Section 147 reopening assessment upheld for bogus LTCG claims in suspicious penny stock transactions

The ITAT Pune upheld the validity of reopening assessment proceedings under section 147, confirming that a valid notice under section 148 was issued to the assessee. The AO's action was based on Investigation Wing reports regarding bogus long-term capital gains (LTCG) claims under section 10(38) from alleged penny stock transactions. The tribunal found the transactions suspicious as equity shares were purchased off-market in cash rather than through banking channels via recognized stock exchanges. SEBI had penalized the company involved for defrauding shareholders and misutilizing preferential share issue proceeds. Despite multiple opportunities, the assessee failed to provide submissions to rebut the CIT(A)'s findings. Following the precedent in PCIT vs. Swati Bajaj, the tribunal dismissed the appeal, upholding the rejection of LTCG exemption claims and confirming the transactions as bogus.

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The core legal questions considered in the appeal pertain to the validity and jurisdiction of reopening assessment proceedings under section 148 of the Income-tax Act, 1961, the limitation period for issuance of such notice, the applicability of the amended provisions introduced by the Finance Act, 2021, and the genuineness of claimed long-term capital gains exemption under section 10(38) of the Act. Additionally, the Tribunal examined the propriety of additions made under sections 68, 69A, and 69C of the Act based on alleged bogus transactions and unexplained expenditure, as well as the procedural correctness in reliance on Investigation Wing reports without independent inquiry.

Regarding the reopening of assessment under section 148 and related procedural issues (Grounds 1 to 6), the legal framework includes the provisions of section 148, section 148A introduced by the Finance Act, 2021 effective from 01.04.2021, and the limitation periods prescribed under section 149. The Supreme Court judgment in Union of India vs. Ashish Agarwal (Civil Appeal No. 3005/2022) was pivotal in interpreting the applicability of notices issued post 01.04.2021, declaring that notices under section 148 issued after this date are to be treated as show-cause notices under section 148A(b) and that this ruling is applicable pan-India under Article 142 of the Constitution. The Tribunal noted that the Assessing Officer (AO) initially issued notice under section 148 on 18.05.2021, followed by a fresh notice on 29.07.2022 in compliance with the Supreme Court ruling, both within prescribed time limits. The appellant's contention that the earlier notice could not be deemed a show-cause notice due to absence of a writ petition was rejected, emphasizing the overriding effect of the Supreme Court's order. The Tribunal also addressed the issue of jurisdiction, observing that the appellant failed to communicate any change of address or request transfer of PAN jurisdiction from Nanded to Hyderabad, where the appellant filed returns. Consequently, notices issued from Nanded were held valid. The extension of limitation periods through various notifications issued by the Central Board of Direct Taxes (CBDT) in 2020 and 2021 was upheld, rendering the notices timely. Case laws cited by the appellant were found inapplicable as they did not consider the amended regime under section 148A. Thus, the Tribunal affirmed the validity of reopening and dismissed Grounds 1 to 6.

On the procedural objection (Ground 9) that reopening was based solely on Investigation Wing reports without independent inquiry, the Tribunal clarified that the Investigation Wing is an integral part of the Income Tax Department tasked with gathering intelligence. The AO is entitled to act on such information and issue notices accordingly, providing the assessee opportunity to respond during reassessment. The mere issuance of notice does not automatically result in additions; the assessee can still satisfy the AO. Hence, reliance on Investigation Wing reports without separate inquiry did not render the reopening invalid.

The substantive issue concerning the rejection of exemption claimed under section 10(38) on long-term capital gains (LTCG) from sale of shares of M/s. Achal Investments Ltd. (Grounds 7 and 8) involved detailed factual and legal scrutiny. The relevant legal principles include the requirement of proving genuineness of claimed income and exemption, the burden of proof on the assessee to establish bona fide transactions, and the applicability of sections 68, 69A, and 69C dealing with unexplained cash credits, investments, and expenditures. The AO's findings, supported by Investigation Wing inputs, indicated that the appellant was involved in transactions with a penny stock company whose shares were artificially jacked up to create fictitious LTCG. The shares were purchased offline in cash well before the company's listing, at prices disproportionate to its financial health, raising suspicion of manipulation. The appellant failed to furnish contemporaneous evidence or satisfactory explanation regarding the source of information or the legitimacy of gains. The Tribunal noted that the AO's order was exhaustive and supported by circumstantial evidence, including SEBI's penalty on the company for fraudulent activities and restrictions imposed on its market dealings. Reliance was placed on authoritative judgments, including the Supreme Court's decision in CIT vs. Durga Prasad More and others, which uphold additions where the assessee fails to discharge the burden of proof and transactions are shown to be manipulative or bogus. The Tribunal also referred to High Court and ITAT decisions affirming denial of exemption and additions under section 68 in similar contexts involving penny stock companies and bogus LTCG claims. The appellant's claim was held to fail the test of human probabilities and the evidentiary standard required, justifying the addition of the entire exemption amount to income.

Regarding the addition under section 69C for unexplained expenditure of Rs. 34,428/- (Ground 10), the Tribunal found that the AO's addition was based on mere suspicion without any material evidence or verification of books of accounts. The appellant did not claim such expense in profit and loss accounts, and no tangible facts were brought on record to substantiate the addition. Accordingly, this addition was deleted.

In conclusion, the Tribunal upheld the reopening of assessment as valid and within limitation, endorsed the AO's findings on bogus LTCG and rejected the exemption claimed under section 10(38), confirmed additions under sections 68 and 69A, and deleted the addition under section 69C for unexplained expenditure. The appellant's appeal was dismissed.

Significant holdings include the Tribunal's adherence to the Supreme Court ruling in Union of India vs. Ashish Agarwal, emphasizing the pan-India applicability of the new procedural regime under section 148A and the validity of notices issued post 01.04.2021. The Tribunal stated: "The appellant's claim that earlier 148 cannot be the deemed show cause in her case since she has not filed the writ petition before Hon'ble Court, cannot be accepted since the court has held that 'as per power under Article 142 of Constitution this order would be applicable PAN INDIA on all judgments and orders passed by different High Courts where similar notices issued after 1-4-2021 under section 148 are set aside'."

On the merits of the LTCG claim, the Tribunal observed: "The Assessing Officer in his well-reasoned order has clearly and in unequivocal terms brought out the appellant's arrangement of arriving at fictitious LTCG through stock manipulation which is just a facade for reducing the tax liability which is payable to the government by claiming bogus exemptions. The appellant has never proved that the exemption as claimed by it in the ROI is genuine and no such manipulation as alleged by the AO has been done."

Further, the Tribunal relied on the principle that "the appellant having not proved the genuineness of the claim, fails the test. In such scenario, the Assessing Officer has to adopt an inferential process which is reasonable and prudent."

The Tribunal also underscored the importance of the Investigation Wing's role and the procedural correctness of reopening based on its report: "The Investigation Wing is also a part and parcel of the income-tax department... Based on the information from the Investigation Wing... the Assessing Officer has rightly issued the notice u/s. 148."

Finally, the Tribunal recognized the limits of additions based on suspicion alone, deleting the addition under section 69C for unexplained expenditure due to lack of supporting evidence.

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