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Facts
The assessee claimed exemption under section 10(38) for long-term capital gains from the sale of shares, which the Assessing Officer (AO) found to be non-genuine transactions involving penny stock, used as a colorable device to convert unaccounted money. The AO made an addition of Rs.17,37,600/- to the assessee's income and levied a penalty of Rs.5,36,500/- under section 271(1)(c) for furnishing inaccurate particulars of income, considering the assessee's subsequent withdrawal of the exemption claim as involuntary after detection by the department.
Held
The Tribunal upheld the CIT(A)'s decision to quash the penalty, ruling that merely withdrawing a claim or an addition being made after departmental detection is not sufficient for imposing a penalty under section 271(1)(c) of the Act. The CIT(A) and Tribunal found that the AO failed to record specific adverse conclusive findings to prove that the transactions were sham or how the assessee furnished inaccurate particulars of income, and that penalty cannot be levied automatically based solely on assessment findings.
Key Issues
Whether the CIT(A) erred in quashing the penalty under section 271(1)(c) when the assessee claimed bogus exemption under section 10(38) from long-term capital gains on penny stock and later surrendered the income; and whether the surrender, being after detection, automatically warrants a penalty.
Sections Cited
Section 10(38), Section 143(3), Section 271(1)(c), Section 274
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Income Tax Appellate Tribunal, RAIPUR BENCH, RAIPUR
Before: SHRI PARTHA SARATHI CHAUDHURY & SHRI ARUN KHODPIA
आदेश / ORDER PER PARTHA SARATHI CHAUDHURY, JM:
The present appeal preferred by the Revenue emanates from the order of the Ld.CIT(Appeals)/NFAC, Delhi dated 22.05.2025 for the assessment year 2014-15 as per the following grounds of appeal:
“1. Whether on the point of law and on the facts and circumstances of the case, the Ld. CIT(A) has erred in quashing the penalty imposed under section 271(1)(c) of the Income-tax Act, 1961 by the Assessing Officer without appreciating that the assessee had furnished inaccurate particulars of income by claiming bogus exemption under section 10(38) of the Act on account of long-term capital gains arising from transactions in penny stock.
2. Whether the Ld. CIT(A) has erred in law and in facts in holding that the surrender of income by the assessee discharges him from the penal consequences under section 271(1)(c) of the Act, without appreciating the fact that the surrender was not voluntary but was made only after detection by the department.
3. Whether the Ld. CIT(A) has erred in law in ignoring the binding judgment of the Hon'ble Supreme Court in the case of MAK Data Pvt. Ltd. vs. CIT-II (2013) 358 ITR 593 (SC), wherein it was held that voluntary disclosure does not release the assessee from the rigours of penalty under section 271(1)(c) of the Act.
Whether the Ld. CIT(A) has failed to consider that the transactions relating to Long-Term Capital Gains from penny stock (NCL Research and Financial Services Ltd.) were found to be non- genuine and were used as a colorable device to convert unaccounted money into tax-exempt income, which clearly amounts to furnishing of inaccurate particulars of income.
5. Whether the Ld. CIT(A) has erred in holding that the penalty was wrongly levied despite clear satisfaction recorded by the Assessing Officer in the penalty order that the assessee had furnished inaccurate particulars of income and concealed the particulars thereof.
6. Whether the Ld. CIT(A) has erred in law and on facts in failing to appreciate that the case falls within Exception 3.1(b) of CBDT Circular No.05/2024 dated 15.03.2024, warranting further litigation despite the tax effect being below the monetary threshold prescribed in CBDT Circular No. 09/2024 dated 17.09.2024.
7. Any other ground that may be adduced at the time of hearing.”
At the time of hearing, none appeared for the assessee. However, an adjournment petition has been filed which is rejected. The matter is heard after recording the submission of the Ld.CIT-DR and on a careful examination of the material available on record.
In this case, assessment was completed u/s.143(3) of the Income Tax Act, 1961 ( for short ‘the Act’) assessing total income of the assessee at Rs.23,18,810/- as against returned income of Rs.5,81,210/- making an addition of Rs.17,37,600/- for the year under consideration. The issue of addition was on account of claim of exemption u/s. 10(38) of the Act on long term capital income with regard to sale of shares. Penalty was levied by the A.O u/s.271(1)(c) of the Act on the assessee vide order dated 23.06.2017 for “furnishing inaccurate particulars of income” by observing as follows: “In this case, order under section 143(3) of the Income tax Act, 1961 was passed by the AO on 24.12.2016 at Rs.23,18,810/- against the returned income of Rs.5,81,210/- thereby making an addition of Rs.17,37,600 for the year under consideration. The issue of addition is on account of claim of exemption under section 10(38) of the Income tax Act, 1961 on long term capital income with regard to sale of shares.
During the course of assessment proceedings, it was found that the assessee purchased and sold the shares of NCL Research and Financial Services Ltd., no. of shares purchased being 1100 for an amount of Rs.1,98,000/- on 2.4.2012 and sold the same on 23.10.2013 for an amount of Rs.17,37,600/-. It was observed that the entire sale proceedings were received from sale of only one strip i.e., M/s NCL Research and Financial Services Ltd. These purchases were through offline mode through preferential placement on a total amount of Rs.1,98,000/-. The source and proof the said purchase was not furnished by the assesse during the course of assessment proceedings. The purchases were being made through Victor Commodeal Pvt. Ltd. Kolkata and not through recognized Stock Exchange. A letter was issued to the said company which was returned back from the postal authority with remarks, 'Receiver, 6, Braboum Road, Room No. G/9 Kol refused due to no such addressee in this address. During the course of assessment proceedings, it was found that the assesse opened a DEMAT account in Microsec Capital Ltd. on 9.8.2013 and the said scrip was dematerialized on 27.8.2013 in Microsec Capital Lad through Eureka STK and SH BKG SERV. The details of scrips credited from the said concerns were not explained by the assesse. It was also noticed that out of the said scrips 200 scrips were sold on 17.9.2017 just after 20 days only by Microsec Capital Ltd. and remaining shares i.e. 900 were first transferred from the account of Microsec Capital Ltd. to the account of Asthvinayak Stock Broking Pvt. Ltd. through East India Sec. Ltd. and thereafter sale was made. The explanation was not furnished by the assesse as to why the said transactions were made through this pattern. As also, the sale rate of first sold 200 scrips was Rs.1983 per share and remaining sold for Rs. 1490/-. A search and survey operation was carried out in the case of Eureka STK and SH BKG SERV/East India Sec. Ltd. and both these concern were found to be involved in such kind of seam, which they have accepted. It was further noticed that the family members of the assesse have also taken entries from the same course. It was also found that the price of the strip kept rising over 1066% through out the period. On examination of the facts gathered during the course of assessment proceedings, it was noticed that the company merely forwarded the share capital received through preferential placement of shares and later on towards loans and advances. It may not be out of place to mention here that the issue was enquired by the Investigation Wing of Kolkata The crux of their statement are that the scrip of NCL Research and Financial Services Ltd. is penny stock and the transactions were not genuine investment transaction or sham ones and as such it is found as colorable device only to convert the unaccounted cash into tax exempt income. In view of the facts gathered during assessment proceedings and circumstantial evidences and also the offer of the assesse for its taxation, an amount of Rs.17,37,600/- on account of LTCG on sale of scrip was added back to the total income of the assessee and penalty u/s.271(1)(c) for furnishing inaccurate particulars of his income was initiated. Show cause notice was issued on 24.2.2016 and subsequent dates. In response, the counsel of the assesse, has filed a written submission in this regard which states that the addition is a result of voluntary disclosure made by the assessee mainly to avoid litigation to buy peace and cooperated with the Department and requested to drop the penalty proceedings initiated u/s.271(1)(c) of the Income tax Act, 1961. The Assessing Officer has considered the entire facts and assessed the income on the basis of material gathered during the course of assessment proceedings. The explanation given by the assessee that penalty proceedings may be dropped as the entire amount arising out of long term capital gain has been offered for taxation is not acceptable. The surrender of income in this case was not voluntary because the offer of surrender was made after the detection made by the Assessing Officer. Had it been the intention of the assesse to make full and true disclosure of its income, it would have filed the return declaring an income accordingly, which was surrendered later during the course of assessment proceedings. The law does not provide that when the assesse makes a surrender of his concealed income, he is absolved from penalty. In view of the above facts, it is clear that the assesse has furnished inaccurate the particulars of his income and liable to be penalized under section 271(1)(c) of the Income tax Act, 1961. Therefore, I levy a penalty of Rs.536500/-being 100% of the tax sought to be evaded.”
4. Against the penalty order, the Ld. CIT(Appeals)/NFAC while allowing the appeal of the assessee observed and held as follows: “Appellant in his submission stated that the assessee has withdrawn claim of exemption u/s.10(38) of the Act. Penalty u/s. 271(1)(c) of the Act is leviable for furnishing inaccurate particulars and concealment of income. No penalty is leviable for making a claim which is found incorrect. On merit, it is seen that assessee has surrendered his claim of long term capital gain which was made in the ROI. No enquiry to disprove the documents filed by the assessee has been made. Just because addition has been made and that too when the assessee has withdrawn the claim, the facts do not per se become sufficient for imposition of penalty. In a similar case ITAT, Kolkata in the case of Navneet Agrawal V/s ITO Kol 2017 dated Jul 20, 2018 has deleted the addition itself. After which there was no question of levy of penalty u/s 271(1)(c). Penalty has been imposed only on the basis of findings in assessment proceedings. In the assessment proceedings, no specific adverse conclusive finding relating to the affairs of the appellant was recorded. The transaction of appellant has not been conclusively proved to be sham. In view of this, penalty could have been imposed on the basis of addition which was made on presumption and voluntary offer. The issue in present appeal is covered in favour of the appellant by the decision of Hon'ble Raipur Bench of ITAT in the case of South Eastern Coalfields Ltd v DCIT (I.T. Act, 1961/CO No.152/rpr/2014) June 9, 2023 In this case quashed penalty order due to Assessing Officer's failure to specify the exact charge in the show cause notice u/s.274 read with section 271(1)(c). The tribunal emphasized that the notice must clearly indicate whether the penalty is for concealment of income or for furnishing inaccurate particulars. Appellate order in a very similar case was also submitted by the appellant namely Shri Siddharth Golchha for the A.Y. 2014-15, where the Ld.CIT(Appeals) held as under: “2.3 The assessee has withdrawn claim of exemption u/s. 10(38) of the Act. Penalty u/s.271(1)(c) of the Act is leviable for furnishing inaccurate particulars and concealment of income. No penalty, is leviable for making a claim which is found incorrect. On merit, it is seen that assessee has surrendered his claim of long term capital gain which was made in the ROL No enquiry to disprove the documents filed by the assessee has been made Just because addition has been made and that too when the assessee has withdrawn the claim. the facts do not per se become sufficient for imposition of penalty. In a similar case ITAT. Kolkatta in the case of Navneet Agrawal Vis ITO dated Jul 20 2018 has deleted the addition itself. After which there was no question of levy of penalty u/s.271(1)(c). In the penalty order and assessment order, the AO has discussed trading in shares of IWs operator in connivance with business man looking to introduce their cash as long term capital gain. AO has also discussed the abrupt movement of share prices of this share in stock market, the financials of the shares and enquiry of Investigation wing Kolkata into 84 scrips which were used by certain persons to artificially show LTCG by business man. Statement of certain persons were recorded who were involved for causing movement in the share prices and facilitating of buying and selling shares. However, there are no facts to establish the involvement of the assessee and collusion with these persons. In the stock market a share can be bought or sold by any person online. However every person who has bought or sold a share has done so with ulterior motive, such a conclusion cannot be derived without bringing on record facts to this effect and to show that assessee has acted in collusion with these persons. As held in Dilip N. Shroff vs JCIT (2007) 291 ITR 5r9, 547 (SC), only on the basis of finding in assessment proceeding, penalty cannot be levied automatically. In case of Shadilal Sugar & General Mills Ltd vs CIT 168-ITR 705 SC 1987, the Hon'ble Supreme Court has observed that the assesse admitted that these were the Incomes of the assessee but that was not an admission that there was deliberate concealment From agreeing to addition, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission, i.e. when the assessee realizes the true position, it does not dispute certain disallowances but that does not absolve the Revenue from proving the mensrea of a quasi-criminal offense. In penalty order, the AO has not made out any case for imposition of penalty. No reason whatsoever has been given in the penalty order as to how and in what manner appellant furnished inaccurate particulars. Relying on the addition made in assessment is not enough.”
That as discernable from the fore-going paras, basis of addition, on which penalty was levied was with regard to claim of exemption u/s. 10(38) of the Act. That facts brought on record as afore-stated clearly demonstrates that the assessee in his submission has stated that the assessee withdraws the claim of exemption u/s.10(38) of the Act. The Ld. CIT(Appeals)/NFAC observed that since the assessee has surrendered his claim of long term capital gain which was made in the return of income and that since no enquiry to disprove the same has been made by the department and just because, addition has been made and that too when the assessee has withdrawn such claim, the facts do not per se become sufficient for imposition of penalty. The A.O has not made out any case for imposition of penalty as to how and in what manner the assesse had furnished inaccurate particulars of income. Accordingly, we do not find any infirmity in the findings of the Ld. CIT(Appeals)/NFAC which is hereby upheld.
As per the above terms grounds of appeal raised by the Revenue are dismissed.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on 20th November, 2025.