2024 (10) TMI 991 - AT - Income Tax

ITAT upholds revision order under Section 263 for inadequate inquiry into penny stock capital gains transaction

Smt. Manishadevi Vinodkumar Agarwal Versus The PR. CIT-1, Ahmedabad

The ITAT Ahmedabad upheld the PCIT's revision order under Section 263, finding the assessment erroneous and prejudicial to revenue interests. The assessee ... Revision u/s 263 - Shares held as penny stock - as per CIT GCM Securities Ltd. is a penny stock and the AO failed to conduct relevant enquiry and passed the assessment order, which is found to be erroneous insofar as prejudicial to the interest of Revenue - HELD THAT:- When we examine the evidences brought on record by the Assessing Officer, the first question that arises is whether these evidences satisfy the test of preponderance of human probability. The Supreme Court has held in the case of SEBI Vs. Rakhi Trading (P) Ltd. [2018 (2) TMI 580 - SUPREME COURT] that abnormal difference between the prices at which the trades were executed without corresponding effect on the price of the underlying security, shows that the option in which the party traded was not in demand in the market and that it was unusual that the trades were transacted with such huge profits when there was no change in the underlying prices - such trade transactions were obviously only aimed at carrying out manipulative objective. Following this principle laid down supra, there was nothing wrong in the Revenue’s doubt about the genuineness of the transaction, considering the volatile fluctuation in share price of GCM Securities Ltd. It is difficult to get direct information or evidence in respect of manipulative activities of price rigging and accommodation entry which happens with prior meeting of minds between the beneficiary and the stock broker. As held in the case of Swati Bajaj [2022 (6) TMI 670 - CALCUTTA HIGH COURT] that a holistic approach is required to be made and the test of preponderance of probabilities have to be applied and while doing so, we cannot lose sight of the fact that the shares of very little-known companies with in-significant business had a steep rise in the share prices within the period of little over a year. The thrust of the assessee’s argument is that the sale consideration was received by cheque on which STT was paid and, therefore, the LTCG earned was genuine cannot be accepted in view of multiple adverse evidences collected by the Revenue and the assessee cannot be treated as a passive beneficiary of the transactions. We are of the considered opinion that the transactions entered into by the assessee are not properly verified by the A.O. while passing the assessment order, as no worthwhile enquiries were made rather superficial enquiries were made, as were warranted keeping in view facts and circumstances of the case. The assessee has relied upon few case laws which are found to be different on facts. Since Ld. PCIT invoking explanation 2 to Section 263 of the Act, has set aside the issue back to the file of AO to pass fresh assessment order after allowing adequate opportunities of being heard to the assessee, no infirmity in the directions given by Ld. PCIT since the A.O. has not made any worthwhile enquiry about the GCM Securities Ltd. shares. Decided against assessee. Issues Involved:1. Legality of the initiation and passing of the order under Section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (PCIT).2. Determination of whether the assessment order passed under Section 143(3) was erroneous and prejudicial to the interest of the Revenue.3. Examination of the genuineness of the long-term capital gains claimed by the assessee under Section 10(38) of the Income Tax Act.Issue-wise Detailed Analysis:1. Legality of the initiation and passing of the order under Section 263:The assessee challenged the initiation and passing of the order under Section 263 by the PCIT, arguing that the order was 'bad in law and contrary to the provisions of law and facts.' The PCIT initiated the revision proceedings on the grounds that the Assessing Officer (AO) failed to conduct a thorough inquiry into the suspicious sale transactions in shares of GCM Securities Ltd., identified as a penny stock. The PCIT relied on an investigation report from the Directorate of Investigation, Kolkata, which revealed manipulation in the shares of GCM Securities Ltd. The Tribunal found that the PCIT was justified in invoking Section 263, as the AO did not make the necessary inquiries, and thus, the order was neither erroneous nor prejudicial to the interest of the Revenue.2. Determination of whether the assessment order was erroneous and prejudicial to the interest of the Revenue:The Tribunal examined whether the AO's assessment order, which accepted the assessee's claim of exempt long-term capital gains without sufficient inquiry, was erroneous and prejudicial to the interest of the Revenue. The PCIT argued that the AO only made superficial inquiries and failed to consider the investigation report that indicated manipulation in the shares of GCM Securities Ltd. The Tribunal agreed with the PCIT, noting that the AO did not confront the assessee with the investigation findings or conduct a thorough examination of the transactions, thereby rendering the assessment order erroneous and prejudicial to the Revenue.3. Examination of the genuineness of the long-term capital gains claimed under Section 10(38):The assessee claimed exemption under Section 10(38) for long-term capital gains from the sale of shares in GCM Securities Ltd. The PCIT's revision order was based on the investigation report, which suggested that the gains were bogus, as the shares were manipulated to create artificial gains. The Tribunal referenced various legal precedents, including the Supreme Court's emphasis on the principle of 'substance over form' and the need to consider the preponderance of human probability. The Tribunal concluded that the AO failed to verify the genuineness of the transactions adequately and that the onus was on the assessee to prove the legitimacy of the gains. The Tribunal upheld the PCIT's order to set aside the assessment for fresh examination, directing the AO to provide all relevant materials to the assessee and conduct a proper inquiry.Conclusion:The Tribunal dismissed the appeal filed by the assessee, upholding the PCIT's order under Section 263. It directed the AO to re-examine the transactions concerning GCM Securities Ltd. shares and pass a fresh assessment order after providing adequate opportunities for the assessee to be heard. The Tribunal emphasized the necessity of thorough inquiries in cases involving alleged manipulation of penny stocks and the importance of considering the surrounding circumstances to determine the genuineness of claimed exemptions.