2025 (1) TMI 1405 - AT - Income Tax

ITAT sets aside PCIT revision order on penny stock LTCG exemption under section 10(38) and 263 (38)

Shummy Poulose Puthanangady Versus Principal Commissioner of Income Tax-27, Maharashtra

ITAT Mumbai set aside PCIT's revision order u/s 263 regarding bogus LTCG from penny scrip transactions. AO had allowed exemption u/s 10(38) for share sale ... Revision u/s 263 - bogus LTCG - Information received from the Investigation Wing that the assessee is one of the beneficiaries of penny scrip - AO vide order passed u/s 147 r.w.s. 144B allowed the exemption claimed by the assessee u/s 10(38) in respect of gains arising from the sale of shares and accepted the return of income filed by the assessee - HELD THAT:- Assessee in response to the notice provided a detailed explanation along with all the relevant documents regarding its transaction in shares of “Ojas Asset Reconstruction Company Ltd.”. However, without addressing/dealing with any of the details filed by the assessee, PCIT came to the conclusion that the transaction by the assessee in shares of “Ojas Asset Reconstruction Company Ltd.” is a sham transaction entered for earning bogus Long-Term Capital Gains. PCIT did not mention as to how the issue of earning bogus Long-Term Capital Gains is proved in the present case vis-à-vis the details filed by the assessee during the re-assessment proceedings and also produced before the learned PCIT. It is pertinent to note that it is also not the claim of the learned PCIT that the details filed before the AO during the re-assessment proceedings were not sufficient to decide the issue of whether the Long-Term Capital Gains earned by the assessee are genuine. Thus, neither in the revisionary proceedings u/s 263 nor during the hearing before us it has been pointed out as to what inquiry was not conducted by the AO with regard to the issue of bogus Long- Term Capital Gains, which can lead to the conclusion that the assessment order is erroneous insofar it is prejudicial to the interest of the Revenue. Thus revision order passed by the learned PCIT under section 263 is set aside - Decided in favour of assessee. ISSUES PRESENTED and CONSIDEREDThe core legal issue in this case revolves around the invocation of revisionary proceedings under section 263 of the Income Tax Act, 1961. The key questions considered were:Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking jurisdiction under section 263 of the Act, asserting that the assessment order was erroneous and prejudicial to the interest of the Revenue.Whether the Assessing Officer (AO) had conducted adequate inquiries and verifications during the reassessment proceedings under section 147 read with section 144B.Whether the transaction in shares of 'Ojas Asset Reconstruction Company Ltd.' was genuine or a sham transaction intended to claim bogus Long-Term Capital Gains (LTCG).ISSUE-WISE DETAILED ANALYSIS1. Invocation of Jurisdiction under Section 263The legal framework for section 263 allows the PCIT to revise an assessment order if it is considered erroneous and prejudicial to the interest of the Revenue. The PCIT's notice alleged that the AO failed to make necessary inquiries regarding the transaction in penny scrips, which were allegedly manipulated to provide bogus LTCG.The Court examined whether the AO had indeed failed to conduct necessary inquiries. It was found that during the reassessment proceedings, the AO had issued detailed notices under section 142(1) seeking comprehensive information from the assessee regarding the transactions in question. The assessee provided various documents, including share sale bills, bank statements, and contract notes, to substantiate the genuineness of the transactions.The Court noted that the PCIT's order under section 263 did not specify which particular inquiries were lacking or how the AO's assessment was erroneous. The PCIT's conclusion that the transaction was a sham was not supported by a detailed examination of the evidence provided by the assessee.2. Adequacy of Inquiries and Verifications by the AOThe Court scrutinized the AO's actions during the reassessment proceedings. The AO had requested and received extensive documentation from the assessee, including details of all demat accounts, transaction statements, and capital gains calculations. The AO had assessed the total income at the returned income, allowing the exemption under section 10(38) for LTCG.The Court found that the AO had conducted a thorough inquiry, and the PCIT's assertion that the AO had failed to understand the nature of the transactions was unfounded. The PCIT did not provide evidence of specific inquiries that were omitted by the AO, nor did it refute the adequacy of the documentation provided by the assessee.3. Nature of Transactions in 'Ojas Asset Reconstruction Company Ltd.'The PCIT alleged that the transactions in shares of 'Ojas Asset Reconstruction Company Ltd.' were manipulated to provide bogus LTCG. However, the assessee consistently maintained that the shares were purchased through a different entity, M/s. Kamalakshi Finance Corporation Ltd., and not through the alleged shell company, M/s. Durable Vinimay Pvt. Ltd.The Court highlighted that the PCIT's reliance on statements from directors of alleged shell companies did not directly implicate the assessee's transactions. Furthermore, the PCIT failed to address the detailed evidence submitted by the assessee, which supported the genuineness of the transactions.SIGNIFICANT HOLDINGSThe Court concluded that the PCIT's order under section 263 was not justified as it lacked a substantive basis for claiming that the AO's assessment was erroneous or prejudicial to the Revenue. The Court emphasized the following principles:The revisionary power under section 263 should be exercised with caution and only when there is clear evidence of error in the assessment that is prejudicial to the Revenue.Merely stating that inquiries were inadequate without specifying the deficiencies does not justify invoking section 263.The AO's assessment should be respected if it is based on a thorough examination of evidence and follows due process.Ultimately, the Court set aside the PCIT's order under section 263, allowing the assessee's appeal. The Court's decision underscores the importance of detailed and specific reasoning when challenging an assessment under section 263.