2022 (12) TMI 1506 - AT - Income Tax

Assessment reopening valid for penny stock transactions but additions under sections 68 and 69C deleted due to genuine investment proof

Damodar Jajoo, Jasodadevi Rajaram Jajoo Versus The ITO, Ward-2 (2) (1), Surat.

The ITAT Surat upheld the validity of assessment reopening based on information received from DDIT Investigation unit regarding penny stock transactions, ... Validity of reopening of assessment - Bogus LTCG claimed - addition u/s 68 - penny stock transaction - HELD THAT:- From the reasons recorded by AO, it is vivid that there is merit in the arguments advanced by ld DR for the Revenue. We note that assessing officer had received the information from the DDIT (Investigation) unit3(2) Kolkata in respect of the BSE listed Penny stock companies. After getting such information, assessing officer has applied his mind and then framed the reasons for reopening the assessment, therefore it is not a borrowed satisfaction. The assessing officer has also mentioned in the reasons recorded the quantity of shares sold, name of the scrip, and amount received on sale of such shares etc. Thus, we note that reasons recorded by the assessing officer are in accordance with the provisions of law. Therefore, based on these facts and applicable precedents to these facts, we dismiss the additional grounds raised by the assessee. Addition u/s 68 - We note that findings of the Hon`ble Jurisdictional High Court of Gujarat in the case of Jagat Pravinbhai Sarabhai (2023 (1) TMI 44 - GUJARAT HIGH COURT] is squarely applicable to the assessee`s facts under consideration. The genuineness of investment in the shares by the assessee was substantiated by him by producing contract note, Transaction was through recognised Broker, transaction was done through banking channel on which STT was paid. The shares were held by assessee, as an Investor for a period of seven/ eight years. The investment was made in the year 2003 and sold in 2010-11. The shares were retained for more than seven years and were sold after such long time. These circumstances suggest that the investment was not bogus. The shares were purchased in order to invest and not for the purpose of earning exempted income by frequent trading in short time. We note that Judgment of Hon`ble Calcutta High Court in the case of Swati Bajaj and others [2022 (6) TMI 670 - CALCUTTA HIGH COURT] should not be applicable to the assessee as it is outside the territorial jurisdiction of Gujarat. However, the Judgment of Hon`ble Jurisdictional High Court of Gujarat in the case of Jagat Pravinbhai Sarabhai(supra) should be applicable to the assessee`s case, as it is the judgment of Jurisdictional High Court. Addition u/s 69C on account of commission paid @ 2% or 3% of bogus long term capital gain - Since, we have deleted the alleged addition of bogus LTCG, hence addition made by AO does not have leg to stand, therefore it is hereby deleted. Issues Involved:1. Validity of reopening the assessment under section 147 by issuing notice under section 148 of the Income Tax Act.2. Addition of Long Term Capital Gains (LTCG) as unexplained cash credit.3. Addition under section 69C on account of commission paid for bogus LTCG.Detailed Analysis:1. Validity of Reopening the Assessment:The assessee challenged the reopening of assessment under section 147, arguing that there was no tangible material in the reasons recorded by the Assessing Officer (AO) to form a 'reason to believe' that there was an escapement of income. The AO had received information from the Kolkata Investigation Directorate about the assessee's transactions in penny stocks, which were allegedly used to introduce unaccounted income. The AO recorded these reasons and obtained necessary approval before issuing the notice under section 148.The Tribunal observed that the AO had credible information from the DDIT Investigation Wing, Kolkata, regarding the penny stock transactions. The AO verified this information with the records and recorded a prima facie reason to believe that income had escaped assessment. The Tribunal cited several judicial precedents, including the Supreme Court's decision in Phul Chand Bajrang Lal, which upheld the reopening of assessments based on new, specific, and reliable information. The Tribunal concluded that the reopening was justified and legal, dismissing the additional grounds raised by the assessee.2. Addition of LTCG as Unexplained Cash Credit:The AO had added the LTCG claimed by the assessee as unexplained cash credit under section 68, arguing that the transactions in the penny stock, Global Capital Markets Ltd., were sham and used to introduce unaccounted income. The CIT(A) confirmed this addition, citing that the transactions were part of a tax fraud scam involving penny stocks.The Tribunal, however, found that the assessee had held the shares for more than seven years, purchased through banking channels, and sold through recognized stock exchanges with STT paid. The Tribunal noted that the assessee had provided sufficient documentation, including contract notes, bank statements, and demat account statements, to prove the genuineness of the transactions. The Tribunal distinguished the case from the Calcutta High Court's judgment in Swati Bajaj, noting that the assessee had not engaged in manipulative practices and had held the shares for a long period. The Tribunal relied on the Gujarat High Court's decision in Jagat Pravinbhai Sarabhai, which held that long-term investments in shares could not be treated as penny stock transactions. Consequently, the Tribunal deleted the addition made by the AO.3. Addition under Section 69C:The AO had made an addition under section 69C for commission allegedly paid for bogus LTCG. Since the Tribunal had deleted the addition of LTCG, it held that the addition under section 69C had no basis and deleted it as well.Conclusion:The Tribunal allowed the appeals filed by the assessee, holding that the reopening of the assessment was valid but the additions made by the AO under sections 68 and 69C were not justified. The Tribunal's decision was based on the assessee's long-term holding of shares, the genuineness of the transactions, and the binding precedent set by the Gujarat High Court.