2024 (9) TMI 354 - AT - Income Tax

PCIT's section 263 revision upheld after AO failed proper inquiry in penny stock reassessment case

The ITAT Ahmedabad upheld the PCIT's revision order under section 263, finding the AO's assessment erroneous and prejudicial to revenue interests. The ... Revision u/s 263 - Share dealt with by the assessee was a penny stock and the AO was to make inquiry which he failed to do so - HELD THAT:- PCIT rightly invoked provisions of section 263 on the ground that the AO while accepting the returned income during the course of re-assessment proceedings has not asked for demat account, and had not made proper inquiries as were required to be made. As keeping in view the decision of Suman Poddar [2019 (11) TMI 1237 - SC ORDER] and other decisions as are listed in the revisionary order passed by ld. PCIT u/s. 263 and directions were rightly issued by ld. PCIT to the AO to make proper inquiry. Explanation 2 to Section 263 is clearly applicable. PCIT rightly set aside the reassessment order passed by the AO, and rightly directed the AO to pass a fresh reassessment order after examining the facts of the case. Once the assessment was reopened u/s. 147 on the ground that the assessee has dealt with penny stock and the inquiries have revealed that the said shares of said company were manipulated to generate bogus long term capital gains/los. It was all the more incumbent on the Assessing Officer to have made detailed inquiry into the matter to unravel the truth and see what is behind the smoke screen, but the Assessing Officer has merely accepted the contentions of the assessee based upon contract notes and the bank statement submitted by the assessee. Thus, the Assessing Officer has made a superficial inquiry and has not made proper inquiry as required in the facts and circumstances of the case. PCIT rightly set aside the reassessment order passed by the AO with the directions to the Assessing Officer to pass fresh order in accordance with law after duly examining the facts of the case as discussed by ld. PCIT in its revisionary order, and after giving reasonable opportunity of being heard to the assessee. Appeal of the assessee is dismissed. Issues Involved1. Legality of the revisionary order passed under Section 263 of the Income-tax Act, 1961.2. Validity of reassessment proceedings under Section 147.3. Adequacy of inquiries conducted by the Assessing Officer (AO) during reassessment.4. Examination of transactions related to penny stock KDJ Holidayscape & Resort Ltd. (KDJHRL).Detailed Analysis1. Legality of the Revisionary Order under Section 263The primary issue is whether the Principal Commissioner of Income Tax (PCIT) was correct in invoking Section 263 of the Income-tax Act, 1961, to revise the reassessment order passed by the AO. The PCIT observed that the AO failed to properly verify the facts and details regarding the assessee's transactions in the penny stock KDJHRL. The PCIT noted that the AO did not call for the demat account and relied only on the ledger account and contract notes submitted by the assessee. The PCIT concluded that the reassessment order was erroneous and prejudicial to the interest of revenue, thus justifying the invocation of Section 263.2. Validity of Reassessment Proceedings under Section 147The reassessment was initiated based on information from the ITBA Portal and the Investigation Wing of the Income Tax Department, which revealed that KDJHRL was involved in providing bogus long-term capital gains/losses. The AO issued a notice under Section 148, and the assessee filed a return of income. The AO accepted the returned income without making a detailed inquiry into the transactions involving KDJHRL. The PCIT found that the AO's reassessment order was made without proper verification, making it erroneous and prejudicial to the revenue.3. Adequacy of Inquiries Conducted by the AOThe PCIT observed that the AO did not conduct an independent inquiry into the genuineness of the transactions involving KDJHRL. The AO accepted the assessee's submissions, including contract notes and bank statements, without calling for the demat account. The PCIT directed the AO to verify the demat account and pass a fresh assessment order. The Tribunal upheld the PCIT's view that the AO's inquiry was superficial and inadequate, thereby justifying the revisionary proceedings under Section 263.4. Examination of Transactions Related to Penny Stock KDJHRLThe Tribunal noted that KDJHRL was identified as a penny stock engaged in providing bogus long-term capital gains/losses. The assessee traded in KDJHRL shares, resulting in significant long-term capital gains, which were claimed as exempt under Section 10(38). The PCIT found that the AO did not adequately verify the transactions, including the demat account, and relied solely on the contract notes and bank statements. The Tribunal agreed with the PCIT that the AO failed to make proper inquiries, which were necessary given the nature of the transactions and the information available from the Investigation Wing.ConclusionThe Tribunal upheld the PCIT's revisionary order under Section 263, finding that the AO's reassessment order was erroneous and prejudicial to the interest of revenue due to inadequate inquiry into the transactions involving KDJHRL. The Tribunal dismissed the assessee's appeal and directed the AO to pass a fresh assessment order after conducting a detailed examination of the facts and providing the assessee with a reasonable opportunity of being heard. The appeal of the assessee was dismissed.Order PronouncementThe order was pronounced in the open court on 30-08-2024.