2025 (11) TMI 336 - AT - Income Tax

Reassessment under s.147 and s.68 upheld where investigation found circular trading, artificial price inflation, unexplained share purchases

ITAT upheld validity of reassessment under s.147, finding the AO's belief based on Investigation Wing material was bona fide and not borrowed ... Validity of reopening of the assessment u/s 147 - information received from the Investigation Wing relied upon - Addition u/s 68 - bogus LTCG - HELD THAT:- In the present case, the information received from the Investigation Wing was duly examined and acted upon by the Assessing Officer in a reasonable and judicious manner. The formation of belief by the Assessing Officer that income had escaped assessment cannot be said to be based on borrowed satisfaction. The material on record establishes that the reopening was not a mechanical exercise but was based on cogent information and due satisfaction recorded by the Assessing Officer. We, therefore, find no error in the finding of the learned CIT(Appeals) in upholding the validity of the reassessment proceedings. In light of the above discussion and following the ratio laid down in Backbone Projects Ltd [2021 (8) TMI 382 - GUJARAT HIGH COURT] we hold that the reassessment proceedings initiated under section 147 of the Act are valid in law. On this issue, we find no infirmity in the order of the learned CIT(Appeals) so as to call for any interference. Accordingly, this ground of appeal raised by the assessee is dismissed. Addition u/s 68 - It is an admitted position that despite repeated opportunities, the assessee has not furnished any plausible or satisfactory explanation as to why such a large number of shares of Kushal Tradelink Ltd., a company having no financial credentials, business performance, or market fundamentals, were purchased, nor was any material placed on record to justify the astronomical rise in its share price within a short span of time. Mere reliance on contract notes, demat statements, and bank payment records cannot discharge the onus placed upon the assessee under section 68 of the Act to prove the genuineness of the transactions, particularly when the surrounding facts and circumstances point to a pre-arranged and artificial accommodation entry designed to convert unaccounted income into exempt capital gains. We find that the AO has drawn his conclusions based on cogent material and well-documented findings of the Investigation Wing and the SEBI order, which established that the shares of Kushal Tradelink Ltd. were part of a manipulated trading pattern through synchronized and circular trades by connected entities, resulting in artificial inflation of the share price. The assessee’s failure to justify the investment in such a company clearly demonstrates that the entire transaction was a colourable device lacking any commercial substance. The principle enunciated by the Hon’ble Supreme Court in Sumati Dayal [1995 (3) TMI 3 - SUPREME COURT] is also squarely applicable here, wherein it was held that the test of human probabilities and surrounding circumstances must prevail over mere documentary evidence while determining genuineness of income transactions. The pattern of conduct of the assessee in the instant case, the absence of commercial rationale, and the artificially inflated share prices of Kushal Tradelink Ltd. clearly demonstrate that the entire transaction was a premeditated arrangement to obtain tax exemption on fictitious gains. Ao has rightly invoked the provisions of section 68 and treated the so-called Long-Term Capital Gain as unexplained income, since the assessee failed to establish the genuineness of the transactions or to discharge the onus placed upon her under the statute. The findings of the Assessing Officer are consistent with the principles laid down in Swati Bajaj [2022 (6) TMI 670 - CALCUTTA HIGH COURT], Usha Devi Modi [2023 (4) TMI 118 - CALCUTTA HIGH COURT], and Suman Poddar [2019 (11) TMI 1237 - SC ORDER] and Sumati Dayal [1995 (3) TMI 3 - SUPREME COURT] Appeal filed by the assessee is, therefore, dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment under section 147/148 was valid where the Assessing Officer acted on material received from the Investigation Wing - i.e., whether the satisfaction recorded by the AO was an independent application of mind or a borrowed satisfaction. 2. Whether long-term capital gains (LTCG) claimed as exempt under section 10(38) arising from sale of shares of a company found by SEBI to have manipulated trading (scrip characterised by synchronized/circular trades and artificial price rise) can be treated as unexplained income under section 68. 3. Whether production of contract notes, demat statements and bank payment records suffices to discharge the assessee's onus under section 68 in cases where surrounding facts and conduct indicate pre-arranged or non-genuine trading (application of test of human probabilities and commercial substance). 4. The extent to which decisions in factually similar matters (including deletion in respect of the same scrip in other proceedings) bind or persuade the Tribunal when the factual matrices differ, and how to reconcile conflicting Tribunal/bench decisions. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening under section 147/148 (borrowed satisfaction vs independent AO satisfaction) Legal framework: Reopening under section 147/148 requires the Assessing Officer to form a satisfaction that income chargeable to tax has escaped assessment. Such satisfaction must be based on material and an independent application of mind by the AO; information from an Investigation Wing may constitute the basis for reopening provided the AO examines and verifies the material and records his own satisfaction. Precedent treatment: The Court relied upon established authorities holding that tangible material from investigation, followed by AO's verification and recording of satisfaction, renders reopening valid; reopening based merely on received information without AO's own satisfaction constitutes borrowed satisfaction and is invalid. Interpretation and reasoning: The AO received credible, tangible material from the Investigation Wing (post search/seizure) indicating the group's involvement in providing accommodation entries. The AO examined the material, conducted verifications and recorded satisfaction. The Tribunal found these steps constituted an independent application of mind and were not a mechanical or borrowed exercise. The Tribunal followed the ratio that where the AO applies mind to investigation material and records reasons, the reopening is lawful. Ratio vs. Obiter: Ratio - reopening is valid where AO, after receiving investigatory material, conducts inquiries and records satisfaction; borrowed satisfaction is absent where AO's independent satisfaction and verification are demonstrable. Obiter - none material beyond the established test was applied. Conclusion: Reopening under section 147/148 was valid; the AO did not act on borrowed satisfaction and the reassessment proceedings stand. Issue 2 - Treating LTCG from manipulated penny-stock transactions as unexplained income under section 68 Legal framework: Section 68 places onus on the assessee to prove identity, creditworthiness and genuineness of any unexplained cash/credits; where gains arise from share transactions claimed as exempt under section 10(38), Revenue may invoke section 68 if transactions lack commercial substance or are part of a pre-arranged scheme. The test of human probabilities and appreciation of surrounding circumstances govern assessment of genuineness. Precedent treatment: The Tribunal applied authorities upholding Revenue's treatment of purported gains from penny stocks as bogus where SEBI/investigation revealed manipulation and the assessee failed to explain steep price rise, counterparty identity/creditworthiness or commercial rationale. It relied on higher-court decisions accepting findings based on human probabilities as findings of fact not liable to interference. Interpretation and reasoning: SEBI's adjudication established synchronized/circular trades by connected entities causing artificial price inflation. The assessee failed to provide plausible reasons for purchasing large quantities of shares in an entity lacking financial credentials or market fundamentals, and failed to explain the sudden astronomical price rise. Mere documentary proof (contract notes, demat, bank entries) was insufficient in this context. Considering the investigatory findings and surrounding conduct, the Tribunal concluded the transactions were a colourable device to convert unaccounted income into exempt LTCG and that the AO rightly treated gains as unexplained income under section 68. Ratio vs. Obiter: Ratio - where market manipulation by connected entities is established and the assessee cannot discharge the evidentiary onus or explain conduct inconsistent with prudent investment, gains may be treated as unexplained income under section 68 notwithstanding documentary formalities and claimed exemption under section 10(38). Obiter - references to specific lines of authority applying the test of human probabilities are explanatory of principle rather than introducing new law. Conclusion: The LTCG in issue was correctly treated as unexplained income under section 68; the assessment addition is sustained on merits. Issue 3 - Sufficiency of documentary evidence (contract notes, demat, bank statements) to discharge onus under section 68 where surrounding circumstances indicate non-genuineness Legal framework: Documentary evidence such as contract notes, demat statements and banking records is prima facie relevant but not conclusive; the assessee must explain surrounding circumstances, commercial rationale, and counterparty creditworthiness where facts defy human probability. The test is one of preponderance of probabilities and commercial substance. Precedent treatment: Courts and Tribunals have repeatedly held that documentary evidence alone may not discharge onus in cases of suspected accommodation entries or manipulated penny-stock trades; higher courts have sustained Revenue findings where the factual matrix undermines the probability of genuine investment. Interpretation and reasoning: The Tribunal emphasised that despite production of documentary records, the assessee failed to explain why investments were made in a company with no fundamentals, why price rose astronomically in short time, and why the pattern of trades was consistent with manipulation. In such context, the documentary trail did not rebut the inference of pre-arranged accommodation entries. Application of the test of human probabilities and consideration of commercial substance led to upholding the AO's conclusion. Ratio vs. Obiter: Ratio - documentary records do not automatically discharge the onus under section 68 where surrounding facts and conduct render the transactions improbable; the assessor may treat such gains as unexplained if on balance of probabilities genuineness is not established. Obiter - none beyond reaffirmation of established principles. Conclusion: The documentary evidence produced was insufficient to discharge the statutory onus; the addition under section 68 was justified. Issue 4 - Role and application of precedents in factually similar matters, including conflicting Tribunal orders on the same scrip Legal framework: Judicial precedents are to be applied with regard to their factual matrix; a decision favourable on similar facts is persuasive but not binding if the facts differ. Ratio decidendi must be read in context; selective extraction of sentences divorced from context is impermissible. Precedent treatment: The Tribunal acknowledged earlier deletion in respect of the same scrip in another proceeding but emphasised settled law that each case depends on its own facts. The Tribunal cited authoritative guidance that judgments must be read as whole and ratio applied only to matching fact situations. Interpretation and reasoning: The Tribunal examined factual distinctions (assessee's inability to explain investments and SEBI/investigation findings in the present record) and concluded that the favourable outcome in the other matter could not override cogent adverse material here. The Tribunal reaffirmed that conflicting decisions must be reconciled on factual differences rather than treated as automatically binding. Ratio vs. Obiter: Ratio - precedents must be applied in context; a decision on identical scrip is not determinative if the factual matrix or evidence differs materially. Obiter - cautionary remarks on misapplication of selective extracts from decisions. Conclusion: The earlier favourable orders on the same scrip did not compel deletion in the present case because the present factual matrix and evidentiary outcome differed; Tribunal sustained the addition. Overall Conclusion The Court upheld the reassessment and the addition under section 68. Reopening was valid because the AO independently examined investigation material and recorded satisfaction; the LTCG claimed as exempt was rightly treated as unexplained income given SEBI's findings of manipulated trading, the surrounding facts, and the assessee's failure to discharge the onus despite documentary production; precedents favourable to the assessee were not followed because the factual matrices differed. The appeal was dismissed.