Reassessment notice u/s148 invalid as mere opinion change; genuine LTCG exempt u/s10(38), additions u/s 69A deleted

ITAT Pune held the reassessment notice u/s 148 to be invalid as it was based on a mere change of opinion. The AO had earlier, on the same material and after full enquiry, accepted the assessee's claim of LTCG and dropped the proceedings u/s 143(3) r.w.s. 147. Issuance of a fresh notice without any new tangible material or independent enquiry was held impermissible. Consequently, the reassessment proceedings and additions made u/s 69A r.w.s. 115BBE were quashed. On merits, ITAT further held that the assessee satisfied all conditions of s.10(38), and in view of SEBI's final report exonerating the concerned scrip from price rigging, the LTCG was genuine. The denial of exemption and related additions were deleted.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether reassessment proceedings initiated by notice under section 148 dated 20/03/2020, leading to assessment under section 147 read with section 144B, were invalid as being based on a mere change of opinion without any new tangible material.

1.2 Whether the long-term capital gains disclosed on sale of equity shares of Mishkafin Finance and Trading Ltd. (MFTL) and claimed exempt under section 10(38) could be treated as bogus and taxed as unexplained money under section 69A read with section 115BBE.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of reassessment under section 147 / notice under section 148 dated 20/03/2020

Legal framework (as discussed)

2.1 The Court proceeded on the principle laid down by the Supreme Court in CIT v. Kelvinator of India Ltd., that reassessment cannot be initiated on a mere change of opinion and must be founded on tangible material, and that the Assessing Officer must form his own satisfaction and not act on borrowed satisfaction.

Interpretation and reasoning

2.2 The assessee's claim of long-term capital gains on MFTL shares and exemption under section 10(38) had already been subjected to:

(a) Inquiry by the Investigation Wing through summons under section 131 in 2015, to which full details and supporting documents were furnished; and

(b) An earlier reassessment initiated by notice under section 148 dated 31/03/2019, culminating in an order under section 143(3) read with section 147 dated 28/11/2019, wherein the proceedings were dropped after accepting the genuineness of the claim.

2.3 On the same set of facts and information, a fresh notice under section 148 dated 20/03/2020 was issued. The Court noted:

(a) No new or fresh material was available with the Assessing Officer at the time of issuing the second notice;

(b) No independent enquiry was carried out by the Assessing Officer to verify or supplement the information earlier received from the Directorate of Income Tax (Investigation);

(c) The Assessing Officer did not investigate who the purchaser/seller of the shares were, nor whether they were involved in price rigging; and

(d) The reasons were essentially a reiteration of earlier suspicions based on the same investigation inputs and SEBI material.

2.4 Relying on the reasoning of the appellate authority, the Court accepted that:

(a) The Assessing Officer had acted mechanically on information from the Investigation Wing without forming his own independent satisfaction;

(b) The reopening was based on "borrowed satisfaction" and not on any fresh tangible material; and

(c) Initiation of reassessment on the same issue, previously examined and accepted, amounted to a mere change of opinion, which is impermissible in law.

Conclusions

2.5 The reassessment proceedings initiated by the notice under section 148 dated 20/03/2020 were held to be invalid as being founded on a mere change of opinion without new material and based on borrowed satisfaction. The order under section 147 read with section 144B dated 28/09/2021 was therefore rightly quashed by the appellate authority, and this finding required no interference.

Issue 2: Characterisation of long-term capital gains on MFTL shares as bogus and taxable under section 69A

Legal framework (as discussed)

2.6 Section 10(38) exempts long-term capital gains from the transfer of listed equity shares where:

(a) The capital asset is an equity share held for more than 12 months;

(b) The transfer is made on a recognised stock exchange; and

(c) Such transfer is chargeable to securities transaction tax (STT).

2.7 The Assessing Officer invoked section 69A to treat the entire sale proceeds of MFTL shares as unexplained money and taxed it under section 115BBE, relying, inter alia, on SEBI's interim order regarding alleged misuse of the exchange mechanism and price manipulation in MFTL shares, and on investigation findings concerning alleged accommodation entries in "penny stocks".

Interpretation and reasoning

2.8 The appellate authority recorded, and the Court endorsed, the following factual matrix:

(a) The assessee purchased MFTL shares through banking channels, with broker notes and purchase bills on record;

(b) The shares were held in demat account, and statements from the depository (CDSL) confirmed the holding and subsequent sale;

(c) The shares were sold through a recognised stock exchange (online trading platform), with contract/broker notes evidencing the trades;

(d) Sale consideration was received through banking channels, and STT was duly paid; and

(e) All relevant documentary evidence (bank statements, demat statements, contract notes, transaction summaries) was produced and not found to be false or fabricated.

2.9 The Assessing Officer's conclusion of bogus LTCG was based on:

(a) Characterising MFTL as a penny stock with artificially rigged prices controlled by operators;

(b) Alleged unusual growth in trading volumes and price rise not commensurate with financials;

(c) General findings from investigation about cash being routed through multiple layers and pre-arranged transactions; and

(d) Reliance on SEBI's interim order restraining trading in MFTL and other entities.

2.10 The appellate authority found that:

(a) No specific defect or inconsistency was pointed out in the assessee's documents (bank records, demat statements, broker notes);

(b) No evidence of cash involvement, cash trail, or round-tripping specific to the assessee was brought on record;

(c) No material linked the assessee or his broker to any operator, promoter, exit provider, or price rigging scheme;

(d) No confessional statement of the assessee or broker was relied upon that would implicate the assessee; and

(e) The assessee was not afforded cross-examination of any person whose statement or material was used against him, amounting to violation of principles of natural justice.

2.11 The authority also noted that:

(a) In online stock exchange transactions, buyer and seller are unknown to each other, and the assessee has no control over the counterparty or price formation; and

(b) The Assessing Officer did not conduct any inquiry to identify the counterparties or establish that they were involved in manipulation.

2.12 On the SEBI material, the Court relied on the reasoning drawn from the appellate order and the cited judgment of the High Court in the case concerning M.S. Gokuldham Enterprise LLP:

(a) The Assessing Officer had relied on SEBI's interim order which alleged misuse of the exchange mechanism and prima facie price manipulation in MFTL;

(b) SEBI's final report dated 05/10/2017 expressly recorded that there were no adverse findings against specified entities (including the assessee) in respect of price manipulation or prima facie violations in the scrip of MFTL, and revoked the earlier directions;

(c) The assessee's name appeared in the list of entities absolved by SEBI, and thus the primary foundation of the Assessing Officer's suspicion, drawn from the interim order, stood negated by the final report; and

(d) There was no other independent finding of the Assessing Officer to demonstrate that the assessee's share prices were manipulated or that the gains were illegitimate.

2.13 It was further emphasised that:

(a) Additions cannot be sustained merely on suspicion, conjectures, and generalised investigation reports without specific linkage and evidence against the assessee;

(b) "Suspicion howsoever strong" cannot substitute legal proof; and

(c) In the absence of any direct or circumstantial evidence tying the assessee to a bogus LTCG accommodation entry scheme, the documentary record supporting genuine purchase and sale must prevail.

Conclusions

2.14 The Court upheld the finding that the assessee had fulfilled all statutory conditions of section 10(38) for exemption of long-term capital gains on listed equity shares, namely, holding period, transaction through recognised stock exchange, and payment of STT, supported by unimpeached documentary evidence.

2.15 As SEBI's final report had exonerated the MFTL scrip and the assessee from allegations of manipulation, and the Assessing Officer had not brought on record any new, specific, or independent evidence of sham transactions, accommodation entries, or cash trails in the assessee's case, the treatment of the declared LTCG as bogus and as unexplained money under section 69A was held to be unsustainable.

2.16 The deletion of the addition of Rs. 1,00,08,500/- made under section 69A, and the acceptance of the assessee's exemption claim under section 10(38), were affirmed. The Revenue's grounds on merits were dismissed.

---