2025 (8) TMI 959 - AT - Income Tax

Revision under section 263 overturned where assessing officer properly verified documents and LTCG exempt under section 10(38)

ITAT, Ahmedabad allowed the appeal, holding that revision under section 263 was unjustified. The AO had confronted the assessee about the penny-stock ... Revision u/s 263 - as per CIT AO failed to add tax on long term capital gain to penny stock - HELD THAT:- From the perusal of the reasons for reopening, it can be seen that the very basis for reopening was on the ground of the scrip Parikh Herbals Ltd.. AO has confronted the assessee during the re-assessment proceeding related to the said transaction and called upon the details of purchase as well as the sale of the said scrip. The assessee also responded the same and submitted the details such as contract note in respect of purchase of shares, contract note in respect of sale of shares as well as the bank statements and the ledger account from the books of the broker through whom the assessee made these transactions. After perusing all these documents only the AO has arrived at the conclusion that the assessee has rightly taken exemption u/s. 10(38) of the Act. The assessee has demonstrated before the AO during the assessment proceedings about the genuineness, creditworthiness of the transactions which was questioned to the assessee during re-assessment proceedings. The invocation of section 263 cannot be applicable in the cases where the assessee has proved the claim of the assessee for exemption or deduction in respect of his income when confronted by the AO through various statutory notices as well as show cause notices. There is no lapse on the part of the AO as well as on the part of the assessee in respect of granting the claim of exemption of the assessee or claiming the exemption u/s. 10(38) of the Act. The observation of the Pr. CIT while invoking section 263 is not justified when the Revenue through its AO has properly verified and has taken into account all the evidences and has arrived at a proper conclusion as per Income Tax Statute. Appeal of the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the Principal Commissioner's invocation of section 263 (revisionary power) was justified where the Assessing Officer, on reopening under section 147, had examined documents and accepted exemption u/s 10(38) for long-term capital gains arising from sale of shares in a thinly traded/penny scrip? 2. Whether the Principal Commissioner correctly characterised the sale proceeds of the specified scrip as unexplained income and directed application of section 115BBE, despite the assessee having produced contract notes, broker ledger and bank statements proving purchase, sale and receipt of sale proceeds and payment of STT? 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of invoking section 263 where Assessing Officer had examined evidence and allowed exemption u/s 10(38) Legal framework: 1. Section 263 permits the Principal Commissioner to revise an assessment if it is 'erroneous' and 'prejudicial to the interests of revenue'. Revision is permissible only where there is a discernible legal or factual error in the assessment order, not merely because a different view could have been taken. Precedent Treatment: 2. The Tribunal treated prior decisions establishing that a mere difference of opinion between the assessing officer and the Principal Commissioner is not sufficient to invoke section 263; revision requires demonstration that the AO failed to exercise jurisdiction properly or ignored material evidence or legal position. Interpretation and reasoning: 3. The Assessing Officer, after reopening under section 147, confronted the taxpayer about the disputed scrip and called for documentary evidence. The assessee furnished contract notes for purchase and sale, broker's ledger, bank statements showing receipt of sale proceeds and evidence of STT payment. The AO considered these documents and concluded that exemption u/s 10(38) was rightly claimable. 4. The Principal Commissioner's reasons for invoking section 263 were premised on a generalized conclusion that the gain was 'bogus' and that under-assessment had occurred; however, the Principal Commissioner did not point to any specific legal or factual inadequacy in the AO's inquiry or explain how the AO's conclusion was erroneous in law or contrary to the material on record. Ratio vs. Obiter: 5. Ratio: Where the AO, after reopening, examines relevant documentary evidence and reaches a reasoned conclusion accepting an exemption, the Principal Commissioner cannot invoke section 263 merely to take a second view without identifying any material irregularity, illegality or failure of application of mind in the AO's order. 6. Obiter: A generalized suspicion about penny stock transactions, absent specification of error in AO's analysis, does not suffice for exercise of revisionary power under section 263. Conclusions: 7. The Tribunal concluded that the invocation of section 263 by the Principal Commissioner was unjustified because the AO had properly confronted the issue, considered documentary proof, and reached a permissible conclusion. The Principal Commissioner failed to demonstrate that the assessment order was erroneous and prejudicial to revenue beyond offering a contrary opinion. Issue 2: Whether sale proceeds should have been treated as unexplained and taxed under section 115BBE despite documentary proof Legal framework: 1. Section 10(38) exempts long-term capital gains on sale of listed securities subject to conditions such as transaction on recognized stock exchange and payment of STT. Section 115BBE applies to unexplained income where sums are treated as income if they are unexplained in response to notices; it is a distinct statutory mechanism imposing tax at special rates on unexplained receipts. Precedent Treatment: 2. The Tribunal relied on the established principle that taxable status under section 115BBE cannot be imposed where an assessee has satisfactorily explained the source and genuineness of the transaction with documentary proof and the AO has accepted the explanation after due enquiry. Interpretation and reasoning: 3. The assessee produced contemporaneous evidence: contract notes (showing broker PAN, trade details, settlement), broker ledger corroborating transactions, bank statements evidencing receipt of sale proceeds, and proof of STT payment. These documents satisfied the statutory conditions for exemption under section 10(38) (recognized exchange transactions and STT payment). 4. The Principal Commissioner's direction to treat sale proceeds as unexplained deposit/receipt and to apply section 115BBE ignored the fact that the AO had evaluated and accepted the documentary explanation. No specific deficiency in the documents or in the AO's assessment rationale was demonstrated by the Principal Commissioner to justify treating the receipts as unexplained. Ratio vs. Obiter: 5. Ratio: Taxation under section 115BBE as unexplained income is impermissible where the assessee has furnished adequate contemporaneous documentary evidence of legitimate exchange transactions and the AO, after enquiry, has accepted that evidence; absent demonstration of falsity or inadequacy, the special provision for unexplained income cannot be invoked. 6. Obiter: The fact that a scrip is a penny stock or thinly traded, standing alone, does not automatically convert documented exchange transactions into unexplained income without specific proof of sham or accommodation entry. Conclusions: 7. The Tribunal held that treating the sale proceeds as unexplained and directing application of section 115BBE was unwarranted given the AO's considered acceptance of documents proving genuineness, creditworthiness and fulfillment of STT/payment conditions for exemption u/s 10(38). The Principal Commissioner's order amounted to impermissible second-guessing. Cross-references and final determination 1. The issues are interrelated: the validity of invoking section 263 (Issue 1) depends on whether the AO's action in accepting exemption under section 10(38) was demonstrably erroneous or prejudicial (Issue 2). The Tribunal found on both counts that no such error was shown. 2. Conclusion: The Tribunal allowed the appeal, holding the revision u/s 263 invalid because the AO had examined and accepted adequate documentary proof; the Principal Commissioner's direction to treat the proceeds as unexplained income and to apply section 115BBE was not justified.