ITAT Chandigarh Sets Aside Reopening u/s 148 and Section 68 Addition on Alleged Bogus LTCG

Background of the Dispute

The appeal before the ITAT Chandigarh in the case of Pawan Garg Vs ITO arose from reassessment proceedings for Assessment Year 2014-15. The assessee challenged:

  1. The validity of reassessment initiated by notice issued under Section 148 on 30.06.2021; and
  2. The addition of Rs. 65,24,960 made under Section 68 by treating his Long Term Capital Gains (LTCG) as unexplained income.

The Tribunal ultimately held that the reopening itself was invalid due to absence of any specific or cogent material linking the assessee to the alleged accommodation entries. Consequently, the addition under Section 68 on account of alleged bogus LTCG was also deleted in entirety.

Original Return and Subsequent Reopening

Filing of Return and Initial Acceptance

  • The assessee filed his return of income on 27.09.2014 declaring total income of Rs. 4,01,840.
  • This return was processed and accepted by the Department without any scrutiny or modification at that stage.

Information Alleging Bogus LTCG

Subsequently, the Assessing Officer (AO) claimed to have received information that the assessee was allegedly a beneficiary of bogus Long Term Capital Gain amounting to Rs. 61,23,120.

According to the AO, this information emanated from investigation into transactions routed through Tradenext Securities Ltd. (erstwhile Lifeline Securities Ltd.), where it was allegedly found that certain beneficiaries had obtained artificial LTCG through “reputed stocks” by using ante-dated forged contract notes during Financial Year 2013-14, relevant to Assessment Year 2014-15.

Based on this generic input, the AO recorded reasons for reopening and proceeded to initiate reassessment under Section 147 by issuing notice under Section 148 dated 30.06.2021, after obtaining approval from the competent authority.

Reassessment Proceedings Before the AO

Notices Issued and Non-Compliance Alleged

After issuance of notice under Section 148, the AO claimed that no return was filed by the assessee in response. Thereafter, several notices under Section 142(1) dated 12.02.2022, 21.02.2022 and 28.02.2022 were issued. Through these, the assessee was called upon to provide, inter alia:

  • Nature of business and source of income;
  • Return of income in response to the notice under Section 148;
  • Computation of income for A.Y. 2014-15;
  • Details of all bank accounts with narration of each credit and debit for F.Y. 2013-14;
  • Justification and supporting documents for the alleged LTCG of Rs. 61,23,120 said to be arising from bogus LTCG transactions through forged contract notes.

The AO recorded that no written submissions were filed and no adjournment was sought in response to these notices.

Ex Parte Assessment and Section 68 Addition

Proceeding ex parte, the AO held that the assessee was a beneficiary of bogus LTCG to the tune of Rs. 61,23,120 earned through reputed shares with the help of ante-dated forged contract notes during F.Y. 2013-14. As the assessee allegedly failed to substantiate his LTCG with documentary evidence, the AO treated the amount as undisclosed income.

A show-cause notice along with a draft assessment order was stated to have been issued on 20.03.2022, fixing compliance on 23.03.2022. As there was again no response, the AO finalized the reassessment by:

  • Taking the returned income as per original ITR under Section 139 at Rs. 4,01,840;
  • Adding Rs. 61,23,120 as unexplained income, thereby computing total income at Rs. 65,24,960.