The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has allowed an assessee’s appeal and directed the Assessing Officer (AO) to delete additions arising from the sale of shares of a company, which had been treated as a bogus penny-stock transaction. 

The bench of Raj Kumar Chauhan (Judicial Member) and S. Rifaur Rahman (Accountant Member) has observed that the transaction could not be branded as a penny-stock transaction merely on the basis of a general investigation report when the department had not brought material linking the assessee with price rigging or other alleged dubious activities.

The case arose after the assessee’s assessment was reopened under Section 147 of the Income Tax Act, 1961, pursuant to a notice under Section 148. The Revenue proceeded on the basis that shares of SVC Resources Limited had been sold during the relevant year for approximately ₹24.33 lakh and that the transaction represented a bogus penny-stock arrangement.

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The assessment also involved a peculiar succession issue. The shares had originally been purchased and held by the assessee’s late husband, D.K. Jain, who died on March 18, 2014. Following his death, the assessee, acting as his legal heir, filed returns on his behalf for AY 2014-15 and AY 2015-16, while also filing her own return of income.

During reassessment, however, the AO treated the return filed on behalf of the deceased as non-est and proceeded to treat the relevant income as belonging to the assessee. The AO treated the share-sale proceeds as unexplained and made an addition under Section 68, relying substantially on the investigation report concerning alleged bogus penny-stock transactions.

The Commissioner of Income Tax (Appeals) upheld the additions, prompting the assessee to approach the ITAT.

The assessee challenged the total additions of ₹28,21,913, comprising the ₹24,33,546 share-sale amount and another addition of ₹3,88,367.

A central contention was that the AO had added the entire sale consideration of ₹24,33,546 without taking into account the acquisition cost of the shares.

According to the assessee, the shares had an acquisition cost of approximately ₹1.26 crore, whereas the shares were sold for only about ₹24.33 lakh. Consequently, the transaction resulted in a long-term capital loss of approximately ₹1.02 crore, rather than a long-term capital gain. The assessee also pointed out that she had not claimed this loss in her own return.

The assessee therefore argued that the very basis for applying the penny-stock modus operandi was misplaced because the investigation material relied upon by the AO concerned generation of bogus long-term capital gains and other artificial losses, whereas the particular transaction had resulted in a substantial capital loss.

The assessee also relied upon documentary evidence concerning the purchase and sale of the shares.

The record before the Tribunal included contract notes issued by registered stock brokers, demat statements, bank statements and other supporting documents relating to the purchase and sale of SVC Resources Limited shares.

The assessee contended that no defect had been identified by the AO in these documents. She also argued that the shares had been acquired through the stock exchange and through a registered broker and that the Revenue had not demonstrated her involvement in any alleged manipulation of the scrip.

Another issue concerned the sum of ₹3,88,367. The assessee submitted that this amount had already been disclosed in the return filed in respect of her late husband and that tax had been paid on the same. According to her, taxing the amount again in her hands would result in double taxation.

The Tribunal examined the material and found that the late D.K. Jain had purchased and held the shares of SVC Resources through the stock exchange using Religare Securities Ltd. The assessee, as his legal heir, inherited the shares following his death.

The Tribunal noted that approximately 13.37 lakh shares were sold during the relevant year for ₹24,33,546.37. The difference between the acquisition cost and sale proceeds was claimed as a long-term capital loss in the return filed on behalf of the deceased husband.
The Tribunal accepted that the AO could treat the transaction as belonging to the assessee after treating the return filed on behalf of the deceased as non-est. However, it found fault with the manner in which the AO dealt with the transaction.

A key observation of the Tribunal was that the AO had effectively focused only on the sale proceeds and treated them as a bogus transaction without properly examining the complete chain of purchase, holding and sale.

The Tribunal held that the AO “should have analyzed and investigated the whole transaction” rather than treating the disputed transaction in isolation merely by relying upon the investigation report.

This became an important factor in the Tribunal’s decision because the material on record showed that the shares had originally been acquired through the stock market by the deceased husband.

The Tribunal further found that the Revenue had not established any connection between the assessee and the alleged manipulation surrounding the scrip.

It specifically observed that the AO had not proved that the assessee was involved in, or had brought on record material linking her with, any dubious transactions relating to entry, price rigging or exit providers.

The Tribunal relied upon the principle emerging from the Bombay High Court decision in Pr. CIT v. Ziauddin A Siddique, where the court considered circumstances involving alleged penny-stock shares purchased and sold through the stock exchange and registered stock brokers.

In that case, the court noted that payments were made through banking channels, securities transaction tax had been paid, the documentation had not been criticised by the AO and there was no allegation that the assessee had participated in price rigging. The Bombay High Court found no reason to interfere with the Tribunal’s factual findings.

The Delhi ITAT also referred to the Delhi High Court’s decision in Pr. CIT v. Smt. Krishna Devi, observing that similar views had been expressed in that case. On that basis, the Tribunal held that the transaction before it could not be treated as a penny-stock transaction in isolation.

The Tribunal separately addressed the computation of the alleged income.

Once the AO treated the share transaction as belonging to the assessee, the Tribunal held that the assessee should receive the benefit of the cost of acquisition attributable to the earlier owner.

The Tribunal recorded the acquisition cost at ₹1,26,73,405.99, against actual sale proceeds of ₹24,33,546.37. This produced a difference of approximately ₹1.02 crore, representing a long-term capital loss.

At the same time, the Tribunal clarified that this unabsorbed long-term capital loss was not to be allowed to the assessee because the loss had been claimed in the return filed on behalf of the late husband and had not been claimed in the assessee’s own return.

Thus, while the Tribunal rejected the Revenue’s approach of converting the transaction into taxable income by ignoring the acquisition cost, it did not grant the assessee a fresh benefit of carrying forward the capital loss.

The assessee had also raised several legal objections against the reopening of the assessment under Section 147.

Among other grounds, she argued that the reassessment was based merely on a change of opinion despite the original assessment having been completed under Section 143(3). She relied upon the Supreme Court decision in Income Tax Officer v. TechSpan India (P.) Ltd.

The assessee further contended that the AO had relied upon information from the Investigation Wing without possessing specific and cogent material establishing that income had escaped assessment. She also alleged that the material relied upon by the Revenue and the reasons recorded for reopening were not supplied in the manner required by law.

However, the Tribunal’s operative relief ultimately focused on the additions made in the assessment.

After considering the rival submissions and material available on record, the Tribunal directed the AO to delete both additions made and sustained by the CIT(A), including the addition under Section 68 and the related income addition.

The Tribunal concluded that the assessee’s appeal was to be allowed.

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