MITUL PRAVINCHANDRA MALANI, ,KOLKATA vs. ACIT, CIR. 33, KOLKATA

This appeal filed by the assessee is against the order of the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (“the Ld. CIT(A)”) passed u/s 250 of the Income Tax Act, 1961 ( “the Act”) for AY 2014-2015, dated 28.03.2024, which has been passed against the penalty order u/s 271(1)(c) of the Act passed by the Assistant Commissioner of Income Tax, Circle 33, Kolkata (“the Ld. AO”), dated 28.06.2017.

The grounds of appeal raised by the assessee are reproduced as under:

For that levy of penalty u/s 271(1)(c) of the amount of Rs.9,560/- is wrong and uncalled for.

The details of purchase and sales of the scripts M/s. Life Line Drugs & Pharma Limited (herein after refer The scrip) were examined. It was found that assessee has purchased 15000 shares at the fag end of the year and within a very short term period assessee has sold the particular script at a much lesser price which resulted bogus short term capital loss with a view to adjust the same with short term capital gain during the financial year under consideration and reduce the tax liability of the assessee. On verification of the investment history made by the assessee it is Mitul Pravinchandra Malani: AY: 2014-15 observed that assessee is an experienced player in the share market but assessee invested in the alleged penny stock script with a view to avail short term loss knowing fully well that the above share script was in downwards trend. Thus a deeper study was needed to ascertain whether the transactions were genuine investment transactions or sham ones and colourable device only to convert the unaccounted cash into tax exempt income. In short, it was to be ascertained whether the apparent was real. On going through the financial position of the Scrip (M/s. Life Line Drugs & Pharma Limited) it is crystal clear that during the period from financial year 2009-10 to 2013- 14 business health of the company was poor and EPS is showing almost 'nil'. During the Period, no material corporate announcement was made by M/s. Life Line Drugs & Pharma Limited The price of the scrip in the market mainly depends on the EPS, the business health of the company or some new development of the company which promises bright futures of the share holders. In the present scrip there were no such factors were occurred. In the present case it is observed that the assessee is an experienced player in the share market but assessee invested in the alleged penny stock script with a view to avail short term loss knowing fully well that the above share script was in downwards tend. Conclusion: Reasons for Investment at the fag end of the year in such penny stock with the intention to generate abnormal bogus short term capital loss which could be adjusted with short term capital gain.

The Ld. AO thereafter has analysed the price movement of the scrip, the modus operandi, the common finding of SEBI in all these cases, the discussion of SEBI in the case of Kailash Auto Finance Limited, which incidentally is not the scrip in which the assessee has dealt (as was also pointed out by the Ld. AR during the course of the hearing), the discussion regarding increase of share price of M/s. SRK Industries Limited (Para 4.1 of the assessment order) and the factor that the assessee is an experienced player in the field of share trading and had invested mostly in blue chips/reputed shares and according to the Ld. AO it was surprising that the assessee suffered loss in the scrip of Life Line Drugs and Pharma Limited in which he never invested and concluded that the scrip was a penny stock and used as an instrument to claim bogus long term capital Mitul Pravinchandra Malani: AY: 2014-15 gain/short term capital loss. The investment was made at the fag end of the year with predetermined objective to make short-term capital loss and to adjust the same with the short-term capital gain which already was earned in the beginning of the year under consideration. The assessee on the other hand had submitted that purchase and sale transactions were through registered broker and all the payments in respect of which had been made through account payee cheques, but the Ld. AO concluded on the basis of his analysis, documentary evidences, circumstantial evidences, human conduct and preponderance of probabilities that what is apparent in this case is not real, that the financial transactions were sham ones and that this entire edifice was only a colourable device used to evade tax. Relying upon several judicial pronouncements, the loss of ₹30,927/- was treated as bogus and was not adjusted against the short-term capital gains earned during the financial year under consideration. Penalty proceedings were also initiated.

The assessee did not contest the addition. The assessee had furnished a reply before the Ld. AO that no appeal had been preferred against the disallowance of loss only to avoid litigation, which is time-consuming and because of the smallness of the case and the assessee requested that the penalty proceedings maybe dropped. In the penalty proceedings, after reproducing Para 10 and Para 11 of the assessment order, it was held by the Ld. AO that the assessee had deliberately produced inaccurate particulars of the income to the extent of ₹30,927/- for which no satisfactory explanation was filed and the penalty of ₹9,560/- was imposed.

Since no explanation was given before the Ld. AO nor the addition of ₹30,927/- made by the Ld. AO was challenged in any quantum appeal, therefore, the Ld. CIT(A) concluded that there was no infirmity in the action of the Ld. AO in concluding that the appellant had deliberately made incorrect claim of short-term capital loss on sale of the penny stock in his ITR and hence it had furnished inaccurate particulars of income.

It was argued before us that the notice was defective and, therefore, the penalty imposed maybe deleted. It was conveyed to the Ld. AR that in view of the decision in the case of the Principal Commissioner of Income-tax v. Thakur Prasad Sao & Sons (P.) Ltd. [2024] 163 taxmann.com 449 (Calcutta), this issue was no longer relevant. It has been held in this case that: In the present set of facts the Assessing Officer has noted in the assessment order the concealment of particulars of income by the respondent/assessee. Notices were also directed to be issued as has been observed in the assessment orders. Once, in the assessment order the Assessing Officer has mentioned concealment of particulars of income by the assessee, the notice under section 274 is merely consequential. The respondent/assessee was well aware of the grounds of concealment of income recorded in the assessment order which he admitted. Section 274 prohibits imposition of penalty unless the assessee has been heard or has been given a reasonable opportunity of being heard. It is admitted fact of the case that the respondent/assessee was heard by the Assessing Officer who passed the penalty order. The submissions made by the respondent/assessee before the Assessing Officer in penalty proceedings, have been noted by the Assessing Officer. Thus, it is undisputed that the assessee has been heard. Under the circumstances, when a satisfaction has been recorded by the Assessing Officer during the assessment proceedings, consequential notice under section 274 was issued to the assessee and the assessee has been afforded an opportunity of being heard then the Tribunal has committed a manifest error of law and facts and has completely misdirected itself to set aside the penalty orders on the ground that ‘the grounds for imposition of penalty were not mentioned in the show cause notice under section 274 and thus, the show cause notice was defective’. [Para 37] The assessee relied upon judgment in Manjunatha Cotton And Ginning Factory (supra) to contend that ‘Notice under section 274 of the Act should specifically state the grounds mentioned in section 271(1)(c)’. In the instant notice under Section 274 for penalty under section 271(1)(c) of the Act, 1961 was issued by the Assessing Officer to the respondent assessee to afford him opportunity of hearing for concealment of particulars of income. Details of undisclosed/concealed income have been well mentioned in the assessment order of the respondent assessee and being well aware of it, the respondent assessee made specific submission in penalty proceedings. Thus, essential requirements of section 271(1)(c) read with section 274 have been complied with. [Para 38] When the Assessing Officer had recorded in the assessment order the particulars of concealed income/undisclosed income of the assessee and on that basis initiated penalty proceeding under section 271(1)(c) then consequential notice under section 274 issued by Assessing Officer to the assessee to afford him opportunity of hearing, was specifically a notice for penalty for concealment of particulars of income/undisclosed income. Such a notice complied with the principles of natural justice and was a valid notice under section 274. [Para 39] 8.1 Hence, Ground No. 3 of the appeal challenging the legality of the notice issued is dismissed as in the assessment order a clear finding of furnishing of inaccurate particulars had been made in para 11.

As regards the merit of the case, it was conveyed by the Ld. AR that no query was made regarding the scrips traded by the assessee and discussion was made regarding the scrips of Kailash Auto Finance Limited in which there was adverse finding of the SEBI while the assessee had purchased and sold the scrips of Life Line Drugs and Pharma Limited. There may be reasons like low tax effect for not preferring an appeal but penalty under section 271(1)(c) cannot be automatically levied on the basis of the addition maded. In the case of National Textiles v. CIT [2001] 249 ITR 125 (Guj.), it has been held that no penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does. If the assessee gives an explanation which is unproved but not disproved, i.e., it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee's case is false, the Explanation cannot help the department because there will be no material to show that the amount in question was the income of the assessee.

In the assessment order, only general discussion has been made in regard to the penny stock and manipulation of the transactions without bringing on record any evidence how the assessee had indulged in such manipulations and how the transactions carried out independently through the stock exchange were bogus when the difference in price was only ₹2.06 per share for purchase price of ₹160.53 and sale price of ₹158.47 and the assessee, in the absence of any further evidence regarding his involvement in a transaction carried out through the stock exchange, cannot be said to have unduly benefited. The assessee is an “experienced player in the share market”, as has been pointed out by the Ld. AO in the assessment order in para 3, had invested a sum of Rs. 24,07,940/- in the shares on 31.01.2014, which apparently was not off market and the amount had been paid by cheque and the shares were sold on 03.02.2014 and a loss of Rs. 30,927/- was incurred but total income of Rs. 10,12,950/- was declared. Thus, the loss works out to only 3.05% of the total income shown and 1.28% of the investment made and was apparently incurred in the normal course of share transactions and from the assessee’s point of view, the same cannot be said to be bogus. Hence, in the totality of the facts and circumstances of the case, the penalty of ₹9,560/- on transactions of ₹24,07,940/- involving “bogus loss” of ₹30,927/- cannot be sustained and is hereby deleted as the assessee had carried out the transactions through the stock exchange in the normal course and while the capital gains on other scrips have been accepted, the loss arising in this particular scrip has been denied. Hence, Ground Nos. 1, 2 and 4 are allowed and the penalty of ₹9,560/- imposed is hereby cancelled. Ground No. 5 being general in nature does not require any separate adjudication.