2025 (12) TMI 67 - AT - Income Tax

Reassessment quashed, deletion of Section 68 addition on penny stock sale taxed without Section 10(38) exemption upheld

ITAT Delhi upheld the order of CIT(A) deleting the addition u/s 68 on alleged unaccounted income from sale of penny stock shares, noting that the assessee ... Addition u/s 68 - unaccounted income - sale of shares by penny stock company as established by the Investigation Wing of the Department which was used for providing accommodation entry and creation of bogus capital gains exempt u/s 10(38) - CIT(A) deleted addition - HELD THAT:- In the instant case the shares were sold through the banking channel on recognized stock exchange through a SEBI registered Stock broker. The assessee had furnished detailed information that was sought by the AO during the assessment. The assessee had offered the tax on the capital gain on the sale of the shares. CIT(A), has examined the issue in the correct prospective and rightly deleted the additions towards the addition u/s 68 of the Act made by AO. The reasoning and findings of the Ld. CIT(A), while granting relief is on proper appreciation of law expounded by the judicial dicta. Validity of reopening of assessment - In the instant case the originally proceedings was concluded u/s 143(3) of the Act vide assessment order and the case was re-opened after the four years from the end of the relevant assessment year. It is alleged that the assessee filed the reply before the AO stating that assessee has disclosed fully and truly all material fact in the return of income. From the perusal of the reasons recorded it reveals that merely on the basis of the information received from the portal the case was re-opened, and no independent enquiry was conducted by the AO. The assessee has shown the STCG in the return of income and offered the tax and the assessee has not claimed the exemption. The case of assessee was reopened on the basis of the change of opinion and without application of mind and any independent verification, which is bad in law and liable to be quashed and quashed accordingly. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the entire sale proceeds of shares, already offered to tax as short term capital gains, could be treated as unexplained cash credits and added under section 68 on the allegation of penny stock / bogus transactions. 1.2 Whether the reassessment proceedings initiated under section 147, after completion of an original assessment under section 143(3), were valid when based on information regarding alleged penny stock transactions already examined in the original assessment. 1.3 Whether reassessment proceedings initiated after the expiry of four years from the end of the relevant assessment year were valid in the absence of any allegation or finding of failure by the assessee to fully and truly disclose all material facts. 1.4 Whether the reassessment order was vitiated for failure of the Assessing Officer to observe the mandatory four-week period between disposal of objections to reopening and passing of the reassessment order. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Addition under section 68 in respect of already taxed capital gains from share transactions Interpretation and reasoning 2.1 The assessee had purchased 19,000 shares of a listed company through a SEBI-registered stock broker on a recognized stock exchange, paid consideration through banking channels, and later sold those shares on the exchange through the same mode. The sale consideration was duly reflected, net of brokerage and other charges, and short term capital gain arising therefrom was disclosed in the return of income and assessed in the original scrutiny assessment under section 143(3). 2.2 The Assessing Officer, in reassessment, treated the entire sale proceeds as unexplained cash credits under section 68 on the basis of investigation wing information branding the scrip as 'penny stock' used for accommodation entries and bogus capital gains. The assessee produced supporting documents and demonstrated that the income had already been offered and taxed as short term capital gains in the relevant year. 2.3 The first appellate authority found, on appraisal of the assessment records and the assessee's documentary evidence, that the specific share transactions and resultant short term capital gains had already been accepted in the original assessment. It held that once the amount had been brought to tax as disclosed income, the same sum could not again be subjected to tax by invoking section 68, particularly when the transactions were routed through recognized stock exchange and banking channels and no contrary evidence was brought to undermine their genuineness. 2.4 The Tribunal noted that the assessee had complied with all requisitions during reassessment, furnished complete details, and that the capital gain on sale of shares had already been offered to tax. It accepted the appellate authority's appraisal that there was no material to justify re-characterizing the already taxed capital gain as unexplained cash credit merely on a general allegation of 'penny stock' without specific adverse evidence against the assessee's transactions. Conclusions 2.5 The treatment of the entire sale proceeds of shares as unexplained cash credits under section 68 was unsustainable when the same transaction had already resulted in disclosed and assessed short term capital gains. The same income could not be taxed again by conversion into section 68 addition. The deletion of the addition by the appellate authority was upheld, and the Revenue's ground on merits was dismissed. Issue 2: Validity of reassessment under section 147 on a matter already examined in original assessment (change of opinion) Legal framework (as discussed) 2.6 The Tribunal proceeded on the settled principle that reassessment under section 147 cannot be initiated merely on a 'change of opinion' on the same material that was available and examined during the original assessment under section 143(3). Formation of 'reason to believe' must be based on tangible material and not on reappraisal of the same facts. Interpretation and reasoning 2.7 In the original scrutiny assessment, the case had been selected under CASS, a questionnaire was issued specifically requiring details of capital gains, and the assessee furnished full particulars of the impugned share transactions and resulting gains. The Assessing Officer accepted the returned income without any addition on this count. 2.8 The reassessment was initiated later on the basis of information from the investigation wing / portal regarding penny stock transactions, but related to the same share transactions which had already been disclosed and examined. The Tribunal found that no new, independent material was brought on record beyond this general information to justify reopening, and that the Assessing Officer had not conducted any independent enquiry prior to recording reasons. 2.9 On this factual matrix, the Tribunal held that the reassessment was premised on re-examination of an issue already scrutinized and accepted in the original assessment, and thus amounted to a mere change of opinion. Such reopening was held to be impermissible in law. Conclusions 2.10 The reassessment proceedings initiated under section 147 were invalid as they were based on a change of opinion on an issue already examined and accepted in the original assessment under section 143(3). On this ground alone, the reassessment was liable to be quashed. Issue 3: Reopening beyond four years without failure to fully and truly disclose material facts Legal framework (as discussed) 2.11 The Tribunal proceeded on the statutory requirement that where an assessment has been completed under section 143(3), no action under section 147 can be taken after four years from the end of the relevant assessment year unless income has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Interpretation and reasoning 2.12 The original assessment under section 143(3) was completed on 27-10-2016. The reassessment proceedings were initiated after the expiry of four years from the end of the relevant assessment year. The Tribunal examined the reasons recorded for reopening and found that they were based merely on information from the portal / investigation wing regarding penny stock transactions. 2.13 The reasons did not allege, nor did the assessment order establish, any specific failure on the part of the assessee to disclose fully and truly all material facts relating to the share transactions. On the contrary, the assessee had disclosed the short term capital gains in the return, had not claimed any exemption thereon, and had provided all relevant particulars during the original scrutiny, which were accepted. 2.14 The Tribunal concluded that, in the absence of any allegation or demonstration of failure of disclosure, the jurisdictional pre-condition for reopening beyond four years was not satisfied. Further, the mere receipt of third-party information, without independent application of mind or verification by the Assessing Officer, could not suffice to override this statutory requirement. Conclusions 2.15 The reassessment initiated after four years from the end of the relevant assessment year was invalid in law, as there was no failure by the assessee to fully and truly disclose all material facts. On this independent ground also, the reassessment was held to be bad in law and quashed. Issue 4: Non-compliance with mandatory four-week period after disposal of objections to reopening Legal framework (as discussed) 2.16 The Tribunal referred to the judicial mandate that, where objections are filed by the assessee to a notice under section 148, and such objections are rejected, the Assessing Officer must not proceed further with the assessment for a period of four weeks from the date of service of the order disposing of the objections, so as to afford the assessee an opportunity to seek appropriate remedy. Interpretation and reasoning 2.17 In the present case, notices under section 142(1) were issued and the assessee filed replies. The Assessing Officer disposed of the assessee's objections to reopening by order dated 20-03-2022, and the reassessment order was passed on 30-03-2022, i.e., within ten days, without observing the four-week interval. 2.18 Relying on the binding judicial precedent which directs strict adherence to the four-week standstill period after disposal of objections, the Tribunal held that the Assessing Officer's failure to observe this mandatory requirement vitiated the reassessment proceedings. Conclusions 2.19 The reassessment order passed within four weeks of rejection of objections to reopening was contrary to the mandatory judicially prescribed procedure and, on this procedural illegality as well, the reassessment was held to be bad in law. Overall disposition 2.20 In view of the above findings: (a) the addition under section 68 in respect of share sale proceeds already taxed as short term capital gains was rightly deleted and the Revenue's appeal was dismissed; and (b) the reassessment proceedings were held to be invalid on grounds of change of opinion, absence of failure to disclose for reopening beyond four years, and breach of the four-week post-objection requirement; accordingly, the cross objection was allowed and the reassessment quashed.