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Facts
The case involves two appeals by the Revenue. For AY 2013-14, the assessee's assessment was reopened under Section 147/148 based on information regarding suspicious penny stock transactions, leading to additions. For AY 2014-15, the Assessing Officer disallowed a claimed Short Term Capital Loss from another penny stock company as bogus. In both instances, the CIT(A) ruled in favor of the assessee, quashing the assessment for AY 2013-14 and deleting the addition for AY 2014-15.
Held
For AY 2013-14, the Tribunal upheld the CIT(A)'s decision, finding the reopening invalid as the assessee had disclosed all material facts and there was no proven escapement of income. For AY 2014-15, the Tribunal affirmed the CIT(A)'s decision to allow the Short Term Capital Loss, stating the AO failed to provide credible evidence to establish the transactions as bogus, as they were conducted through recognized stock exchanges with proper documentation. Both appeals by the Revenue were dismissed.
Key Issues
Whether the reopening of assessment under Section 147/148 was valid for AY 2013-14 despite disclosure of transactions, and whether the Short Term Capital Loss from penny stock transactions for AY 2014-15 was genuinely incurred or bogus.
Sections Cited
147, 148, 144B, 151, 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, AHMEDABAD “C” BENCH, AHMEDABAD
Before: SHRI T.R. SENTHIL KUMAR & SHRI NARENDRA PRASAD SINHA
O R D E R PER NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER:
These two appeals are filed by the Revenue against the orders of the National Faceless Appeal Centre, Delhi (in short “the CIT(A)”), both dated 21.10.2024, for the Assessment Years (A.Y.) 2013-14 & 2014-15 respectively.
As the facts involved in these two appeals are identical, the matters were heard together and both these appeals are being disposed of vide this common order for the sake of convenience.
The brief facts of the case are that the assessee had filed his return of income for the A.Y. 2013-14 declaring total income of Rs.1,97,483/-. An information was received by the Assessing Officer that the assessee is one of the beneficiaries who had entered into suspicious transaction and traded in the scrip of M/s. JRI Industries & Infrastructure Ltd., a penny stock company during the Financial Year (FY) 2012-13. The assessee had made total transaction of Rs.102,55,113/- in this penny stock company and, according to the Assessing Officer, he had not offered income resulting from the said transaction. Therefore, the case was reopened under Section 147 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) after recording reason and a notice under Section 148 of the Act was issued. The assessment was completed under Section 147 read with section 144B of the Act on 31.03.2022 at a total income of Rs.1,04,52,603/- wherein addition of Rs.88,45,598/- was made on account of unaccounted income in non-genuine share transactions and loss of Rs.14,09,515/- claimed by the assessee in such transaction was also disallowed and added to the income of the assessee.
Aggrieved with the order of the Assessing Officer, the assessee had filed an appeal before the First Appellate Authority which was decided by the Ld. CIT(A) vide the impugned order and the appeal of the assessee was allowed.
Now, the Revenue is in appeal before us. The following grounds have been taken in this appeal: -
(a) The Ld. CIT(A) has erred in quashing the assessment order u/s.147 r.w.s. 144B made aby AO by stating that no new credible/tangible materials on record is brought by AO without appreciating that the Investigation Wing of the Department has already investigated the issue & 2206/Ahd/2024 (Assessment Years: 2013-14 & 2014-15) ITO vs. Deepa Rajendrakumar Agrawal Page 3 of 10 of bogus transactions in the said penny stock M/s. JRI Industries & Infrastructure Limited and accordingly disseminated the information to AO and AO after detailed discussion of modus operandi adopted by operator for arranging bogus LTCG/Loss made additions in assessment order ? (b) The appellant craves leave to add, alter and/or to amend all or any the ground before the final hearing of the appeal.
Shri Hargovind Singh, Ld. Sr. DR submitted that the Ld. CIT(A) had quashed the assessment order on the ground of reopening. He explained that, according to the Ld. CIT(A), no approval was taken from the competent authority before initiation of proceeding under Section 147 of the Act as no such fact was mentioned in the assessment order. The Ld. Dr. DR explained that the Assessing Officer in the reason recorded under Section 147 of the Act had categorically mentioned that approval of the PCIT was taken as per the provisions of Section 151 of the Act. The Ld. Sr. DR had taken us through the reason as recorded by the AO for reopening the case and submitted that the Ld. CIT(A) was not correct in holding that the conditions regarding escapement of income was not satisfied in the reasons recorded by the Assessing Officer.
Per contra. Shri Sunil Talati, Ld. AR of the assessee, at the outset, challenged the maintainability of the appeal on the ground that the tax effect involved was Rs.30,54,753/- which was below the prescribed limit of Rs.50 Lakhs. He submitted that the exception provided in CBDT Circular No.5/2024 dated 15.03.2024 was also not applicable for the reason that the Ld. CIT(A) had cancelled/annulled the assessment on the ground of jurisdiction to adjudicate the issue of penny stock on merit. On the issue of reopening, the Ld. AR strongly supported the order of the Ld. CIT(A) and submitted that there was no tangible material found and the & 2206/Ahd/2024 (Assessment Years: 2013-14 & 2014-15) ITO vs. Deepa Rajendrakumar Agrawal Page 4 of 10 conclusion of the Assessing Officer for issue of notice under Section 148 of the Act was not proper. Further that there was no escapement of income as all the transactions were duly disclosed in the return of income filed by the assessee.
We have carefully considered the rival submissions and gone through the material brought on record. The finding given by the Ld. CIT(A) on the reopening of the case is found to be as under: -
Decision : I have carefully considered the above submission of the appellant and gone through the AO’s observation & decision in assessment order and find that this issue had arisen also in A.Y- 2014-15. I find from the assessment order that the AO as per information in possession, after analysing the data pertaining to the appellant has found that the appellant has made transaction of penny stock amount to Rs.1,02,55,113/- and the appellant has not offered income resulting for the said transaction and to verify the same the case was reopened by issuance of notice u/s 148 of the I.T Act. While reopening the case vide notice u/s 148 dated 30.03.2021 for the A.Y 2013-14, I find no approval is mentioned in the assessment order to be taken by the AO from the Competent Authority before initiation of the income escaped proceedings u/s. 148 of the I.T Act. Without specifically mentioning the reason to believe for reopening the case, only to verify the generation of income out of unexplained transaction, as it is observed from the assessment order, is not permissible for invoking provision of section 147 of the I.T. Act for Income escaped assessment. Therefore, I find merit in the contention of the appellant in as much as it states no failure on its part to disclose any information or material fact. I find the AO is unable to bring any cogent material how he reaches the conclusion of ingenuine transaction entered by the appellant without rebutting the submission made by the appellant and the AO without any independent enquiry, investigation, verification regarding the said ingenuine transaction, solely depended upon the information received from the third party i.e initiation of proceeding done based on borrowed satisfaction. Therefore, I find infirmity in the order of the AO in as much as no new credible/tangible materials on record is brought by the AO to justify the reopening proceeding, So, the said initiation of proceeding u/s 147 of the I.T Act is treated as not in accordance with law. In view of above the order passed u/s 147 read with section 144B of the I.T Act vide dated 31.03.2022 stand annulled/quashed. The grounds on these issue are allowed. Decision : Regarding the other grounds, since the principal assessment order is annulled/quashed, the remaining grounds are not adjudicated separately.
& 2206/Ahd/2024 (Assessment Years: 2013-14 & 2014-15) ITO vs. Deepa Rajendrakumar Agrawal Page 5 of 10 10. A copy of the reason recorded by the Assessing Officer has been brought on record in the paper-book filed by the assessee. It is found therefrom that the Assessing Officer had received an information from the DDIT, Investigation Unit-5(1), New Delhi that the company M/s. JRI Industries & Infrastructure Ltd., a penny stock company, was utilised for generating fake loss. The matter was referred to the Assessing Officer to examine the transactions of the assessee in respect of this penny stock company. The Assessing Officer had recorded in his reason that the assessee had declared income of Rs.1,97,483/- along with declared loss of Rs.85,29,272/-. The total transaction done by the assessee in the penny scrip of M/s. JRI Industries & Infrastructure Ltd. was amounting to Rs.1,02,565,113/-. On this basis, the Assessing Officer had recorded that the assessee did not offer income resulting from the transaction in the above penny stock and that the transaction was unexplained and there was failure on the part of the assessee to disclose the details of these transactions.
It is found that the reason as recorded by the Assessing Officer was self-contradictory. When the assessee had disclosed the loss of Rs.85,29,272/- incurred in the penny stock transactions in the return of income, the transactions were duly disclosed in the return and there was no escapement of income. There was no discussion in the reason as to how and why this loss was bogus. Therefore, the basic condition to initiate the proceeding under Section 147 of the Act that there was an escapement of income is found missing in the reason as recorded by the Assessing Officer. The fact recorded by the Assessing Officer in his reason that the assessee did not offer income resulting from the transactions in the penny stock, is itself incorrect as the assessee had disclosed loss of Rs.85,29,272/- incurred in the penny stock transactions & 2206/Ahd/2024 (Assessment Years: 2013-14 & 2014-15) ITO vs. Deepa Rajendrakumar Agrawal Page 6 of 10 in the return of income. In view of this fact the finding of the AO that “it is established that the assess has not offered income resulting from the transaction in the above Penny Stock and hence, such transactions remain unexplained on the failure on the part of the assessee by disclosing details of such transaction” is not found correct. The assessee had not only disclosed the transactions but also shown the loss incurred in those transactions in the return of income. Therefore, the finding given by the Ld. CIT(A) that there was no failure on the part of the assessee to disclose any information or material fact is found to be correct. Since the basic ingredient of escapement of income and the failure on the part of the assessee to disclose the material facts, was not satisfied in the reason as recorded by the AO, the Ld. CIT(A) was correct in holding that the reopening of the case was not proper. Therefore, the Ld. CIT(A) had rightly quashed the assessment order. We do not find anything wrong with the order of the CIT(A). Accordingly, the decision of the Ld. CIT(A) is upheld and the appeal of the Revenue is dismissed.
ITA No.2206/Ahd/2024 for A.Y. 2014-15
The assessee had filed his return of income for the A.Y. 2014-15 on 21.06.2014 declaring total income of Rs.2,13,744/-. Thereafter, a revised return was filed on 09.07.2014 declaring total income of Rs.3,67,934/-. The case was selected for scrutiny under CASS on the ground of suspicious transaction relating to penny stock. The assessee had claimed short term capital loss of Rs.31,58,863/- in the transaction of shares of Shree Shaleen Textiles Limited, a penny stock company. The Assessing Officer treated the Short Term Capital Loss of Rs.31,58,863/- as bogus and disallowed the same. The assessment was completed under Section 143(3) of the Act on 23.12.2016 on the total income of Rs.1,20,56,070/-.
& 2206/Ahd/2024 (Assessment Years: 2013-14 & 2014-15) ITO vs. Deepa Rajendrakumar Agrawal Page 7 of 10 13. In the first appeal, the Ld. CIT(A) had deleted the addition and directed set off of Short Term Capital Loss of Rs.31,58,863/- with the Long Term capital gain derived by the assessee.
Aggrieved with the Order of the Ld. CIT(A), the Revenue is in appeal before us.
Following grounds have been taken in this appeal:-
(a) The Ld. CIT(A) has erred in law and on facts in allowing the claim of Short Term Capital Loss on sale of Penny Script M/s. Shree Shaleen Textile Limited made by assessee without appreciating that: (i) The credible information was received from DIT (Investigation), Kolkata that the shares of M/s. Shree Shaleen Textiles Limited is one of the penny scripts which has been utilised with the sole objective of providing accommodation entry of LTCG/STCL and assessee has claimed bogus loss of Rs.31,58,863/- on trading in such shares and claimed as set off from the LTCG from sale of house property. (ii) The assessee was unable to furnish sufficient proof for purchase of shares of M/s. Shree Shaleen Textiles Limited. (iii) The financial results of the Penny Stock used for the purpose clearly indicate that its quoted price at the peak was the result of rigging. (iv) The above facts have been independently also been confirmed by SEBI.
Shri Hargovind Singh, Ld. Sr. DR submitted that the assessee had purchased 70500 shares of Shree Shaleen Textiles Limited through broker Centrum Broking Limited at a cost of Rs.43,37,968/- which was sold after few months for a meagre amount of Rs.11,79,781/-. He submitted that the reason for such huge loss within a short period of time was not explained by the assessee and that such behaviour was against the principle of human probability which proved that the transaction was bogus. He, therefore, strongly supported the order of the AO.
& 2206/Ahd/2024 (Assessment Years: 2013-14 & 2014-15) ITO vs. Deepa Rajendrakumar Agrawal Page 8 of 10 17. Per contra, Shri Sunil Talati, Ld. AR of the assessee submitted that all transactions of shares were made through recognised Stock Exchange and the documentary evidence in the form of bank book, bank statement, copy of de-mat account, contract note etc. were filed in the course of assessment proceedings which substantiated the trail of assessee’s genuine transactions in trading. He submitted that the documentary evidences brought on record were not disputed and, therefore, there was no basis to make the addition. He explained that the loss was due to fluctuating nature of the stock market and merely because loss was incurred, the transaction cannot be held as in-genuine. He, therefore, strongly supported the order of the Ld. CIT(A).
We have carefully considered the rival submissions and the documents brought on record. In the assessment order, the Assessing Officer has discussed in detail the general modus operandi of the transaction carried out in a penny stock company. However, apart from a mere statement that the assessee had dealt into shares of M/s. Shree Shaleen Textiles Limited, no material was brought on record by the Assessing Officer to establish that the transactions of the assessee were not genuine and that the Short Term Capital Loss incurred in those transactions was bogus. There is no statement of any broker that the assessee had obtained any accommodation entry by way of incurring Short Term Capital Loss of Rs.31,58,863/- in the share transactions. Further, there is no evidence on record that any cash was exchanged by the assessee for the loss incurred in the penny stock transactions. We don’t find any cogent discussion or any evidence in the assessment order to treat the loss of the assessee as in-genuine. All the purchase and sale transactions were made through recognised stock exchange and were duly supported with contract notes and monetary details. There is no & 2206/Ahd/2024 (Assessment Years: 2013-14 & 2014-15) ITO vs. Deepa Rajendrakumar Agrawal Page 9 of 10 evidence to treat the Short Term Capital Loss incurred by the assessee as bogus. Merely because loss was incurred in the share transactions, the same cannot be treated as bogus for this reason alone. The AO had made the disallowance on mere surmise and conjecture and without bringing anything on record to establish that the Short Term Capital Loss incurred by the assessee in the share transactions was in-genuine. Therefore, we do not find any infirmity in the order of the Ld. CIT(A). The deletion of addition in respect of Short Term Capital Loss of Rs.31,58,863/- by the Ld. CIT(A) is upheld. The appeal of the Revenue is dismissed.
In the final result, both the appeals filed by the Revenue are dismissed.
Order pronounced in the open Court on this 4th July, 2025.