income Tax Act, 1961 in assessment year 2012-13.

2. The grievance of the assessee is that ld. PCIT has erred in taking cognizance under Section 263 of the Income Tax Act and thereby setting aside the impugned assessment order for passing a denovo assessment.

3. The brief facts of the case are that assessee has filed his return of income for assessment year 2012-13 declaring total income of Rs.7,64,058/-. The assessee has claimed exemption of Long Term Capital Gain under Section 10(38) of the Income Tax Act amounting to Rs.24,66,160/- on sale of shares of M/s Twenty First Century India Ltd. The return was accepted under Section 143(1). Thereafter, the assessment of the assessee was reopened on the ground that originally assessee has purchased 200 shares of M/s Sarathi Dealers Pvt. Ltd. This company was amalgamated with M/s Twenty First Century India Ltd., rather four companies were amalgamated in M/s Twenty First Century India Ltd. The assessee got 38 shares of M/s Twenty First Century India Ltd. as against one share of M/s Sarathi Dealers Ltd. Therefore, 200 shares held by the assessee of M/s Sarathi Dealers Ltd. were converted into 7600 shares of M/s Twenty First Century India Ltd. These shares were sold by the assessee during this year and alleged Long Term Capital Gain earned by him has been claimed as exempt under Section 10(38) of the Income Tax Act. The AO was of the view that he has received information from DDIT (Investigation) Unit 4(1) Kolkata that M/s Twenty First Century India Ltd. is a paper company and was used to provide bogus Long Term Capital Gain. It is controlled by Shri Anil Khemka, whose statement was recorded by the Investigation Wing, Kolkata during their investigation. On the basis of this information, ld. AO has recorded the reasons that income of the assessee has escaped assessment and he issued notice under Section 148 of the Income Tax Act on 29.03.2019. In response to notice under Section 148, assessee has filed a letter contending therein that original return filed by him be treated as filed in response to this notice. The ld. AO has issued notice under Section 143(2) as well as under Section 142 and thereafter passed the assessment order. The discussion made by the AO in the assessment order read as under :

“6.

On 08.05.2019, Shri Subhash Jain, C.A. appeared and filed the reply alongwith copy of bank statement, 26AS and certificate from M/s swastik Enterprise, the employer of the assessee.

In his reply, the counsel of the assessee stated that the assessee has purchased 200 shares of M/s Sarathi Dealers Pvt. Ltd. For total consideration of Rs.80,400/- in the F.Y, 2009-10 relevant to the A.Y. 2010-11 and the said amount was surrendered by the assessee in his return of income for the A.Y. 2010-11.

Further, the counsel of the assessee has stated that the assessee has purchased 200 shares of M/s Sarathi Dealers Pvt. Ltd. Which was later on converted into Limited Company. On the directions of Hon’ble Calcutta High Court, order dated 23.12.2010, M/s Sarathi Dealers Limited has been amalgamated with M/s 21^st Century India Limited and the shareholder of M/s Sarathi Dealers Limited got the 38 shares of M/s 21^st Century India Limited against the one share of M/s Sarathi Dealers Limited. Therefore, being the assessee was holding the 200 shares of M/s Sarathi Dealers Limited, the assessee got the 7600 shares of M/s 21^st Century India Limited, which was transferred in the Demat account of the assessee.

After perusal of the reply, summons u/s 131 of the Income Tax Act, 1961 was issued to the assessee to record the statement. On 15.05.2019, the statement of the assessee Shri Vikram Jain was recorded u/s 131 of the Income Tax Act, 1961 in the presence of the counsel of the assessee Shri Subhash Jain, CA.

10.

While recording the statement, the assessee was asked various questions regarding Long Term Capital Gain claimed by the assessee. He was also asked to explain that in his original return he has shown the exempted Long Term Capital Gain of Rs.2,45,26,367/- whereas in the return filed in response to notice u/s 148, the assessee has shown the exempted Long Term Capital Gain Rs.23,62,760/- only.

11.

In response to that, the assessee has stated that due to clerical mistake, Zero was automatically taken by thesystem which was not removed by the staff of the C.A. and the mistake was now corrected while filing the return in response to notice u/s 148.

12.

The assessee was asked to submit an affidavit in this regard alongwith the copy of ITR and computation for the A.Y. 2010-11 in which the original investment was surrendered for taxation.

13.

On 16.05.2019, Shri Subhash Jain, CA appeared and filed the copy of ITR alongwith computation for the A.Y. 2010-11 and affidavit from the assessee regarding typographical mistake regarding return filed by the assessee for the A.Y. 2012-13.

14.

The reply filed by the assessee is duly perused. After perusal, no adverse inference has been drawn. Therefore, returned income of the assessee at Rs.7,64,060/- is accepted.

Assessed. Issue requisite documents.

Sd/-

(Rajesh Gupta)

Income Tax Officer

Ward 2(5), Ludhiana

4. The ld. CIT harboured a belief that AO has not investigated the issue properly and therefore, his order is erroneous and has caused a prejudice to the interests of revenue, hence, he issued a Show Cause Notice under Section 263 of the Income Tax Act inviting the explanation of the assessee as to why assessment order be not set aside for passing a fresh order. The copy of the Show Cause Notice is available at page No. 1 to 5 of the Paper Book. The assessee has filed reply to this Show Cause Notice and contended that AO has reopened the assessment for the same issue. He has examined the issue of alleged Long Term Capital Gain claimed by the assessee. The ld. PCIT did not accept the written submissions of the assessee and set aside the assessment order. The finding of the PCIT read as under :

6. Having recaptured the facts of the case and the judicial pronouncements of the various Hon’ble courts on the issue of bogus LTCG, I come to the written statement of the assessee.

I have considered the written submissions of the assessee and the facts available on records. Although originally the shares are claimed to have been purchased on 31.10.2009, yet there is no time stamped document to prove that it was done on that date. Moreover, the assessee did not have the funds in hand for that and the amount was surrendered in the returned income. The first time stamped incidence on 27.05.2011 when the shares were transferred to the demat account of the assessee. These were sold on 30.06.2011 i.e. just after one month. The abnormal rise in price of share is apparently not real but is an apparent artificial jack up which is not at all commensurate with the Financials of the company as discussed in detail in the earlier part of this order. In fact the investigation of the department at Calcutta also showed that this company M/s Twenty First Century India Limited was used to provide bogus Long Term Capital Gain. In view of these facts, the AO was required to make further enquiries. The AO should have verified the fact of alleged purchase of shares by the assessee on 31.10.2009 by examining the broker and/or verifying his records or by any other suitable mode of verification. He should have called for the evidence for the fact of purchase of shares. He should have seen as to when was the return for the A.Y. 2010-11 has filed whether it was revised for surrender of the amount of Rs. 80,400/-. Although the A.O. has recorded the statement of the assessee on oath u/s 131 of the Act on 15.05.2019, he has not confronted the assessee with the statement given by Sh. Ashok Kumar Kayan, Proprietor of M/s Ashok Kumar Kayan, who had categorically admitted that he had provided bogus Long Term Capital Gain to a large number of clients through a syndicate of brokers and Entry Operators. Failure of the AO in not doing so has rendered the assessment erroneous as much as prejudicial to the interest of the revenue as the claim made has been allowed as such.

6.1 Under the aforesaid circumstances, the order of the A.O. is erroneous as the AO did not enquire/verify about the complete details and documentary evidences and also is prejudicial to the interest of the revenue being the claim of deduction u/s 10(38) of the Act, remained unexplained and escaped for taxation. Detailed and deep enquiries were required to be made on the issue discussed above before accepting claim of the assessee. In this regard, it is worthwhile to refer to provisions of Explanation 2 to Section 263(1) of the Income Tax Act, 1961 according to which an order passed by the A.O. shall be deemed to be erroneous in so far as it is prejudicial to the interest of revenue for various reasons including the fact that if in the opinion of Principal Commissioner or Commissioner the order is passed without making any enquiry or verification which should have been done and also includes the order which is passed allowing any relief without enquired into the claim.

6.2 Reliance is placed on the decision of Hon’ble Supreme Court in the case of Malabar Industrial Company Ltd. v. CIT dated 10.02.2000 which upheld order u/s 263 of the Income Tax Act, 1961 in a case where the A.O. passed assessment order without application of mind.

6.3 It has been held in the case of Jai Commercial Co. Ltd. v. Joint CIT (2000) 66 TTJ (Del-Trib) 731, that section 263 is to be invoked for the purpose of setting right distortions and prejudice to the interest of the revenue. Under section 263 the Commissioner does have the power to set aside the assessment order and restore the matter for a fresh assessment if he is satisfied that further enquiry is necessary. In the case of Express Newspapers (P) Ltd. v. CIT 255 ITR 137 (Madras), it was held that the Commissioner’s power under section 263 is not to be regarded arbitrary if substantial prejudice to the revenue is involved in view of detection of concealed income in respect of capital gain. The ITAT held in the case of Desai Brothers Ltd. v. Dy. CIT (Pune) that it is well established that where the A.O. fails to make the necessary enquiries which he is legally required to make and decide the issue without making such inquiries, then the order of the A.O. would be erroneous in law.

6.4 Further it has also been held in the case of Gee Vee Enterprises v. Addl. CIT &Ors. (Delhi) that an order can be regarded as erroneous when either it does not decide a point and record a finding on an issue which ought to have been done or decides it wrongly. The word ‘erroneous’ in the section includes cases, where there has been a failure to make necessary inquiries. The Patna HC in CIT v. Pushpa Devi ITR 639 (Patna), held that if the procedure adopted by the A.O. brings in lesser revenue than some other procedure, the order would be prejudicial to the revenue. It has been held in the case of LajjaWatiSinghal, Smt. V. CIT ITR 527 (Allahabad) that on failure of Assessing Officer to make enquiry as expected, Commissioner was justified in invoking provisions of section 263 because order passed as such by Assessing Officer was erroneous as well as prejudicial to the interest of the revenue. Similar view has been taken by the Hon’ble Madras High Court in the case of K.A. RamswamyChettiar&AnrVs. CIT(Madras).

6.5 Moreover, the facts of the case are squarely covered by Explanation 2 of Sec.263, which is inserted w.e.f. 01.06.2015 as under:-

1. The order is passed without making inquiries or verification which should have been made.

2. The order is passed allowing any relief without inquiring into the claim.

3. The order has not been made in accordance with any order, direction or instruction issued by the board u/s 119 or

4. The order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional high court or Supreme Court in the case of the assessee or any other person.

Hence, keeping in view the above discussed facts of the case and the various judicial pronouncements and in light of the lapses on the part of the A.O., I hold the assessment order dated 20.05.2019 for the A.Y. 2012-13 in the case of the assessee is erroneous as well as prejudicial to the interest of the revenue and therefore set aside the order to the file of the A.O. for passing a fresh order in accordance with law in respect of the issue discussed above and also raised in show cause notice u/s 263(1) of the Act, after giving sufficient opportunity of hearing to the assessee.”

5. With the assistance of ld. Representative, we have gone through the record carefully. Before we embark upon an enquiry on the facts and issues agitated before us to find out whether the action u/s 263 of the Act, deserves to be taken against the assessee or not, it is pertinent to take note of this section. It reads as under:-

“263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.

[Explanation.- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-

(a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include-

(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income Tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;

(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120;

(b) “record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner;

(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.

(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.

(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court.

Explanation.- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.”

6. A bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show-cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order.

7. A perusal of sub-clause (c) of the above would contemplate that if any order, which is subject matter for revision under section 263 is challenged in appeal, then, on the items which are subject matter of appeal, no power under section 263 could be exercised by the ld. Commissioner. We may elaborate further, for example- an assessment order was passed, it contains five issues, which were challenged before the ld. CIT(A), but ld. Assessing Officer failed to look into few issues, which may arise from the record, then inspite of the assessment order being challenged before the ld. CIT(A), the ld. Commissioner would have jurisdiction on such items, which are not subject matter of appeal in that assessment order.

8. At this stage, before considering the multi-fold contentions of the ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263. The ITAT in the case of Mrs. Khatiza S. Oomerbhoy v. ITO, Mumbai, (Mumbai), analyzed in detail various authoritative pronouncements including the decision of Hon’ble Supreme Court in the case of Malabar Industries 243 ITR 83 and has propounded the following broader principle to judge the action of CIT taken under section 263.

(i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled.

(ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted.

(iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous.

(iv) If the order is passed without application of mind, such order will fall under the category of erroneous order.

(v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law.

(vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s 263 is not permitted to substitute his estimate of income in place of the income estimated by the AO.

(vii) The AO exercises quasi-judicial power vested in him and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not fee stratified with the conclusion.

(viii) The CIT, before exercising his jurisdiction under s. 263 must have material on record to arrive at a satisfaction.

(ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard.

9. In view of the above, let us examine the facts of the present case. The allegation against the assessee is that he has made investment in the shares of a paper company who was amalgamated with another paper company and on sale of those shares, he has earned bogus Long Term Capital Gain. It is pertinent to note that alleged four companies discussed in the reasons for re-opening by the AO have amalgamated in M/s Twenty First Century India Ltd. The assessee was investor of M/s Sarathi Dealers Pvt. Ltd. which is one of the amalgamated company. This amalgamation has been approved by the Hon’ble High Court. It was mandatory to implead the Income Tax Department as a party to such amalgamation proceeding for putting their case forward, but they have not raised any concern. Once companies have been amalgamated under the order of the Hon’ble High Court, this would show that those companies were in existence. The shares have been transferred to D-mat account of the assessee which have been later on sold. All these aspects have been considered by the AO and he has also accepted. The ld. PCIT was of the view that assessee should be confronted with the statement given by Shri Ashok Kumar Kayam, Proprietor of M/s Ashok Kumar Kayam. It is pertinent to note that this statement was not recorded in the presence of the assessee.It was from the back of the assessee by DDIT (Investigation) Kolkata in some other proceedings. How this statement has a relevancy unless some other corroborated evidence is being collected by the Investigation Wing, Kolkata. The alleged report was even not supplied to the assessee. It was just an information for setting the machinery in motion for taking enquiries against the assessee. The said report can never be termed as a gospel truth which can be given preference over to the judgement of Kolkata High Court approving the amalgamation. If the test propounded in the order of the ITAT in the case of Mrs. Khatiza S. Oomerbhoy (extracted supra) are applied in the present case, then it would come out that every error is not required to be corrected under Section 263. The AO is also a quash judicial officer who has taken one of the view possible on the given set of facts. The CIT has not pointed out as to how his view was absurd and against the law. Therefore, no 263 is tenable in the given facts and circumstances of the present case. Accordingly, the impugned order passed by the ld. PCIT is quashed and appeal of the assessee is allowed.

10. In the result, appeal of the assessee is allowed.