2025 (8) TMI 1687 - AT - Income Tax

Long-term capital gain from listed share trading not hit by s.68 or s.69 after SEBI clearance and revoked restraint order

ITO Delhi Versus Mahavir Singhal And (Vice-Versa)

ITAT, Delhi upheld the CIT(A)'s deletion of additions under s.68 and s.69, finding the assessee's long-term capital gain from trading in shares of a ... Bogus LTCG - unexplained cash credit - AO the price of share of M/s Kailash Auto Finance Ltd. has sky rocketed without having any corresponding financial results. The parameters which are essential for increase of price of share are not present. The AO also observed that in this matter, SEBI had directed BSE to suspend trading in several trading in several Penny Stocks which includes the shares you have traded in i.e. of M/s Kailash Auto Finance Ltd. HELD THAT:- We find that the transaction of the assessee in the script of Kailash Auto Finance Limited., which resulted in long term capital gain to the assessee, has been found to be not violative of the provisions of relevant Act and Rules by the SEBI upon necessary investigation and even the initial restraint order was revoked vide order dared 21-09-2017. CIT(A) has examined the issue in the correct prospective and rightly deleted the additions towards unexplained cash credit u/ 68 and unexplained expenditure u/s 69 of the Act. We do not find any reasons to interfere with the findings of the Ld. CIT (A). The appeal of the revenue is liable to be dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether additions under section 68 (unexplained cash credit) and section 69C (unexplained expenditure - 5% addition) can be sustained in respect of long-term capital gains arising from sale of shares in a suspected 'penny stock' when (a) SEBI issued interim restraint orders and subsequently concluded an investigation revoking those interim orders with no adverse findings; and (b) the Assessing Officer did not undertake independent inquiries (for example, under section 133(6)) with brokers/intermediaries to establish non-genuineness of transactions. 2. Whether the Assessing Officer's reliance solely on SEBI's interim restraining order (without independent corroborative evidence) is sufficient to treat consideration as unexplained and to make additions under sections 68 and 69C. 3. Whether reassessment/notice procedure and jurisdiction were validly exercised by the Assessing Officer in issuing notices and conducting assessment functions (challenge to AO's territorial/functional jurisdiction). 4. Whether the appeal/cross-proceedings are maintainable in light of timeliness, low tax effect and departmental circulars (i.e., whether the matter fell within exceptions to non-entertainment of departmental appeals in low tax effect cases related to penny-stock investigations). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of additions under section 68 and section 69C where SEBI interim order was later revoked after investigation Legal framework: Section 68 permits taxation of unexplained cash credits where assessee fails to satisfactorily explain source of sum credited to their books; section 69C permits addition of unexplained expenditure in respect of investments/transactions where consideration cannot be explained. SEBI's interim orders and investigatory findings are administrative/regulatory actions under the SEBI Act and PFUTP regulations and are evidentiary material in tax proceedings but do not of themselves conclusively determine tax liability. Precedent treatment: The Tribunal considered and relied upon decisions cited by parties (including decisions following the principle that mere invocation of SEBI interim restraining orders is not conclusive for tax additions where SEBI later gives clean chit and where revenue fails to make independent enquiries). Specific case law cited by the Department was distinguished on facts where independent corroborative enquiries existed or SEBI findings differed. Interpretation and reasoning: The Court examined the sequence of events: SEBI issued interim restraint orders barring entities from market access; subsequently SEBI completed investigation and modified/revoked interim orders, finding no adverse evidence against 244 entities (including the assessee) warranting continuation of action. The Assessing Officer had imposed additions under sections 68 and 69C relying primarily on the initial SEBI interim orders and observed unusual price movement in the scrip. The Tribunal found that the AO did not undertake independent verification steps (such as issuing notices to brokers under section 133(6), or other enquiries to trace intermediaries/entry operators) to corroborate non-genuineness. The Tribunal reasoned that where SEBI's final investigatory outcome absolves the assessee and the revenue has not brought independent or corroborative material to demonstrate that transactions were fictitious, additions lack an 'authentic base.' Ratio vs. Obiter: Ratio - Where SEBI, after investigation, revokes interim restraining orders and finds no adverse evidence against entities, and where the Assessing Officer fails to conduct independent enquiries to establish non-genuineness, additions under sections 68 and 69C cannot be sustained solely on the basis of earlier interim SEBI orders. Obiter - Observations on general market characteristics of penny stocks and policy considerations underlying SEBI interventions not necessary for the decision. Conclusion: The Tribunal upheld the appellate authority's deletion of additions under sections 68 and 69C. The additions were held to be unsupported by independent evidence and rendered unsustainable in the face of SEBI's subsequent exculpatory findings. Issue 2 - Sufficiency of reliance on SEBI interim order by Assessing Officer without independent corroboration Legal framework: AO may rely on information from investigative/regulatory agencies as material; however, tax additions require satisfaction of statutory tests under sections 68/69C and, where credibility or genuineness is contested, the AO is obliged to make independent inquiries to establish that sums are unexplained or transactions are sham. Precedent treatment: The Tribunal applied established administrative law and income-tax practice principles that an adjudicatory officer must make independent enquiries and cannot treat a temporary/regulatory restraint order as conclusive proof of tax evasion where later regulatory findings negate the inference of wrongdoing. Interpretation and reasoning: The Tribunal emphasized that the AO 'simply relied' on SEBI's interim order but did not issue notices to brokers or intermediaries under section 133(6) nor produce corroborative evidence to show the transactions were not genuine. Given SEBI's later investigative outcome clearing the entities, reliance on the interim order alone was insufficient to sustain additions. The Tribunal treated the AO's approach as procedurally deficient and substantively inadequate. Ratio vs. Obiter: Ratio - Reliance on an interim regulatory order, without independent corroborative enquiries or evidence proving non-genuineness, does not meet the requirement for additions under sections 68/69C. Obiter - Comments on how SEBI's investigatory standards compare with tax evidentiary requirements are ancillary. Conclusion: AO's reliance solely on SEBI interim orders was held unsatisfactory; without independent inquiries the additions were liable to be deleted. Issue 3 - Jurisdiction of the Assessing Officer (territorial/functional) in issuing notices and reassessment steps Legal framework: Notices must be issued by appropriate Assessing Officer with territorial/functional jurisdiction; change of ward or transfer of assessment within the Department may be permissible if jurisdictional nexus (residential address/employment source) supports the issuance. Precedent treatment: The appellate authority reviewed the AO's explanation regarding initial issuance by one ward and subsequent transfer to the correct ward handling salaried employees; no authority to the contrary was invoked by the assessee with supporting material. Interpretation and reasoning: The Tribunal accepted the appellate authority's finding that the original notice issuance was based on territorial jurisdiction and that subsequent transfer to the ward handling salary income was proper and within time. Accordingly, the jurisdictional plea was dismissed as baseless on the facts. Ratio vs. Obiter: Ratio - Where the AO demonstrates a rational basis for initial notice issuance and proper subsequent transfer to the ward competent for the assessee's income profile, jurisdictional challenge fails. Obiter - None significant. Conclusion: Jurisdictional exercise by the AO was upheld and the ground raised by the assessee was dismissed. Issue 4 - Maintainability/timeliness and low tax effect objection in departmental cross-proceedings Legal framework: Departmental appeals may be subject to time limits and policy circulars on low tax effect appeals; however exceptions may apply in cases involving market integrity/penny stock investigations. Precedent treatment: The Tribunal noted arguments on limitation and low tax effect but accepted the Departmental contention that the matter fell within the purview of penny-stock investigations (and thus the exception identified by the revenue) and that no timely objection had been raised by the assessing office with respect to filing. Interpretation and reasoning: The Tribunal found force in the Department's contention that the case fell within the special considerations for penny stock matters and decided the grounds against the assessee on these procedural points accordingly. Ratio vs. Obiter: Ratio - Procedural objections of timeliness or low tax effect raised by the assessee are not tenable where the Department reasonably treats the matter as part of penny-stock investigations and no procedural objection was timely raised by the Department's own office. Obiter - Broader policy on selection criteria for departmental appeals in low tax effect matters. Conclusion: Procedural grounds (timeliness/low tax effect) were not sustained in favour of the assessee; departmental appeal proceeded to merits and was dismissed on substantive grounds. Overall Disposition The Tribunal affirmed the deletion of additions under sections 68 and 69C on the ground that SEBI's subsequent investigatory revocation and clean chit, coupled with the AO's failure to undertake independent inquiries or produce corroborative evidence, rendered the additions unsustainable; jurisdictional and procedural objections were rejected on the facts. The revenue's appeal and the assessee's cross-objection were dismissed accordingly.