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Facts
The assessee claimed exemption under Section 10(38) on sale of shares. The case was reopened based on information that the assessee traded in "penny stocks" and was a beneficiary of bogus long-term capital gains. The Assessing Officer (AO) issued a notice under Section 148 and subsequently disallowed the exemption.
Held
The Tribunal held that the reassessment proceedings were initiated on the basis of information regarding trading in "Global Cap" penny stock, but the addition was made on a different issue related to "Parag Shilpa Investments Ltd." shares. Since no addition was made on the original grounds, the reassessment was not valid. Further, on merits, the holding period of shares exceeded 12 months, satisfying the condition for long-term capital gain exemption.
Key Issues
1. Validity of reopening and issuance of notice under Section 148A and 148. 2. Disallowance of exemption claimed under Section 10(38) for long-term capital gains.
Sections Cited
Section 10(38), Section 148A, Section 148, Section 151A
AI-generated summary — verify with the full judgment below
Order Under Section 254(1) of Income Tax Act Per: Pawan Singh, Judicial Member: 1. This appeal by the assessee is directed against the order of learned CIT (A) dated 27.02.2025 for Assessment Year 2015-16. The Assessee has raised following grounds of appeal:-
1. On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in upholding the validity of notice issued under clause b of section 148A of the IT Act 1961 and the order passed thereafter under clause d of section 148A of the IT Act 1961 and consequent issuance of notice u/s 148 of the IT Act 1961 and the reason assigned for doing so are wrong and contrary to the provisions of Income Tax Act and Rules made there under.
2. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding validity of issue of notice u/s 148 of the Act, which was in contravention of provisions of section 151A of the Act which mandates that the notice u/s 148 can only be issued by the faceless Assessing Officer and not by the jurisdictional Assessing Officer and the reason assigned for doing so are wrong and contrary to the provisions of Income Tax Act and Rules made there under.
(AY 2015-16) Chintan Harshad Kanakia 3. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the disallowance of claim of exemption of Rs. 1,41,11,269/- claimed u/s 10(38) of the Act and the reason assigned for doing so are wrong and contrary to the provisions of Income Tax Act and Rules made there under.
4. On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in upholding penalty u/s 271(1)(c) of the IT Act 1961 and the reasons assigned for doing so are wrong and contrary to the provisions of Income Tax Act and Rules made there under.
5. On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in upholding interest under section 234B 234C and 234D of the IT Act 1961 and the reasons assigned for doing so are wrong and contrary to the provisions of Income Tax Act and Rules made there under.
6. Your Appellant crave, leave to add, alter, amend or modify any or all grounds of appeal
on or before the date of hearing.
2. The brief facts of the case are that the assessee is individual, filed his return of income for Assessment Year (AY) 2015-16 on 27.01.2016 declaring income of Rs.10,06,180/-. In the computation of income, the assessee claimed exemption of Rs.1.41 Cr on sale of shares of Parag Shilpa Investment Ltd. under Section 10(38). The case of the assessee was reopened on the basis of information received from Principle Commissioner of Income Tax-32 (PCIT), Mumbai that search action under section 132 was carried out on KCGP Share Broking Services Pvt.
Ltd., which were providing entry of penny stock and assessee is one of the beneficiary bogus long-term capital gain. As per information the assessee traded in the scrips of Global Cap, which is penny scrip and claimed exemption of Rs.68,40,897/-. The AO recorded reasons of reopening and proceeded for re-assessment. The notice under Section 148 was issued to assessee on 23.06.2021. After the decision of Hon’ble Apex Court in Union of India Vs Ashish Aggarwal (2022) 444 ITR 1 SC (AY 2015-16) Chintan Harshad Kanakia where in the notice issued under Section 148 between 01.04.2021 to 30.06.2021 to respective assesses’ was directed to be considered as deemed notice under Section 148A. As per direction of the Hon’ble Apex Court the assessee was provided reasons recorded, information and material relied by the Revenue. The information and material was provided to the assessee on 31.05.2022 with the direction to furnish reply within two weeks from the date of receipt of notice. The Assessing Officer recorded, in absence of reply to said show cause notice order under Section 148A(d) was passed on 29.07.2022 and issued notice under Section 148. In response to notice under Section 148 dated 29.07.2022 the assessee filed his return of income on 13.08.2022.
The Assessing Officer after serving notice under Section 143(2) and 142(1) proceeded for reassessment. The Assessing Officer required the assessee to furnish brief note on business activities, computation of income, profit and loss account with balance sheet along with all annexure and note on account, details of all bank accounts, details of all capital gains, claim exempted along with details of purchase of shares, DEMAT account reflecting the purchase of shares, bank statement showing purchase consideration and evidence of sales of share and payment of Security Transaction Tax (STT). The AO also recorded that the assessee that return filed on 13.08.2022 in response to notice under Section 148 is not a valid return. The AO recorded that assessee has not responded to his show cause notice, thus, another notice was issued to the assessee. In response to which, the assessee filed his reply on 06.02.2023 and 07.02.2023. On the basis of reply furnished by assessee 3 (AY 2015-16) Chintan Harshad Kanakia the AO recorded that assessee submitted copy of invoices of purchases of shares of Parag Shilpa Investments Ltd, share certificate reflecting assessee’s name on back side of share certificates. The assessee submitted sale was made through India Advantage Security Ltd and sales invoices were furnished. The Assessing Officer recorded that on careful perusal of purchase invoices, he find that assessee purchased shares from Conquer Barter on 22.07.2023, the share to Conquer Barter was allotted on 10.09.2013. So, it was not possible for Conquer Barter to sell the shares before allotment. Thus, a fresh notice dated 24.03.2023 was issued to assessee to submit DEMAT account showing the purchase of share from Conquer Barter on 22.07.2013. The AO further recorded that assessee failed to respond to show cause notice so he issued a fresh show cause notice on 10.04.2023 to furnish reply on or before 17.04.2023. The contents of such show cause notice is recorded in para 8 of assessment order. The AO further recorded that the assessee again not furnished any reply and failed to furnish DEMAT account.
The AO on the basis of details available with him in para 12 of assessment recorded that assessee purchased 30,000 share of Parag Shilpa Investments Ltd. on 22.07.2023 from Conquer Barter and these share were split into ratio of 1:10 and became 3,00,000 share. Out of these share 172350 were sold in between 13.12.2015 to 18.03.2015 for a sale consideration of Rs.1.48 Cr on which assessee computed capital gain of Rs.1.41 Cr. And after reducing purchase cost and claimed exemption under Section 10(38). The shares were allotted to Conquer Barter only on 10.09.2023, so such share could not have been purchased 4 (AY 2015-16) Chintan Harshad Kanakia on 22.07.2013 as claimed by the assessee. The assessee failed to furnish DEMAT account reflecting the purchase of such share. The assessee failed to prove the share of Parag Shilpa Investments Ltd. were held for a period exceeding 12 month, thus, not eligible to claim exemption under Section 10(38) and exemption on sale of shares of Parag Shilpa Investments Ltd. was disallowed and added to the income of assessee.
Aggrieved by the addition in the assessment order, the assessee filed appeal before CIT (A). Before CIT (A) the assessee challenged the validity of reopening beyond three years as per new provisions of Section 148/148A w.e.f. 01st April, 2021 and thus notice issued on 23.06.2021 is void ab initio and entire assessment is bad in law. The assessee also raised plea that no addition was made on the reasons recorded and that additions were mode on different issue, which is not permissible. The assessee also challenged the validity of addition in disallowing exemption for not qualifying the period of twelve months. In support of all the grounds of appeal, the assessee filed detailed written submission and statement of fact.
The Ld. CIT (A) after considering the submission of assessee upheld the action of Assessing Officer on validity of reopening as well as on merit.
On the validity of reopening the assessee submitted that re-assessment was initiated on specific information regarding trading in GLOBAL CAP being penny stock, this was sole reason for issuing notice under Section
However, during reassessment process the Assessing Officer made different addition by expended the scope of inquiry and disallowed claim of assessee of long-term capital gain related with share of Parag Shilpa 5 (AY 2015-16) Chintan Harshad Kanakia Investments Ltd. which is beyond the jurisdiction of Assessing Officer as it is unrelated to the original grounds of reopening. The Ld. CIT(A) appeal held that judicial precedent clarify that once reassessment is validly initiated the AO is empowered to exempt any income that comes to notice during reassessment even if it was notpart of original reasons recorded.
On merit the assessee submitted that Assessing Officer during assessment focused on authenticity of shareholding period and doubted the claim on the basis of date of purchases. Due to discrepancies in the date of allotment and purchase by assessee the AO doubted the legitimacy of assessee’s claim. It was also contended that delay in issuing the share certificate not affects the ownership and shares were validly transferred on the date of purchase. The assessee provided purchase invoices and sale contract. The assessee failed to furnish DEMAT account. Section 10(38) mandates for long-term capital gain exemption when share is held for more than 12 months and sold through recognised stock exchange and on payment of STT. There was clear evidence regarding holding period and sale of share through India Advantage Security Ltd. The Ld. CIT (A) on considering the submission of the assessee noted that Assessing Officer identified certain discrepancies in the evidence provided by the assessee wherein the assessee claimed purchase of share from Conquer Barter Pvt. Ltd. on 22.07.2013; however, shares were allotted to Conquer Barter Pvt. Ltd. on 10.09.2013.
The assessee was asked to provide DEMAT account to prove conclusively about holding period but assessee failed to furnish such DEMAT account. 6 (AY 2015-16) Chintan Harshad Kanakia The Ld. CIT (A) held that decision of AO in absence of critical evidence and inconsistencies found in evidence of assessee and upheld the action of Assessing Officer. Further aggrieved the assessee has filed present appeal before the Tribunal.
We have heard the submissions of Ld. Authorised Representative (AR) of the Assessee and the Ld. Senior departmental representative (ld DR) for the Revenue. The Ld. AR of the assessee submits she has two-fold submissions, firstly, that case of assessee was reopened on the basis of information received from Principle Commissioner of Income Tax (PCIT)
32 Mumbai that assessee traded in the share of GLOBAL Cap which is penny scrip Company, used to facilitate introduction of unaccounted money and the assessee is beneficiary of sale of such scrip of Rs.68,40,897/-. The copy of reasons recorded as provided to the assessee along with notice under Section 148A(b) is placed on record at page No. 13-15 of Paper Book (PB). The Assessing Officer has not made any addition on such reasons recorded. The Assessing Officer picked up some other issue related with transaction of Parag Shilpa Investments Pvt. Ltd. which was not covered in the information received, which was basis of reasons recorded. Thus, assessment order completed on different issue is bad in law as has been held in a series of decision including by decision of jurisdictional High Court in Jet Airways (I) Ltd.
Vs. CIT (2011) 331 ITR 236 (Bomb.) wherein it was held that if after issuing notice under Section 148, the AO does not assess or re-assess such income for which he had formed reason to believe that it had (AY 2015-16) Chintan Harshad Kanakia escaped assessment, it is not open to him to independently assess or re- assess any other income which came to his notice subsequently during the re-assessment proceeding. To support her submission the Ld. AR also relied upon the following decision. CIT Vs Shri Ram Singh(306 ITR 343 Raj), Ranbaxy Laboratory Ltd Vs CIT (336 ITR 136 Delhi), Tata Communication Transformation Services Ltd Vs ACIT (ITA No. 358/ Mum/2022, 8. Secondly, on merit, the Ld. AR of the assessee submitted assessee purchased 30,000 share of Parag Shilpa Investments Ltd. for a consideration of Rs. 12.00 lakhs by making payment through account payee cheque. Later on the shares of Parag Shilpa Investments Ltd. were split into ratio 1:10. Out of which 172350 shares were sold on 13.02.2015 and 18.03.2015 through Security Exchange Board of India (SEBI) registered broker after payment of Security Transaction Tax (STT). Before Assessing Officer the assessee furnished purchase invoices, share certificate showing ownership in the name of assessee, contract note form registered broker and bank statement showing payment through banking channel. All such evidence which was filed before AO is also placed on record. To prove the essential condition for establishing genuineness of long-term capital gain on listed company the assessee has shown identity of parties, genuine contract of purchase and sale payment through banking channel and after payment of STT. Once the assessee furnished primary evidence the burden shifts on the revenue to disprove them through credible material. The AO has not carried out any independent investigation from stock exchange or broker of the assessee 8 (AY 2015-16) Chintan Harshad Kanakia to bring adverse evidence. The addition is based on third-party general information that assessee’s name appeared in the list of beneficiary found during search in KCGP Share Broking Services Pvt. Ltd. The report with AO was not provided to the assessee rebut the allegation of implicating him. No cross-examination of such person was offered by AO.
The sole ground for making addition was discrepancies in the purchase date. The conclusion drawn by AO is legally and factually unsustainable.
When the transaction was off market under the Companies Act, share can be transferred before the name is entered in the Register of members with subsequent regularization by issuing Company. The AO never examined register of members of Parag Shilpa Investments Ltd. to verify actual transfer entries. No notice under Section 133(6) or summon under Section 131 was issued to Conquer Barter Pvt. Ltd. The action of AO is purely presumptive and not supported by law or fact. The assumption cannot replace evidence, specifically when assessee’s documents were not controverted. The share certificate produced before AO clearly shows he name of assessee entered in the Register of member on 22.11.2013. Even if, the date of acquisition is conservatively taken as of 22.11.2013, the holding period up to the date of sale on 13.02.2015 to 18.03.2015 clearly qualifies 12 months period for satisfying statutory condition for eligibility of long-term capital gain.
Thus, basic condition for long-term capital gain is fulfilled. The AO has not doubted any other instance of transaction of long term capital gain, except the date of purchase of shares. The Ld. AR of assessee submits that Hon’ble jurisdictional High Court in CIT Vs. Jamna Devi Aggarwal 9 (AY 2015-16) Chintan Harshad Kanakia (2010) 328 ITR 656 (Bombay) held that once period of holding exceed 12 months and shares were sold through exchange with STT paid, exemption under Section 10(38) must follow. Similarly, Punjab & Haryana High Court in PCIT Vs. Prem Pal Gandhi (2018) 403 ITR 552 (P&H) also held that suspicions about timing of purchase cannot override documentary evidence providing long-term capital holding. The Ld. AR of assessee reiterated that even on AO’s own interpretation of transaction chronology, the period of holding is more than 12 months and addition in disallowing long-term capital gain is not legally tenable. The Ld. AR submits that she has good case on merit as well as on legal issue.
On the other hand, the Ld. Senior DR for the Revenue supported the order of lower authorities and relied on both the issues. The Ld. Senior DR for the revenue submits that AO as well as Ld. CIT (A) has given detailed finding while disregarding the submission of the assessee.
We have considered the rival submissions of both the parties and gone through the orders of the lower authorities carefully. We have also deliberated on various case laws relied by Ld. AR of the assessee. We have also deliberated on various documentary evidence furnished by assessee which includes the purchase invoices, copy of cheques issued from Oriental Bank of Commerce dated 01.08.2013 for Rs.10,00,000/- and Rs.2,00,000/- against the purchase consideration, copy of share certificates bearing the date of transfer. First, we are considering the primary submission of Ld. AR of the assessee about validity of assessment order. We find that case of assessee was reopened on the (AY 2015-16) Chintan Harshad Kanakia basis of information received from PCIT-32 that in the search action on KCGP Share Broking Services Pvt. Ltd. that the assessee traded in scrip Global Cap, which is penny scrip and used to facilitate introduction of unaccounted money in the form of long-term capital gain. However, in the assessment order there is no such reference.
Rather, during assessment the AO on the basis of details provided by assessee noted that in the transaction of long-term capital gain on share of Parag Shilpa Investments Pvt. Ltd. there is discrepancies in the date of purchase of share. Thus, admittedly, no addition is made on the basis which was the basis of reopening of assessment. We find that Hon’ble jurisdictional High Court in CIT Vs Jet Airways (supra) held that the Bombay High Court held that when no addition was made on the basis of reasons recorded for reopening of the assessment, it was not open for the AO to bring some other income to tax in the course of assessment proceedings. It was also held if after issuing notice under section 148, the AO accepts contention of assessee and holds that income, for which he had initially formed a reason to believe that it had escaped assessment, has, as a matter of fact, not escaped assessment, it is not open to him to independently assess some other income; if he intends to do so, a fresh notice under section 148 would be necessary, legality of which would be tested in event of a challenge by assessee.
We find that Mumbai Tribunal in Aishwarya Rai Bachchan vs Pr. CIT [2022] 135 taxmann.com 335 (Mumbai – Trib.), also held that where AO recorded reasons on basis of which reassessment was initiated, but did (AY 2015-16) Chintan Harshad Kanakia not make any addition in reassessment proceedings, in such case primary reason to believe that income had escaped assessment would fail and reassessment could not be treated as a valid order.
Similar view was taken by Delhi High Court in CIT Vs. Shri Ram Singh (supra) and Ranbaxy Laboratory Ltd. Vs. CIT (supra). Thus, in view of, aforesaid factual and legal submission the assessee succeeded on primary submission.
Even on merit we find that Assessing Officer has only doubted the date of acquisition of scrip of Parag Shilpa Investments Pvt. Ltd. There is no other material on record that scrip of Parag Shilpa Investments Pvt. Ltd is also part of penny scrips. We find that the Ld. AR of the assessee in all her fairness has filed copy of share certificate issued in the name of Conquer Barter Pvt. Ltd. which bears the date of issuance as 10.09.2013.
The shares were transferred to assessee on 22.11.2013. Such date of transfer is clearly discernible on back side of share certificates, copy of which is filed at page No. 77 of the Paper Book. We find that Assessing Officer or the CIT (A) has not doubted any other sequence of event in furtherance of transfer of such share. The AO and CIT(A) has not disputed about the sale of share through India Advantage Share Broking Company and payment of STT. Even as per the submission of Ld. AR the date of acquisition of share is taken from 22.11.2013, the assessee clearly qualified 12 months for seeking benefit of long-term capital gain.
Thus, assessee also succeeded on merit. In the result, ground No.3 of appeal is allowed.
(AY 2015-16) Chintan Harshad Kanakia 13. Considering the fact, we have allowed appeal of the assessee on merit therefore specific adjudication of ground No.1 & 2 which relates to issuance of notice under Section 148 by faceless Assessing Officer and not by jurisdictional Assessing Officer, has become academic. 14. In the result, appeal of the assessee is allowed.