2025 (12) TMI 1637 - AT - Income Tax

Penny-stock share sale reported as STCG, wrongly treated as fake LTCG for reassessment; s.147 reopening quashed

Reopening under s.147 to treat alleged penny-stock LTCG as unexplained cash credit u/s 68 was held invalid because the assessee had not claimed or earned ... Validity of reopening of assessment - Unexplained cash credit u/s 68 - Bogus LTCG - assessee has made transaction of sale in scrip which is a penny stock - HELD THAT:- The real fact is that the assessee did not earn the LTCG in the scrip mentioned in the assessment order and the assessee earned only short-term capital gain (STCG) which was disclosed by the assessee in the return of income and paid the taxes thereon. Therefore, the item on which the assessee has paid the taxes and it is already stated and mentioned in the Return of Income and books of accounts of the assessee, it cannot be said that the income has escaped assessment. Therefore, the income of short-term capital gain, is already mentioned in the books of accounts of the assessee and assessee has offered the same in the income tax return and paid the due taxes, therefore, on such item, there should not be any reassessment proceedings, as the income has not escaped from the assessment. Therefore, assessment in the assessee’s case was reopened based on the incorrect facts and incorrect presumption. AO did not provide the information of reopening to the assessee - Appeal filed by the assessee, is allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the reassessment proceedings were validly initiated where the recorded reason proceeded on the belief that the assessee had booked 'bogus long-term capital gain (LTCG)', but the record showed only disclosed short-term capital gain (STCG) on share transactions and taxes had been paid thereon. (ii) Whether the reopening was vitiated for lack of 'live link'/tangible basis and for being founded on incorrect factual premises, including allegations of borrowed satisfaction and non-furnishing of reopening information to the assessee. (iii) Consequence of quashing the reassessment: whether adjudication on the addition made under section 68 (and other consequential issues) survived. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i) & (ii): Validity of reopening when reasons alleged bogus LTCG but assessee had disclosed STCG and paid tax Legal framework (as discussed in the judgment): The Court examined the requirement that reopening must be supported by 'tangible material' and that the recorded reasons must have a 'live link' with the formation of belief of escapement of income. Interpretation and reasoning: The Court found that the reopening was triggered on information alleging that the assessee booked bogus LTCG in a specified scrip and routed unaccounted income. However, on examining the return of income and record, the Court noted that the assessee had not claimed any LTCG on sale of shares during the year; instead, the assessee had disclosed STCG and paid tax. On these facts, the Court held that the very foundation of the recorded reasons-escapement due to bogus LTCG-was factually incorrect. Since the income item (STCG) had already been recorded in the books and offered to tax, it could not be treated as having 'escaped assessment' on the stated premise. The Court further held that the reasons were recorded on wrong factual premises, lacked a live link to escapement, and reflected borrowed satisfaction/absence of application of mind. The Court also noted that reopening information was not provided to the assessee. Conclusion: The Court concluded that the reassessment was reopened on incorrect facts and incorrect presumption, with defective reasons lacking the required nexus; consequently, the reassessment proceedings were quashed. Issue (iii): Effect of quashing reassessment on section 68 addition and other matters Interpretation and reasoning: Having quashed the reassessment itself, the Court held that challenges to the merits of the addition made in the reassessment (including the addition of sale consideration as unexplained cash credit under section 68) did not require determination. Conclusion: All other issues on merits of the additions and consequential matters in the impugned reassessment were treated as academic and infructuous, and the appeal was allowed.