ITAT Quashes Reassessment for Penny Stock Loss Lacking Direct Nexus

Navneetbhai Ramanlal Patel Vs ITO (ITAT Ahmedabad)

ITAT Ahmedabad: Quashes reassessment absent specific averment in ‘reasons’ recorded u/s 147 on alleged penny-stock

Summary: The ITAT Ahmedabad quashed the reassessment initiated under Section 147 for AY 2016–17 on alleged penny-stock losses, holding that the reopening was legally unsustainable due to the absence of any specific or tangible material. The Tribunal found that the “reasons to believe” recorded by the Assessing Officer did not identify any particular scrip, transaction, or evidence showing that the claimed loss of ₹46,88,950 arose from a bogus penny-stock scheme. Instead, the AO relied only on vague information from the Investigation Wing and made additions without any independent inquiry or corroboration. Citing precedents such as SFIL Stock Broking, Meenakshi Overseas, Varshaben Sanatbhai Patel, and Lakhmani Mewal Das, the Tribunal reiterated that reopening cannot be based on borrowed satisfaction or general allegations without a live nexus between material and belief. Since both the reassessment and resulting addition rested entirely on unverified external inputs and lacked identification of any specific scrip or sham transaction, the ITAT held the proceedings invalid and deleted the entire addition, allowing the appeal in full.

Facts:

• The assessee is an individual engaged in the business of commission agency for LIC. For A.Y. 2016–17, he filed his original return of income on 06.2016, declaring a total income of Rs. 2,55,960. The return was processed under section 143(1) of the Income-tax Act, 1961.
• Subsequently, the Assessing Officer (AO) received information from the Investigation Wing that the assessee had allegedly entered into sale and purchase of shares through M/s Marfatia Stock Broking Pvt. Ltd., claimed to be part of a bogus “penny stock” scheme. As per this information, the assessee was alleged to have claimed a fictitious trading loss of Rs. 46,88,950, which was considered disproportionate having regard to his modest declared income.
• On this basis, the AO formed a belief that income had escaped assessment and issued a notice under section 148 on 31.03.2021.
• In response to the notice under section 148, the assessee filed a return reiterating the same income of 2,55,960.
• During the reassessment, the AO issued several notices under sections 142(1) and 143(2) along with questionnaires calling for Contract notes, Demat statements, Broker’s bills, Bank statements and other supporting evidence in respect of the share transactions and loss claimed.
• The AO recorded that the assessee failed to furnish the requisite documentary evidences, Sought repeated adjournments and Remained largely non-compliant till the limitation period for passing the assessment order was approaching.
• In view of the assessee’s non-compliance, the AO invoked section 144 read with section 147 and completed the assessment to the best of his judgment. The AO treated the alleged share trading loss of 46,88,950 as fictitious / accommodation loss created to adjust other taxable income. The AO accordingly added Rs. 46,88,950 to the total income of the assessee. For justifying best judgment assessment in case of non-compliance, the AO placed reliance on decisions such as Swadeshi Polytex Ltd. v. ITO (127 ITR 287) and CIT v. Motor General Finance Ltd. (254 ITR 449).
• Aggrieved, the assessee preferred an appeal before the CIT(A), National Faceless Appeal Centre (NFAC). In his statement of facts and grounds, the assesse challenged the validity of reopening under section 147, Disputed the addition of Rs. 46,88,950 as fictitious loss, Alleged breach of principles of natural justice and non-grant of proper opportunity.
• However, during the appellate proceedings repeated notices were issued through ITBA, the assessee did not file any written submissions or documentary evidence, sought adjournments and ultimately did not substantiate his case.
• The CIT(A) recorded that despite sufficient and repeated opportunities, the assessee neither appeared properly nor furnished details.
• Holding that the assessee could not take advantage of his own non-compliance and relying on the maxim “vigilantibus non dormientibus jura subveniunt” (the law assists the vigilant and not those who sleep over their rights), the CIT(A) upheld the best judgment assessment, confirmed the addition of Rs. 46,88,950 as business income, and Dismissed the appeal ex parte and on merits.
• The assessee carried the matter in further appeal before the Income Tax Appellate Tribunal, Ahmedabad SMC Bench. Before the Tribunal, the central thrust of the assessee’s challenge was on the legality and validity of the reopening under section 147, rather than on the quantum only.

Issues:

• Whether the reassessment initiated under section 147, in the absence of identification of any specific scrip or tangible material indicating a bogus penny-stock transaction, is valid in law.
• Whether the addition of Rs. 46,88,950, treated as a fictitious trading loss without any specific evidence or corroboration, can be sustained.

Observations:

• The Tribunal observed that the reasons recorded for reopening the assessment, as well as the reassessment order passed under sections 147 read with 144, were fundamentally deficient. There was not even an iota of mention identifying the particular scrip or transaction alleged to constitute a penny-stock accommodation entry. The record was entirely silent on which specific share had been treated as bogus, what precise transaction was regarded as non-genuine, and in what manner the alleged loss of Rs. 46,88,950 was considered fictitious. The Assessing Officer merely referred in general terms to information said to have been received from the Investigation Wing and from the Bombay Stock Exchange, without placing any tangible material on record to establish any nexus between such information and the assessee’s actual transactions.
• In examining the legality of the reopening, the Tribunal reiterated the well-settled legal principle that the formation of “reasons to believe” under section 147 must rest upon specific, relevant, and tangible material, and cannot be founded on vague, general, or borrowed information or on mere suspicion. Reliance was placed on the judgment of the Delhi High Court in CIT v. SFIL Stock Broking Ltd. (2010) 325 ITR 285 (Del.), where reopening based purely on Investigation Wing information, without any independent application of mind by the Assessing Officer, was held invalid. The Tribunal also referred to the decision of the Delhi High Court in Meenakshi Overseas (P) Ltd. v. Pr. CIT (2017) 395 ITR 677 (Del.), which held that the reasons recorded must disclose a live link between the material relied upon and the belief formed; a mere reference to a general investigation report does not satisfy the statutory requirement. The Tribunal drew further support from the judgment of the Gujarat High Court in Varshaben Sanatbhai Patel v. ITO, Tax Appeal No. 1287 of 2014 (Guj.), decided on 13.10.2015, where reassessment was quashed on the ground that the Assessing Officer had acted merely on borrowed satisfaction without applying an independent mind. The Supreme Court’s seminal decision in ITO v. Lakhmani Mewal Das (1976) 103 ITR 437 (SC) was also relied upon to emphasise that there must be a direct nexus or live connection between the material available and the formation of belief that income had escaped assessment.
• Applying these principles to the facts of the present case, the Tribunal noted that the Assessing Officer had not disclosed, either in the recorded reasons or in the assessment order, the identity of the company or scrip in respect of which the loss had been claimed. No details of any specific transaction were set out, nor was any evidence brought on record to indicate that the scrip was in fact a penny stock or that the transactions were sham. The addition had been made entirely on the basis of unverified external information, without any independent inquiry or corroborative evidence and without any material indicating that the assessee had received cash or accommodation entries corresponding to the alleged loss. Such an approach, in the view of the Tribunal, amounted to mechanical formation of belief and was a clear instance of borrowed satisfaction, unsupported by any specific or tangible material connecting the assessee to a bogus transaction.
• Having found the very foundation of the reassessment to be legally untenable, the Tribunal held that the reassessment proceedings initiated under section 147 were invalid. Consequently, the assessment framed pursuant thereto, and the addition of Rs. 46,88,950 made on account of the alleged fictitious loss, were unsustainable in law as well as on facts. The Tribunal accordingly directed that the addition made by the Assessing Officer and affirmed by the CIT(A) be deleted, and the appeal of the assessee was allowed in its entirety.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD