2025 (10) TMI 581 - AT - Income Tax

Decision upholds taxpayer's share trading legitimacy, finds AO enquiries adequate and sets aside order passed under section 263

Mohammedsaqib Aiyub Puthawala Versus The PCIT-1, Ahmedabad

ITAT held that the AO had made adequate enquiries into share transactions, which were executed through a registered broker and reflected in the assessee's ... Revision u/s 263 - accommodation entry receipts - as per CIT AO erred in accepting claimed exempt Long Term Capital Gain (LTCG) arising from trading in a penny scrip - as argued case was reopened was to examine the share transactions - HELD THAT:- AO did enquire from the assessee regarding trading in the shares of M/s. Kushal Tradelink Ltd and it was not a case of no or inadequate enquiry. From the materials brought on record, it is evident that the assessee had duly explained the genuineness of the transactions, as the purchase and sale transactions were made through registered broker and all the transactions were duly reflected in the de-mat account of the assessee. As further found that the assessee was a regular trader in shares and the trading in the shares of M/s. Kushal Tradelink Ltd. was not an isolated one-off transaction. Therefore, the finding of PCIT that the AO did not make proper enquiries in the matter cannot be held as correct. The Ld. PCIT did not point out any infirmity in the explanation of the assessee and the conclusion derived by the AO thereon. A.O. had categorically recorded that he had no evidence on record to establish that the transactions undertaken by the assessee were fraudulent and in the nature of accommodation entries. In the proceedings u/s 263 as well, the Ld. PCIT has not referred to any such information or evidence which could establish that the transactions of the assessee were ingenuine. In the absence of any such evidence, the conclusion as drawn by the A.O. cannot be held as incorrect. A.O. had taken a plausible view in the matter after considering the explanation of the assessee and going through the evidences brought on record in support of the transactions. The finding of the PCIT that the order of the A.O. was erroneous is not found sustainable. Accordingly, the order passed u/s 263 of the Act is set-aside. Appeal of the Assessee is allowed 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the Principal Commissioner invoking revisional jurisdiction under section 263 could set aside an assessment passed under section 147 r.w.s.144B on the ground that the Assessing Officer erred in accepting claimed exempt Long Term Capital Gain (LTCG) arising from trading in a penny scrip as genuine when the AO had made enquiries and recorded satisfaction that the transactions were genuine. 2. Whether Explanation 2 to section 263 (attracting revision where there was no/inadequate inquiry) applied where the AO had issued show cause, called for documents, examined contract notes, broker ledger, bank payments, STT payment and returned an explicit finding that no evidence was available to connect the assessee with the alleged fraud. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of exercise of revisionary power under section 263 where the AO made enquiries and accepted LTCG as genuine Legal framework: Section 263 permits revision where the order of the AO is found to be erroneous and prejudicial to the interests of revenue. The power is to be exercised only when the AO's order is vitiated by lack of inquiry, jurisdictional error, or a conclusion no reasonable AO could have reached on the material available. Precedent Treatment: No specific precedents are relied upon or overruled in the judgment; the Court applies settled principles regarding the limited scope of section 263 and the requirement that the revisional authority identify material infirmity in the AO's inquiry or reasoning. Interpretation and reasoning: The Tribunal examined the assessment record and found that the AO reopened the case solely to examine the penny-scrip transactions, issued a show-cause notice, and elicited extensive documentary evidence from the assessee: contract notes, broker ledger, bank payment receipts, STT proof, demat entries, broker's registration, and explanation linking source of funds. The AO expressly recorded that no specific document from the Investigation Wing established nexus between the assessee and the alleged operators, and on the basis of the evidence and lack of incriminating material the AO took a considered view accepting the LTCG exemption. The revisional order did not point to any new material or identify any specific infirmity in the AO's inquiries or findings; it merely disagreed with the AO's conclusion without demonstrating that the AO's conclusion was perverse or lacked any evidentiary basis. Ratio vs. Obiter: Ratio - where the AO has made relevant and adequate enquiries, considered documentary evidence and recorded a plausible conclusion that no nexus or fraud was established, the revisional authority cannot set aside the assessment under section 263 merely by substituting its opinion; such exercise requires demonstrable error or lack of inquiry. Obiter - observations about the assessee being a regular trader and that the transactions were not isolated bolster the principal reasoning but are ancillary. Conclusion: The Court concluded that the AO had conducted adequate inquiry and taken a plausible view on the facts; the revisional order under section 263 was not sustainable and must be set aside. The exercise of revision was improper in absence of any identified material demonstrating that the AO's conclusion was erroneous and prejudicial to revenue. Issue 2: Applicability of Explanation 2 to section 263 (no/inadequate inquiry) in the facts Legal framework: Explanation 2 to section 263 contemplates invocation of revision where the AO's order is founded on no inquiry or an inadequate inquiry; the revisional authority must show that the AO failed to make necessary inquiries or ignored relevant material. Precedent Treatment: The judgment does not cite prior decisions applying or distinguishing Explanation 2, but applies the settled criterion that mere disagreement with a concluded, documented inquiry does not transform the AO's exercise into an inadequate inquiry. Interpretation and reasoning: The Tribunal found that the AO had undertaken specific, material inquiries: issuance of a show-cause notice, request for explanation regarding identified LTCG, and assessment-stage consideration of contract notes, bank payments, broker correspondence, STT payment evidence and demat records. The AO explicitly stated that evidence from the Investigation Wing was not received and therefore nexus could not be established. The revisional authority did not identify any failure of the AO to ask for or consider any relevant document that was in the AO's power to collect, nor did it show that the AO ignored material on record. The PCIT's invocation of Explanation 2 was therefore not supported by the assessment record. Ratio vs. Obiter: Ratio - Explanation 2 cannot be invoked where the record demonstrates that the AO made specific, adequate inquiries and recorded reasons for accepting the assessee's documentary evidence; absent demonstrable absence or inadequacy of inquiry, revision under section 263 is impermissible. Obiter - suggestions that further evidence from investigation wing could have altered the outcome are speculative and do not justify revision without such evidence being available and shown to the AO. Conclusion: Explanation 2 to section 263 was not attracted. The revisional order failed to establish either no inquiry or inadequate inquiry by the AO; consequently, the direction to reopen or pass a fresh assessment was unsustainable and was set aside. Cross-reference and overall conclusion The two issues are interrelated: the validity of exercising section 263 depends on whether the AO's inquiry was adequate (Explanation 2). Because the AO conducted detailed enquiries, considered material documentary evidence, and recorded a reasoned conclusion that no nexus with the penny-scrip operators was shown by the available material, the revisional authority's contrary conclusion, unsupported by additional evidence or identification of a legal infirmity in the AO's process, amounted to impermissible substitution of opinion. The Tribunal therefore allowed the appeal and set aside the revision under section 263.