2025 (11) TMI 146 - AT - Income Tax

Revision under s.263 upheld for erroneous acceptance of LTCG exemption under s.10(38) due to unexamined demat records

ITAT RAJKOT - AT upheld revision under s.263, finding the AO failed to examine transaction mode, dematerialisation and Demat debits/credits for shares, ... Revision u/s 263 - information that the assessee has made transactions in penny stock - Denial of long term capital gain (LTCG) income thereon, as exempt u/s 10(38) - HELD THAT:- We note that assessing officer has not examined the mode of transactions (Physical / online through stock exchange) made by the assessee at the time of purchase and sale of shares of Karma Ispat Limited and also not verified dematerialization of the share purchased by the assessee. The Debit and credit of shares in the Demat account of the assessee with reference to date of purchase and sale made, were also not examined by the assessing officer. Therefore, we note that the order u/s. 263 of the I.T. Act, 1961 is valid even if one of the several items dealt with therein is found prejudicial to the interest of revenue and for this proposition of law, we place reliance on the decision of Indian Textiles [1985 (2) TMI 23 - MADRAS HIGH COURT]. Further, it is also important to mention here that the provisions of section 263 can be invoked even where full facts are disclosed but the assessing officer has not examined these details as per correct provisions of law. In support of this proposition, we place reliance on the decision of Emery Stone Manufacturing Company [1994 (7) TMI 36 - RAJASTHAN HIGH COURT] Further, the provisions of section 263 can be invoked even where the issue is debatable. For this proposition, we place reliance on the decision of Hon'ble Jurisdictional Gujarat High Court delivered in the case of CIT Vs. M. M. Khambhatwala [1991 (12) TMI 29 - GUJARAT HIGH COURT]. Hon'ble Delhi High Court has also considered the ratio laid down in earlier decisions of the Hon'ble Supreme Court in Rampyari Devi Sarogi [1967 (5) TMI 10 - SUPREME COURT] and Tara Devi Aggarwal [1972 (11) TMI 2 - SUPREME COURT] wherein it was held that “where AO has accepted a particular contention/issue without any enquiry or evidence whatsoever, the order is erroneous and prejudicial to the interest of the Revenue.” C.I.T. has rightly exercised his jurisdiction under section 263 of the Act in case of these four assessee’s case. Therefore, we dismiss the appeal of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the order of the Assessing Officer (AO) under section 143(3) read with section 147, accepting exempt long-term capital gain (LTCG) claimed under section 10(38) in respect of transactions in penny-stock scrips, was 'erroneous' and 'prejudicial to the interest of the revenue' so as to justify revision under section 263 of the Income-tax Act. 2. Whether failure by the AO to conduct inquiries or verifications (including examination of mode of transaction, dematerialisation records, broker custody, bank/payment trail and financials of the scrip-issuer) constitutes failure to make enquiries which should have been made within the meaning of Explanation 2 to section 263 and renders the AO's order erroneous. 3. Whether differential treatment (additions in some co-case assessments and acceptance in others involving the same scrip and same investigation inputs) amounts to arbitrariness and supports exercise of jurisdiction under section 263. 4. Whether the principal commissioner's direction to the AO to re-frame the assessment after making appropriate enquiries (rather than issuing a final addition) was within jurisdiction and appropriate relief. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of invoking section 263 where AO accepted LTCG exempt under section 10(38) in penny-stock transaction Legal framework: Section 263 empowers the Principal Commissioner/Commissioner to revise an assessment order which is 'erroneous in so far as it is prejudicial to the interest of the revenue.' Explanation 2 (effective 01/06/2015) identifies that an AO's order is deemed erroneous if passed without inquiries/verification which should have been made, or if relief was allowed without inquiry, etc. Precedent treatment: The Court relied on established authorities that an order passed without application of mind or without making enquiries which circumstances warrant, is 'erroneous' under section 263; earlier High Court and Supreme Court jurisprudence supports this proposition and was followed. Interpretation and reasoning: The Tribunal examined the AO's assessment order and record and found the AO's order cryptic and lacking any discussion of key investigative inputs (investigation reports, SEBI findings, modus operandi of penny-stock syndicates). The AO accepted returned income after limited queries and did not address specific facts pointing to possible bogus accommodation entries (huge abnormal price rise, off-market purchase, broker custody, absence of bank payment trail, demat anomalies). Given these circumstances, the Tribunal held that the AO failed to make inquiries which ought to have been made before accepting the exemption claim under section 10(38). Ratio vs. Obiter: Ratio - failure to make required inquiries in presence of investigation inputs renders AO's order erroneous and prejudicial under section 263. Obiter - observations on broader patterns of penny stock manipulation as illustrative facts. Conclusion: Invocation of section 263 was justified on the ground that the AO's order was erroneous and prejudicial for failure to verify critical aspects of the claim of exempt LTCG. Issue 2 - Application of Explanation 2 to section 263: scope and required inquiries Legal framework: Explanation 2 lists specific circumstances where an AO's order is deemed erroneous: (a) order passed without making inquiries/verification which should have been made; (b) relief allowed without inquiry; (c) non-compliance with Board directions; (d) not in accordance with adverse decisions of higher courts. Precedent treatment: The Tribunal relied on appellate and High Court jurisprudence interpreting Explanation 2 to permit revision where the AO did not examine material available on record or did not apply mind to circumstances that mandate inquiry. Interpretation and reasoning: The Tribunal identified concrete verification steps enumerated in the CBDT SOP for penny-stock cases-mode of transaction (physical/online), dematerialisation status, debit/credit entries in demat, broker ledgers and contract notes, source of funds/bank trail, financials of the issuer. These were not examined by the AO despite available investigative intelligence identifying the scrip as used in accommodation entry schemes. The Tribunal concluded the omission fits squarely within Explanation 2(a)/(b), since AO allowed/accepted exemption without adequate verification. Ratio vs. Obiter: Ratio - Explanation 2 permits revision where AO omits verifications mandated by facts and SOP inputs; such omission is an error prejudicial to revenue. Obiter - recitation of SOP factors as non-exhaustive guidance. Conclusion: The AO's failure to undertake those specific verification steps justified exercise of revisional jurisdiction under Explanation 2 to section 263. Issue 3 - Effect of discriminatory treatment across related assessments on validity of AO's order Legal framework: Section 263 permits revision where an AO's order is erroneous and prejudicial; inconsistent application of scrutiny across co-cases may indicate non-application of mind or arbitrariness. Precedent treatment: The Tribunal treated relevant judicial dicta that a plausible difference of view may be permissible but arbitrary or discriminatory treatment, particularly when investigative inputs are identical, undermines the reasonableness of AO's order; such authorities were followed. Interpretation and reasoning: Record showed that for the same scrip and investigative inputs, some assessees were made additions while others (including the present assessee) were accepted without addition. The Tribunal found this disparity unexplained and indicative of lack of uniform application of enquiry and non-application of mind by the AO, supporting characterization of the AO's order as erroneous and prejudicial. Ratio vs. Obiter: Ratio - unexplained differential treatment where same facts and evidence exist supports revisional jurisdiction under section 263. Obiter - comments on administrative parity. Conclusion: Discriminatory treatment reinforced the view that AO's order was erroneous and prejudicial, validating revision. Issue 4 - Scope of relief under section 263: direction to re-frame assessment after fresh enquiries Legal framework: Section 263 empowers the revisional authority to revise the assessment order; the form of relief may include setting aside the order and directing AO to re-assess after making proper enquiries and giving opportunity of hearing. Precedent treatment: Courts have approved remand/re-frame directions where revisional authority finds procedural or substantive omissions by AO but further fact-finding is required at assessment level. Interpretation and reasoning: Given the factual matrix-need for verification of demat/broker records, source of funds and issuer financials-the Tribunal endorsed the Principal Commissioner's course of setting aside the AO's order to the extent of the issue and directing fresh assessment proceedings, rather than making a final substantive addition itself. This preserves the AO's role as fact-finder while remedying the identified error. Ratio vs. Obiter: Ratio - revisional authority may set aside and direct fresh assessment where AO failed to make required inquiries; remand is appropriate to enable proper fact-finding with procedural fairness. Obiter - none. Conclusion: Direction to the AO to re-frame assessment after conducting required verification and affording opportunity to the assessee was proper and within jurisdiction under section 263. Final Disposition and Practical Conclusions The Tribunal held that the revisional jurisdiction under section 263 was validly exercised because the AO's order was erroneous and prejudicial to revenue by virtue of failure to make inquiries highlighted by investigation/SOP inputs and unexplained differential treatment across related assessments. The Tribunal dismissed the appeals and upheld the Principal Commissioner's direction to remand the matter to the AO for fresh consideration after conducting the necessary verifications and providing the assessee reasonable opportunity of hearing.