2023 (4) TMI 118 - HC - Income Tax

s.68 additions upheld where unexplained credits lacked genuine identity, creditworthiness, or satisfactory explanation; s.263 revision denied

THE PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL) -2, KOLKATA Versus SMT. USHA DEVI MODI

Calcutta HC held that the Assessing Officer and CIT(A) reasonably inferred that unexplained credits were not genuine and, absent satisfactory explanation ... Revision u/s 263 - Addition u/s 68 - whether there was no enquiry conducted by the Assessing Officer warranting exercise of jurisdiction by the Principal Commissioner of Income Tax u/s 263 ? - HELD THAT:- Assessee having not proved the genuineness of the claim, the creditworthiness of the companies in which they had invested and the identity of the persons to whom the transactions were done, have to necessarily fail. In such factual scenario, the AO as well as the CIT(A) have adopted an inferential process which we find to be a process which would be followed by a reasonable and prudent person. AO and the CIT (A) have culled out proximate facts in each of the cases, took into consideration the surrounding circumstances which came to light after the investigation, assessed the conduct of the assessee, took note of the proximity of the time between the buy and sale operations and also the sudden and steep rise of the price of the shares of the companies when the general market trend was admittedly recessive and thereafter arrived at a conclusion which in our opinion is a proper conclusion and in the absence of any satisfactory explanation by the assessee, AO were bound to make addition u/s 68 - Decided in favour of the revenue. Issues involved:The judgment involves the consideration of substantial questions of law raised by the revenue regarding the setting aside of an order under section 263 of the Income Tax Act, 1961, the allowance of exemption under section 10(38) of the Act, and the treatment of Long Term Capital Gain as exempted income under section 10(38) despite the script being identified as a penny stock.A. Setting aside of order under section 263:The High Court examined whether the Tribunal erred in law by setting aside the order passed under section 263 without acknowledging the erroneous and prejudicial nature of the assessment order made by the Assessing Officer. The Court emphasized the importance of the Commissioner's justification for invoking the power under section 263, highlighting the need for a proper enquiry by the Assessing Officer to justify such action. It was noted that the assessing officer failed to conduct a thorough investigation into the genuineness of the claim for Long Term Capital Gain (LTCG) and Short Term Capital Loss (STCL), which led to the conclusion that the assumption of jurisdiction under section 263 was justified. The Court criticized the Tribunal for not delving deep into the core issues of the case and for overlooking the manipulative practices of stock brokers and entry operators, ultimately leading to a perfunctory and perverse decision.B. Exemption under section 10(38):The Court also examined whether the Tribunal erred in law by allowing exemption under section 10(38) of the Income Tax Act, 1961, in a situation where the entire transaction was deemed colluded and bogus. It was highlighted that the rise in share prices was artificially manipulated, and the onus was on the assessee to prove the genuineness of the claim, creditworthiness of the companies, and the identity of the involved parties. The Court found that the assessing officers and the CIT(A) followed a reasonable and prudent process in assessing the facts and circumstances, leading to the proper conclusion that additions under Section 68 of the Act were necessary due to the lack of satisfactory explanations from the assessee.C. Treatment of Long Term Capital Gain:Regarding the treatment of Long Term Capital Gain as exempted income under section 10(38), the Court highlighted the need for a detailed enquiry by the assessing officer into the genuineness of the claim, especially in cases involving penny stocks. The Court emphasized that the assessing officer's failure to conduct a thorough investigation, considering the unhealthy rise in share prices of certain companies, justified the assumption of jurisdiction under section 263. The Court reiterated that the burden of proof lay with the assessee to establish the legitimacy of the transactions, and in the absence of such proof, the assessing officers were justified in making additions under Section 68 of the Act.In conclusion, the High Court allowed the appeal filed by the revenue, answering the substantial questions of law in favor of the revenue. The Court found that the Tribunal's order warranted interference based on the issues surrounding the setting aside of the order under section 263, the allowance of exemption under section 10(38), and the treatment of Long Term Capital Gain as exempted income despite concerns about the genuineness of the transactions.