Assessee failed to declare capital gains/losses on penny stock shares, revision under section 263 upheld for erroneous assessment

ITAT Ahmedabad upheld revision under section 263 against assessee who failed to declare Long Term Capital Loss on ECL shares and Long Term Capital Gain on Saya shares in return of income. Both companies were penny stocks with ECL being delisted. AO failed to inquire into these omissions during assessment proceedings. While ITAT agreed assessee's argument that PCIT erred in directing specific assessment under sections 69A and 115BBE, it held assessment order was erroneous and prejudicial to revenue interest. Matter remanded to AO for de-novo assessment with proper opportunity of hearing to assessee.

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Issues:
1. Jurisdiction under Section 263 without showing prejudice to revenue.
2. Direction to disallow capital loss and invoke Section 69A.
3. Source of unexplained money and invocation of Section 69A.
4. Investment in shares in a specific financial year.
5. Principles of natural justice in passing orders.
6. Correctness of initiating Section 263 proceedings.
7. Verification by Assessing Officer during 147 proceedings.
8. Alleged lack of inquiry by Assessing Officer.
9. Correctness of PCIT's directions to Assessing Officer.
10. Correctness of the assessment order and direction for de-novo assessment.

Analysis:

1. The appeal was filed against the order passed by the Ld. Principal Commissioner of Income Tax-3 under Section 263 of the Act for Assessment Year 2016-17. The grounds of appeal included challenging the jurisdiction under Section 263 without showing how the lack of inquiry by the Assessing Officer prejudiced the revenue.

2. The PCIT observed that the assessee had traded in shares of a company involved in generating bogus LTCG and STCL. The PCIT found the assessment order erroneous and prejudicial to revenue, directing disallowance of capital loss and invoking Section 69A. The PCIT concluded that the assessee failed to explain the genuineness of transactions, leading to unexplained amounts.

3. The appeal argued that the initiation of Section 263 proceedings was based on incorrect facts, as there was no set-off of LTCL against LTCG as alleged by the PCIT. The Counsel highlighted discrepancies in the PCIT's allegations and the actual return of income filed by the assessee.

4. The Counsel further contended that the Assessing Officer had conducted necessary verifications during the 147 proceedings, and the assessee had provided explanations regarding the LTCL on the sale of shares. The Counsel argued that the Assessing Officer had made due inquiries and taken a legally correct view.

5. The PCIT's observations regarding the assessee's trading activities in penny stocks were highlighted by the DR, supporting the PCIT's order. The DR argued that the PCIT's decision was justified due to the assessee's engagement in trading penny stocks.

6. The Tribunal noted discrepancies in the PCIT's presumption of facts and the actual return of income filed by the assessee. The Tribunal observed that the assessee had not correctly declared details of transactions involving penny stocks in the return of income, leading to inaccuracies.

7. The Tribunal found that the Assessing Officer had failed to inquire into crucial aspects of the case, such as the treatment of LTCL and LTCG not reflected in the return of income. The Tribunal agreed with the Counsel's argument that the PCIT erred in directing the AO to assess income under Section 69A without independent application of mind.

8. Consequently, the Tribunal concluded that the assessment order was erroneous and prejudicial to the interest of Revenue. The Assessing Officer was directed to conduct a de-novo assessment after providing the assessee with a hearing opportunity.

9. The appeal was dismissed, and the Assessing Officer was instructed to conduct a fresh inquiry based on the observations made by the Tribunal.

This detailed analysis covers the various issues raised in the judgment, providing a comprehensive overview of the arguments presented and the Tribunal's decision.

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