2023 (1) TMI 312 - AT - Income Tax

Tribunal upholds tax authority's decision on illegitimate capital gains, orders reassessment

The Tribunal dismissed the appeal, upholding the Principal Commissioner of Income Tax's decision to set aside the assessment order for fresh ... Revisionary jurisdiction under section 263 of the Income-tax Act - long-term capital gains from penny stocks treated as bogus - reliance on Directorate of Income-tax (Investigation) report - onus on assessee to prove genuineness of transactions - test of preponderance of probabilities - condonation of delay owing to COVID exclusion of limitationCondonation of delay owing to COVID exclusion of limitation - Whether the Tribunal should condone the delay in filing the appeal in view of COVID-period exclusion of limitation. - HELD THAT: - The Registry pointed out a delay of 247 days but the Tribunal noted that the impugned order was passed during the COVID period and that the Supreme Court in suo motu proceedings had excluded the COVID period for limitation purposes. Applying those directions, the Tribunal found no substantial delay on the part of the assessee and exercised discretion to condone the delay, permitting the appeal to be heard on merits. [Paras 2]Delay condoned and appeal admitted for adjudication on merits.Revisionary jurisdiction under section 263 of the Income-tax Act - long-term capital gains from penny stocks treated as bogus - reliance on Directorate of Income-tax (Investigation) report - onus on assessee to prove genuineness of transactions - test of preponderance of probabilities - Whether the Principal Commissioner of Income Tax was justified in invoking section 263 and setting aside the assessment framed under section 143(3) in respect of claimed exempt long-term capital gains. - HELD THAT: - The Tribunal examined the facts that the assessee claimed exemption under section 10(38) for long-term capital gains from sale of shares of a company listed among 84 companies identified by the Directorate of Income-tax (Investigation) as penny stocks whose prices were allegedly rigged to generate bogus gains. The Assessing Officer had not made enquiries despite the investigation report being available on the Income Tax Portal. The Tribunal treated the jurisdictional High Court's decision in Swati Bajaj (binding on the Tribunal) as dispositive: that where investigation reveals a pattern of manipulation, the test is one of preponderance of probabilities, the onus to prove genuineness lies on the assessee, and surrounding circumstances (volume, proximity of buy/sell, sudden steep rise in price, poor financials of the company) may justify treating gains as fabricated. Applying that principle and noting the AO's failure to inquire despite available investigative material, the Tribunal held that the PCIT was justified in concluding the assessment was erroneous and prejudicial to revenue and in directing a fresh assessment. [Paras 8, 9, 10]PCIT rightly invoked revisionary jurisdiction under section 263; assessment set aside for fresh consideration and the appeal dismissed.Final Conclusion: The Tribunal condoned the delay in filing the appeal due to COVID-period exclusion of limitation and, applying the binding decision of the jurisdictional High Court and the Directorate of Investigation's findings, held that the Principal Commissioner was justified in invoking section 263 to set aside the assessment in respect of long-term capital gains from identified penny-stock transactions; the assessee's appeal is dismissed. Issues Involved:1. Time-barred appeal due to COVID-19 pandemic.2. Legitimacy of the Long-Term Capital Gain (LTCG) claimed by the assessee.3. Validity of the Principal Commissioner of Income Tax (PCIT)'s revisionary proceedings under section 263 of the Income Tax Act, 1961.Detailed Analysis:1. Time-barred Appeal Due to COVID-19 Pandemic:The Tribunal addressed the issue of the appeal being time-barred by 247 days. The impugned order was passed on 22.06.2020, during the COVID-19 period. The Supreme Court, in suo motu Writ Petition No. 3 of 2020, extended the period of limitation due to the pandemic. Considering this, the Tribunal condoned the delay, stating, 'if the COVID period is being excluded keeping in view the Hon'ble Supreme Court's order, then there is no substantial delay in filing the appeal on the part of the assessee.'2. Legitimacy of the Long-Term Capital Gain (LTCG) Claimed by the Assessee:The assessee declared an LTCG of Rs. 51,99,603/- from the sale of shares of CCL International Limited and claimed an exemption under section 10(38) of the Income Tax Act. The PCIT observed that CCL International Limited was identified as a penny stock company involved in generating bogus LTCG to evade tax. The PCIT noted that the Assessing Officer (AO) failed to utilize the evidence provided by the Investigation Wing and did not conduct any enquiry into the transaction. The Tribunal referenced the investigation report which listed 84 penny stock companies and highlighted that these companies had poor financials and manipulated share prices.3. Validity of the PCIT's Revisionary Proceedings under Section 263:The Tribunal considered the PCIT's revisionary proceedings justified. The PCIT issued a showcause notice under section 263, citing the AO's failure to investigate the transaction despite having access to the Investigation Wing's report. The Tribunal referred to the jurisdictional High Court's decision in Swati Bajaj & Others (2022) 139 taxmann.com 352 (Cal.), which dealt with similar issues and upheld the addition under section 68 of the Act and the revisionary proceedings under section 263. The Tribunal noted that the AO did not conduct any enquiry into the transaction, even though the Investigation Wing's report was available on the Income Tax Portal. The Tribunal concluded that the PCIT was correct in invoking revisionary proceedings, holding the assessment order as 'erroneous as well as prejudicial to the interest of revenue' and directed the AO to reassess considering the observations in the impugned order.Conclusion:The Tribunal dismissed the appeal of the assessee, concluding that the PCIT was justified in setting aside the assessment order for fresh consideration. The Tribunal emphasized that transactions involving penny stock companies to generate LTCG were held to be bogus, and the AO's failure to investigate warranted the revisionary proceedings under section 263. The order was pronounced in the open court on November 16, 2022.