2025 (6) TMI 327 - HC - Income Tax

Reopening of assessment - threshold limit of Rs. 50.00 Lacs thereby justifying issuance of notice u/s 149(1)(b) - whether the information available with the AO and as furnished to the petitioner suggested that income of the petitioner has escaped or likely to be escaped assessment exceeds Rs. 50.00 Lacs? HELD THAT - The transaction of making payment in cheque and receiving the money in cash is a separate transaction. There was no such allegation in the notice issued to the petitioner that there was information as to any such separate transaction. There is also no material on record which would suggests that the amount of purchase consideration paid in cash for acquiring the shares have been received back by the petitioner in cash through another transaction. And in any event the said transaction is not in the previous year relevant to AY 2013-14 as the purchase consideration paid for the shares in question was paid in the previous year. The only transaction in the previous year relevant to AY 2013-14 is the sale of shares of Gemstone and PMPL. Thus there is no material with the AO to indicate that the gross sale consideration had escaped assessment in AY 2013-14. Thus if the information as available with the AO was verified to be correct the income which the petitioner had claimed as exempt u/s 10 (38) of the Act would be the income that was chargeable to tax under the Act and had escaped assessment. Concededly this amount is below the threshold limit of Rs. 50.00 Lacs for attracting the provision of Section 149 (1) (b) of the Act. We find merit in the contentions of the petitioner that the impugned notice has been issued beyond the period of limitation as prescribed u/s 149 (1) (a) of the Act and the conditions as specified so as to attract the provisions of Section 149 (1) (b) of the Act are not satisfied. The impugned order and impugned notice are set aside - Decided in favour of assessee.

Summary

The core legal questions considered by the Court in this matter were:

1. Whether the impugned order and notice issued under Sections 148A(d) and 148 of the Income Tax Act, 1961, respectively, were barred by limitation.

2. Whether the income alleged to have escaped assessment exceeded the threshold limit of Rs. 50.00 Lacs, thereby justifying issuance of notice under Section 149(1)(b) of the Act.

3. Whether the material and information provided by the Assessing Officer (AO) sufficiently indicated that income had escaped assessment, warranting reopening of assessment for the relevant Assessment Year (AY) 2013-14.

4. The legal validity of treating long-term capital gains (LTCG) claimed as exempt under Section 10(38) of the Act as income escaping assessment based on allegations of sham transactions involving penny stocks.

Issue-wise Detailed Analysis

1. Limitation for Issuance of Notice under Sections 148A(d) and 148 of the Act

The petitioner challenged the impugned order and notice on the ground that they were issued beyond the prescribed limitation period. The impugned order was issued pursuant to a notice dated 06.04.2021, which was deemed to be a notice under Section 148A(b) following directions by the Supreme Court in a precedent case. The petitioner contended that even after accounting for statutory extensions and exclusions under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA), the issuance was time-barred.

The Court examined the statutory framework governing limitation periods for reopening assessments. Section 149(1)(a) prescribes a three-year limitation period from the end of the relevant AY for issuance of notice where escaped income does not exceed Rs. 50.00 Lacs. Section 149(1)(b) provides a longer ten-year period where escaped income exceeds Rs. 50.00 Lacs.

The Court noted that the initial notice dated 06.04.2021 was beyond the three-year period applicable under Section 149(1)(a). The petitioner's argument was that since the alleged escaped income was below Rs. 50.00 Lacs, the shorter limitation period applied, rendering the notice invalid.

The Court's reasoning relied on the interplay between the limitation provisions and the threshold for escaped income. It held that the impugned notice and order were issued beyond the prescribed limitation period under Section 149(1)(a), and the conditions for invoking the extended period under Section 149(1)(b) were not met.

2. Whether Income Escaping Assessment Exceeded Rs. 50.00 Lacs

The AO issued a supplementary notice dated 21.05.2022, alleging that the petitioner had booked fictitious profits amounting to Rs. 52,24,250/- from trading in shares of Gemstone Investment Limited and Priti Mercantile Private Limited (PMPL). The AO relied on information from an investigation by the Stock Exchange Board of India (SEBI) indicating rigged share prices and accommodation entries to generate bogus LTCG exempt under Section 10(38).

The petitioner contested this, providing purchase and sale contract notes, finance ledgers, and income tax returns showing declared income and purchase consideration paid through banking channels aggregating Rs. 9,08,887/-. The petitioner argued that the net exempt LTCG was Rs. 42,97,299/-, below the Rs. 50.00 Lacs threshold, and that the purchase consideration should be deducted from the gross sale consideration to compute escaped income.

The AO rejected the petitioner's contention, asserting that the transactions were sham and that the payments made through banking channels were likely received back in cash by the petitioner, thereby constituting unaccounted income. The AO emphasized the suspicious nature of penny stock transactions, including rigged prices and lack of genuine business activity.

The Court analyzed the evidence and found the AO's assumption regarding cash receipt unsupported by material. It recognized that the payments for purchase of shares were reflected in the petitioner's bank statements and books for the prior year (AY 2012-13), not the year under consideration (AY 2013-14). The Court held that any separate transaction involving cash receipt was not alleged or supported by material relevant to AY 2013-14.

Accordingly, the Court concluded that the only income escaping assessment in AY 2013-14, if any, was the LTCG claimed as exempt under Section 10(38), amounting to Rs. 42,97,299/-, which is below the Rs. 50.00 Lacs threshold.

3. Validity of Reopening Assessment Based on Alleged Sham Transactions

The Revenue's case rested on the contention that the purchase and sale of shares in penny stock companies were sham transactions intended to generate bogus LTCG exempt under Section 10(38). The AO relied on SEBI's investigation report indicating rigged share prices and accommodation entries.

The Court observed that it was not appropriate to examine the merits of the allegations at the interlocutory stage. The focus was confined to whether the information available to the AO justified reopening of assessment under the statutory provisions.

The Court emphasized that reopening is permissible only if there is material suggesting escaped income beyond the prescribed threshold and within limitation. Since the escaped income, if any, was below Rs. 50.00 Lacs and the notice was issued beyond the three-year period, the reopening was not justified.

4. Application of Section 10(38) Exemption and Treatment of LTCG

The petitioner had claimed LTCG on sale of shares as exempt under Section 10(38). The AO challenged this exemption on the ground that the gains were fictitious, arising from rigged transactions.

The Court noted the petitioner's computation of exempt LTCG totaling Rs. 42,97,299/- for AY 2013-14. It observed that the AO's case did not dispute the payment of purchase consideration through banking channels, which was reflected in the prior year's accounts. The Court held that the only income chargeable to tax and allegedly escaping assessment was the exempt LTCG amount, which was below the threshold for extended limitation.

The Court further clarified that transactions involving payment by cheque and receipt of money in cash are separate transactions; no material was placed on record to suggest such separate cash transactions relevant to AY 2013-14.

Significant Holdings

The Court held:

"The impugned notice has been issued beyond the period of limitation as prescribed under Section 149(1)(a) of the Act and the conditions as specified so as to attract the provisions of Section 149(1)(b) of the Act are not satisfied."

It established the core principle that reopening of assessment under Section 148 must comply strictly with limitation provisions and threshold requirements for escaped income.

The Court concluded that the information available with the AO did not justify reopening the assessment for AY 2013-14 as the alleged escaped income was below Rs. 50.00 Lacs and the notice was issued beyond the prescribed period.

Consequently, the impugned order and notice were set aside, and any assessment order passed pursuant to them was quashed.