2025 (7) TMI 185 - AT - Income Tax

Reopening of assessment - Bogus LTCG - eligibility of reasons to believe - denial of exemption income u/s 10(38) - additions u/s 68 - mandation to apply independent application of mind - AO alleged transactions in penny stocks through 77 transactions linked to Consortium Capital Private Limited as connected with assessee - HELD THAT - Merely placing reliance on any other authority without recording own satisfaction or bringing any cogent substance on record shows that without applying his mind the AO has issued the notice which is invalid. Since the AO has formed his reason to believe just on the basis of the information received from the Director of Income Tax (Inv.) Kolkata that income has escaped assessment and not a reason to believe which is necessary for reopening of the assessment proceedings. In our view the AO cannot reopen the assessment merely on the basis of information received without applying his independent mind to the information and forming an opinion. It is well established that the reason recorded by the Ld. A.O. shall be concrete specific and shall be recorded after making all necessary and independent enquiries and the AO should clearly form his belief that the assessee has escaped income and only then can he reopen the assessment u/s 147 of the Act. The reopening for the purpose of fishing inquiries or to verify the details is not permitted u/s 147 of the Act - Decided in favour of assessee. Bogus LTCG - Addition on the basis of the SEBI report - We are of the considered view that just the modus operandi generalization preponderance of human probabilities cannot be the only basis for rejecting the claim of the assessee. Unless specific evidence is brought on record to controvert the validity and correctness of the documentary evidences produced the same cannot be rejected. SEBI order while identifying price manipulation by specific entities in the JMD Telefilms scrip does not name or implicate the assessee in its findings. particularly for her transaction in Patch 6. Therefore sale at a lower price Rs. 54-55 during a period of price decline after holding the shares for over three years contradicts the modus operandi of manipulative trades. The absence of any SEBI enquiry involving the assessee and the legitimate nature of her stock exchange transaction further affirm the genuineness of her LTCG claim under Section 10(38). We noticed that the CIT(A) overlooked the crucial fact that the Assessee did not purchase shares in the scrip of Consortium Capital Ltd a private company nor was beneficiary in any manner. However the AO relied on the specific report of Securities and Exchange Board of India on JMD Telefilm Ltd. Now in the present case we found that the SEBI has not issued any notice to the assessee or broker of the assessee in relation to these trades. The assessee submits again that it has never received any notice for violating the SEBI Rules or regulations. Therefore the AO has made a baseless allegation and put reliance of the Investigation report without any substance and corroborative evidences. The SEBI Report reproduced by the AO in the assessment order has nothing to do with the assessee. If some person manipulates the trades in JMD Shares does not mean that the assessee was also involved. There is no evidence from AO or in the report reproduced by the AO in assessment order. Therefore the addition made by placing reliance on the SEBI stands deleted and the above-ground stands allowed. Penny stock transactions - With regard to the so-called Penny Stock Capital Gain as recently decided in the case of Ms. Farrah Marker 2016 (6) TMI 786 - ITAT MUMBAI wherein it was held that the Long-term capital gains on sale of penny stocks cannot be treated as bogus unexplained cash credit if the documentation is in order there is no allegation of manipulation by SEBI or the BSE. Denial of right of cross-examination is a fatal flaw which renders the assessment order a nullity. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeal are:

(a) Whether the reopening of the assessment under Section 147 of the Income-tax Act, 1961 was valid, given that the Assessing Officer (AO) relied solely on information received from the Director of Income Tax (Investigation), Kolkata, without independent application of mind or specific reasons recorded.

(b) Whether the addition made under Sections 68 and 69 of the Act on account of alleged bogus long-term capital gains (LTCG) and unaccounted commission income was justified, especially in light of the assessee's submissions and documentary evidence.

(c) Whether reliance on the Securities and Exchange Board of India (SEBI) investigation report on the scrip of JMD Telefilms Ltd. was appropriate to discredit the genuineness of the assessee's transactions and capital gains claim.

(d) Whether the AO and CIT(A) erred in rejecting the assessee's claim of exemption under Section 10(38) of the Act on sale of shares of JMD Telefilms Ltd. without bringing any material evidence implicating the assessee in manipulative or bogus transactions.

(e) Whether the ad hoc addition of unaccounted commission income under Section 69C was sustainable without corroborative evidence.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of Reopening of Assessment under Section 147

Legal Framework and Precedents: Section 147 empowers the AO to reopen assessment if he has "reason to believe" that income chargeable to tax has escaped assessment. The AO must record specific, concrete reasons after independent application of mind. Reliance was placed on judicial pronouncements including the Delhi High Court ruling in Signature Hotels Pvt. Ltd. v. ITO, and Bombay High Court decisions in Hindustan Lever Ltd. v. R.B. Wadkar and others, which emphasize that reopening cannot be based on mere borrowed satisfaction or vague allegations.

Court's Interpretation and Reasoning: The AO's reasons for reopening cited information from DIT (Investigation), Kolkata, alleging bogus transactions in penny stocks amounting to Rs. 9.75 crores through 291 transactions. However, the AO misstated the amount, number of transactions, and linked the case to an unrelated statement of a third party (Jaikishan Poddar of Consortium Capital Pvt. Ltd.), which had no connection with the assessee. The AO did not apply independent mind, nor did he correct these factual errors despite objections raised by the assessee.

Key Evidence and Findings: The reopening notice was based on incorrect and unsubstantiated information. The AO failed to establish a rational nexus between the information and the assessee's transactions. The reopening was thus a mere fishing inquiry without concrete material.

Application of Law to Facts: The AO's action violated the settled legal principle that reopening must be based on independent reasons and not on mere information from other authorities. The reopening notice was quashed accordingly.

Treatment of Competing Arguments: The revenue's reliance on the DIT (Inv.) information was rejected as insufficient and invalid without AO's own satisfaction. The assessee's objections highlighting factual inaccuracies were accepted.

Conclusion: The reopening under Section 147 was invalid and the notice under Section 148 was quashed.

Issue (b) and (d): Addition under Sections 68 and 69 and Rejection of LTCG Claim

Legal Framework and Precedents: Section 68 pertains to unexplained cash credits and Section 69 to unexplained investments. The assessee's claim of LTCG exemption under Section 10(38) requires genuineness of transactions. Judicial precedents including Bombay High Court decisions in Shyam Pawar and PCIT vs Indravadan Jain, HUF, and ITAT rulings emphasize that transactions on recognized stock exchanges supported by third-party documents cannot be disbelieved on suspicion alone. The burden of proof lies on the revenue to establish collusion or bogus nature.

Court's Interpretation and Reasoning: The AO treated the sale consideration from shares of JMD Telefilms Ltd. as unexplained cash credit, ignoring the detailed documents submitted by the assessee including contract notes, demat account statements, bank statements, and broker ledger accounts. The AO's reliance on the SEBI report and other material was misplaced as no direct link or evidence was brought against the assessee. The CIT(A) erred in following a non-jurisdictional High Court decision that imposed a heavier burden on the assessee, ignoring contrary binding decisions of the Bombay High Court.

Key Evidence and Findings: The assessee submitted comprehensive documentary evidence proving the genuineness of transactions. The shares were sold through recognized stock exchanges via reputed brokers, and the sale consideration was reflected in the return of income. The AO's addition was based on conjecture without corroborative evidence.

Application of Law to Facts: The legal principle that suspicion or surmises cannot substitute for evidence was applied. The assessee's transactions were bona fide and supported by credible documents. The AO failed to discharge the burden of proving collusion or sham transactions.

Treatment of Competing Arguments: The AO and CIT(A) disregarded the assessee's submissions and relied on generalized findings from SEBI and third-party statements. The Tribunal preferred binding jurisdictional precedents favoring the assessee's position.

Conclusion: The additions under Sections 68 and 69 were deleted, and the exemption claim under Section 10(38) was upheld.

Issue (c): Reliance on SEBI Investigation Report

Legal Framework and Precedents: SEBI reports under Section 133(6) of the Income-tax Act can be used as evidence but must be specific and implicate the assessee. Generalized findings or reports implicating others cannot be used to penalize an unrelated assessee. Natural justice requires that the assessee be given opportunity to rebut such reports.

Court's Interpretation and Reasoning: The SEBI investigation report pertained to price manipulation in the scrip of JMD Telefilms Ltd. during 2009-2010, divided into eight patches. The assessee's transactions fell within Patch 6 (March-April 2010), during which the stock price was falling, and the assessee sold shares at a lower price after holding them for over three years. The report did not mention the assessee or her broker, nor did it implicate her in any manipulative scheme. No SEBI notice or enquiry was directed to the assessee. The AO's reliance on this report to discredit the assessee's LTCG claim was therefore baseless.

Key Evidence and Findings: The absence of the assessee's name or transactions in the SEBI report, the timing and price of sale, and the lack of any SEBI communication against the assessee were key findings. The Tribunal noted that the SEBI report identified only specific parties as violators, none of whom included the assessee.

Application of Law to Facts: The principle that generalized or unrelated findings cannot be used against an assessee was applied. The assessee was not given opportunity to rebut the SEBI report before the AO relied on it. The report's findings were insufficient to disprove the genuineness of the assessee's transactions.

Treatment of Competing Arguments: The revenue's reliance on the SEBI report was rejected. The Tribunal emphasized the need for specific evidence against the assessee rather than reliance on modus operandi or generalizations.

Conclusion: The addition based on the SEBI report was deleted.

Issue (e): Ad hoc Addition of Unaccounted Commission Income under Section 69C

Legal Framework and Precedents: Section 69C relates to unexplained money credited or found in the books of account. Additions must be supported by corroborative evidence and cannot be made on an ad hoc basis without substantiation.

Court's Interpretation and Reasoning: The AO made an adhoc addition of Rs. 26,69,703/- towards unaccounted commission income without bringing any corroborative evidence against the assessee. The Tribunal found this addition to be unjustified.

Key Evidence and Findings: No material evidence was placed on record to substantiate the addition. The assessee had submitted documents and explanations which were ignored.

Application of Law to Facts: The addition was arbitrary and lacked evidentiary basis.

Treatment of Competing Arguments: The revenue failed to produce any evidence to support the addition.

Conclusion: The adhoc addition under Section 69C was deleted.

3. SIGNIFICANT HOLDINGS

"The AO cannot reopen the assessment merely on the basis of information received without applying his independent mind to the information and forming an opinion."

"Reasons recorded by the AO for reopening must be concrete, specific and based on independent enquiries. Vague or arbitrary allegations do not satisfy the threshold for 'reason to believe' under Section 147."

"Suspicion or surmises cannot substitute for evidence. Where transactions are conducted through recognized stock exchanges and supported by third-party documents, the burden lies on the revenue to establish collusion or sham transactions."

"Generalized findings or reports implicating other parties cannot be used to discredit an assessee unless the assessee is specifically named or implicated and given an opportunity to rebut."

"Ad hoc additions without corroborative evidence are unsustainable."

"The assessee's claim of exemption under Section 10(38) on LTCG from sale of shares is upheld where the transactions are genuine and supported by documentary evidence."

"The reopening notice under Section 148 is quashed for lack of independent application of mind and absence of valid reasons."

"The addition made under Sections 68 and 69 on account of alleged bogus LTCG and unaccounted commission income is deleted in absence of cogent evidence."