HC upholds PCIT's order under Section 263, rejects exemption on penny stock long-term capital gains

HC upheld the PCIT's order under s 263, rejecting the assessee's claim of exemption u/s 10(38) on long-term capital gains from penny stock sales. The PCIT found the AO's assessment prima facie erroneous and prejudicial to revenue, treating the credit as bogus and rightly adding it back. The PCIT independently examined the assessment records and identified the transactions as bogus. The Tribunal erred in setting aside the PCIT's order. The HC distinguished the present case from Sinhotia Metals & Minerals Pvt. Ltd., where the PCIT's jurisdiction was faulted. Consequently, the HC restored the PCIT's order under s 263.

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Issues Involved:
1. Quashing of the order u/s 263 of the Income Tax Act, 1961.
2. Proper enquiry by the Assessing Officer regarding bogus claim of exemption of Long Term Capital Gain (LTCG).
3. Justification of the Tribunal's decision to ignore the report of the Investigation Wing.
4. Manipulation of share price of M/s. Kailash Auto Finance Ltd.
5. Consideration of binding precedents by the Tribunal.

Summary:

1. Quashing of the order u/s 263 of the Income Tax Act, 1961:
The Tribunal set aside the order passed by the Principal Commissioner of Income Tax (PCIT) u/s 263, stating that the PCIT invoked jurisdiction solely based on a proposal from the Assessing Officer. The Tribunal relied on the decision in Principal Commissioner of Income-tax Vs. Sinhotia Metals and Minerals Pvt. Ltd., (2023) 455 ITR 736.

2. Proper enquiry by the Assessing Officer regarding bogus claim of exemption of LTCG:
The assessment was completed u/s 143(3) accepting the return filed by the assessee. The Tribunal noted that the transaction regarding the sale of shares was confirmed by the details filed by the assessee, and no discrepancy was found. However, the Court highlighted that the Assessing Officer failed to conduct a proper enquiry as required, ignoring the investigation report which indicated sham transactions to generate LTCG.

3. Justification of the Tribunal's decision to ignore the report of the Investigation Wing:
The Court emphasized that the Tribunal ignored the facts brought on record in the revision order u/s 263, which established manipulation of share prices to generate fictitious LTCG. The Tribunal's decision was deemed perverse as it failed to consider the manipulative practices adopted by stock brokers and entry operators.

4. Manipulation of share price of M/s. Kailash Auto Finance Ltd.:
The Court noted that the assessee dealt with penny stocks, including shares of Kailash Auto, which were under adverse notice by the department. The PCIT had examined the facts and concluded that the Assessing Officer should have treated the entire credit as bogus and added it back u/s 263, rejecting the claim for exemption u/s 10(38).

5. Consideration of binding precedents by the Tribunal:
The Tribunal failed to consider binding precedents such as Pr. CIT Vs. Swati Bajaj, Pr. CIT Vs. Hill Queen Investment (P) Ltd., and Pr. CIT Vs. Smt. Usha Modi. The Court found that the Tribunal committed a manifest error in allowing the assessee's appeal and setting aside the order passed u/s 263.

Conclusion:
The appeal was allowed, the order passed by the Tribunal was set aside, and the order passed by the PCIT dated 12.12.2018 was restored. The connected application [GA/1/2024] was closed.

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