ITAT deletes section 68 and 115BBE additions on penny stock transactions declared as business losses

The ITAT Mumbai set aside additions under section 68 read with section 115BBE relating to alleged bogus long-term capital gains from penny stock transactions. The assessee had declared equity share transactions in ACI and Tilak scrips as business losses in the return, holding shares for over two years. The AO incorrectly observed transactions as undisclosed despite being declared as business transactions rather than capital gains. Following Bombay HC precedents, the tribunal held transactions genuine as they were conducted through stock exchange with registered brokers, payments made through banking channels, STT paid, and no price rigging involved. Both AO's addition and CIT(A)'s enhancement were deleted, deciding in favor of the assessee.

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Issues Involved:
1. Legality of Reopening u/s 148 of the Income-tax Act, 1961.
2. Addition of Rs. 62,03,535/- u/s 68 of the Act.
3. Double Taxation of the same income.
4. Determination of current year business loss.
5. Limitation of addition to the extent of profit/loss after considering purchase cost.

Summary:

1. Legality of Reopening u/s 148 of the Income-tax Act, 1961:
The assessee contended that the reopening of the case was "bad in law" as the necessary sanction u/s 151 was not provided, and the objections to reopening were not disposed of before proceeding with reassessment. The Tribunal noted that the reopening was based on the alleged non-disclosure of transactions related to shares of ACI Infocom Ltd and Tilak Ventures Ltd, treated as penny stock transactions. The Tribunal relied on the judgment of the Hon'ble Bombay High Court in Arvind Sahdeo Gupta vs. ITO, which held that reopening based on incorrect facts or conclusions cannot be sustained.

2. Addition of Rs. 62,03,535/- u/s 68 of the Act:
The CIT(A) upheld the AO's action and enhanced the addition under section 68 from Rs. 20,18,348/- to Rs. 62,03,535/-, considering the sale proceeds of equity shares as unexplained credits despite the assessee explaining the nature and source of the credits. The Tribunal observed that the AO and CIT(A) relied on third-party statements and data without giving the assessee an opportunity to cross-examine those parties. The Tribunal found no direct evidence of sham transactions and noted that the assessee had disclosed the transactions as business income, not as capital gains.

3. Double Taxation of the same income:
The assessee argued that the sale consideration of Rs. 62,03,535/- on the alleged penny stocks was already offered as business income, leading to double taxation if taxed again under section 68. The Tribunal quashed the addition, finding no basis for treating the transactions as undisclosed income.

4. Determination of current year business loss:
The assessee contended that the AO/CIT(A) should have determined the current year business loss excluding the sale consideration of the alleged penny stocks and allowed the set-off of such loss against the additions made under section 68. The Tribunal did not specifically address this issue as the primary addition itself was quashed.

5. Limitation of addition to the extent of profit/loss after considering purchase cost:
The assessee argued that the AO/CIT(A) should have restricted the addition to the extent of profit/loss after considering the purchase cost of the equity shares. The Tribunal quashed the entire addition, rendering this argument moot.

Conclusion:
The Tribunal allowed the appeal, quashing the addition made by the AO and the enhancement by the CIT(A). The Tribunal found that the reopening was based on incorrect facts, and the transactions were genuine as they were conducted through recognized stock exchanges with payments made through banking channels. The Tribunal relied on the judgments of the Hon'ble Bombay High Court and the coordinate bench of Jodhpur in similar cases. The appeal in ITA No. 4035/Mum/2023 was allowed, and the order was pronounced in the open court on 24th April 2024.

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