Manjeet Kaur Duggal Vs ITO (Delhi High Court)
Delhi High Court, in a significant ruling, has set aside a reassessment notice issued by the Income Tax Department, holding that an Assessing Officer (AO) cannot rely on mere assumptions to determine that income escaping assessment exceeds the statutory threshold of ₹50 lakh required for reopening cases beyond three years. The court emphasized that the quantum of escaped income must be based on the information and material on record, not on conjecture.
The judgment was delivered in a petition filed by Manjeet Kaur Duggal challenging a notice issued under Section 148 of the Income Tax Act, 1961, for the Assessment Year (AY) 2013-14. The proceedings were initiated based on information that the assessee had booked bogus Long-Term Capital Gains (LTCG) amounting to ₹52.24 lakh from the sale of “penny stocks.”
Background of the Case
The Income Tax Department issued a notice to Duggal on April 6, 2021, which, following the Supreme Court’s directions in the case of Union of India & Ors. v. Ashish Agarwal (2022), was treated as a show-cause notice under Section 148A(b) of the Act. The department alleged that the assessee had earned fictitious LTCG of ₹52,24,250 from trading in the shares of M/s Gemstone Investment Limited and M/s Priti Mercantile Private Limited.
The petitioner, in her income tax return for AY 2013-14, had disclosed the sale of these shares and claimed an LTCG of ₹42,97,299 as exempt from tax under Section 10(38) of the Act. This figure was arrived at after deducting the purchase cost of ₹9,08,887 from the total sale consideration.
The petitioner challenged the reassessment proceedings primarily on the ground that they were barred by limitation. Under Section 149(1)(a) of the Act, the time limit for issuing a notice is three years from the end of the relevant assessment year. An extended period of up to ten years is permissible under Section 149(1)(b) only if the AO has information suggesting that the income escaping assessment is likely to be ₹50 lakh or more. The petitioner contended that the only potential escaped income was the net gain of ₹42.97 lakh, which is below this threshold.
The Revenue’s Arguments vs. The Court’s Analysis
The Revenue’s counsel argued that the entire transaction was a sham designed to accommodate bogus LTCG. The AO contended that in such cases, the entire sale consideration of ₹52.24 lakh should be treated as escaped income. The AO’s reasoning, as noted in the order under Section 148A(d), was based on the assumption that the purchase consideration paid by the assessee through banking channels must have been received back in cash in a separate, unrecorded transaction.
The Delhi High Court unequivocally rejected this contention, terming it “ex facie untenable.” The court noted several critical flaws in the AO’s reasoning. First, the AO’s belief that the purchase money was returned in cash was a pure assumption, unsupported by any material or information on record. The notice issued to the assessee contained no such allegation or evidence.
Second, the court pointed out that the purchase of the shares was made in the financial year 2011-12 (relevant to AY 2012-13), whereas the reassessment was for AY 2013-14, the year of sale. Any transaction related to the return of purchase money, even if it had occurred, could not be attributed to the year under assessment without specific information.
The court concluded that based on the information available with the AO, the only income that could have possibly escaped assessment in AY 2013-14 was the net gain of ₹42,97,299, which the petitioner had claimed as exempt.
Legal Precedent and Final Verdict
This ruling is consistent with the long-established legal principle laid down by the Supreme Court in cases like Dhakeswari Cotton Mills Ltd. vs. CIT (1954), which holds that tax authorities cannot make assessments based on “suspicion, conjecture or surmise” and must be guided by relevant material. The AO’s attempt to treat the entire sale consideration as escaped income by assuming a circular flow of cash was deemed a conjecture by the High Court.
Since the potential escaped income of ₹42.97 lakh was admittedly below the ₹50 lakh threshold, the conditions for invoking the extended limitation period under Section 149(1)(b) were not met. The notice was therefore issued beyond the prescribed three-year limit.
Consequently, the High Court allowed the petition, quashing the order passed under Section 148A(d) and the consequential notice issued under Section 148. The judgment reinforces the principle that the department must possess concrete information, not mere suspicion, to justify reopening assessments beyond the standard limitation period, particularly when relying on the monetary threshold specified in the Act.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. The petitioner has filed the present petition, inter alia, impugning the order dated 15.07.2022 [impugned order] passed under Section 148A(d) of the Income Tax Act, 1961 [the Act] and consequential notice dated 15.07.2022 [impugned notice] issued under Section 148 of the Act in respect of the Assessment Year [AY] 2013-14. The petitioner also prays that the Assessing Officer [AO] be restrained from taking any steps pursuant to the impugned notice.
2. The present petition was listed on 20.03.2023 and this Court passed the interim order that the proceedings pursuant to the impugned notice may continue, however, any adverse order if passed, shall the same would not be given effect to till further directions of the Court. There is no cavil that assessment order, which was passed subsequently would be subject to the outcome of the petitioner’s challenge in the present petition.
3. The petitioner has assailed the impugned order on several grounds including that the impugned notice was barred by limitation. This challenge is founded on two grounds. First, that the impugned order was issued beyond the prescribed period of limitation. The said order holding that it is a fit case for issuance of notice under Section 148 of the Act was issued pursuant to the notice dated 06.04.2021, which was directed to be deemed to be a notice under Section 148A(b) of the Act by virtue of the directions issued by the Supreme Court in Union of India & Ors. v. Ashish Agarwal: (2022) 444 ITR 1. The petitioner contends that even after taking into account the exclusion/extension of the time period, and the benefit of extension of time under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA), the impugned order and impugned notice was beyond the time as prescribed.
4. The second ground urged on behalf of the petitioner is that the income alleged to have escaped assessment neither exceeded ₹50.00 Lacs nor was likely to exceed ₹50.00 Lacs. The time period for issuance of the notice under Section 149(1)(a) of the Act was three years from the end of the relevant assessment year. Thus, the initial notice dated 06.04.2021 was also beyond the prescribed period of three years.
5. The original notice dated 06.04.2021 issued under Section 148 [which was deemed to be a notice under Section 148A(b) of the Act] did not contain any reason or material which is suggestive of income escape assessment. In terms of the decision of the Supreme Court in Union of India & Ors. v. Ashish Agarwal (supra), the AO had thirty days’ time to provide the relevant material, which is required to be accompanied a notice under Section 148A(b) of the Act. In compliance of the said decision, the AO issued the supplementary notice dated 21.05.2022. The said notice alleged that the AO had information to the effect that Long Term Capital Gain [LTCG] was booked by the beneficiary in lieu of the commission in respect of the purchase and sale of penny stocks – 1,00,000 shares of M/s Gemstone Investment Limited [Gemstone] and M/s Priti Mercantile Private Limited [PMPL].
6. The information as available with the AO as set out in the supplementary notice dated 21.05.2022 reproduced below: –
“3. In this regard, in compliance with the subject order of the Hon’ble Supreme Court, you are hereby provided with information and material relied upon by this office for issue of the show cause notice. The details of which is provided as under: –
“As per the information received, an enquiry was initiated in the case of M/s PMC Fincorp Ltd. During the investigation it was found that it is listed in BSE and has facilitated bogus LTCG to the tune of Rs. 1328 Crores. The Scrip price was rigged and managed to provide accommodation entry of LTCG to various beneficiaries in lieu of Commission. During the year under consideration, you have booked fictitious profits of Rs.15,15,000/- from trade in Gemstone Investment Limited and Rs.37,09,250/- from trading in PMC Fincorp Ltd. As per the e-filing records, the ITR for A.Y. 2013-14 has been filed declaring the income of Rs.33,60,950/-under the head of salary, Income from house property, PGBP and income from other sources (including agriculture income of Rs.2,55,000/-). Therefore, the fictitious profit in equity/derivative trading amounting to Rs.52,24,250/- remains unexplained.”
7. The petitioner responded to the said notice disputing the aforesaid contention. Further, the petitioner amongst other material also forwarded the following: –
a) Purchase contract note for shares of Gemstone;
b) Finance ledger;
c) Sale contract note for sale of Gemstone;
d) Financial letter indicating sale of the subject shares;
e) Income tax return of the petitioner; and
f) Purchase and sale contract notes regarding shares of PMPL.
8. However, the said reply was not accepted and the AO passed the impugned order holding that it was a fit case for issuance of notice under Section 148 of the Act.
9. The material provided by the petitioner indicates that the petitioner paid an aggregate amount of ₹9,08,887/- through banking channel as purchase consideration for the shares of two entities – Gemstone and PMPL. The petitioner contends that the purchase consideration, which is reflected in the income tax return is required to be reduced from the gross sale consideration of ₹52,24,250/-. However, this contention was rejected by the AO in the following words: –
“7. The submission of the assessee has been considered carefully and found not tenable since aim behind opting penny scrip cases is to introduce unaccounted cash into books of accounts without paying the due taxes. In penny stock cases beneficiary provisions of the I.T.Act, 1961 have been misused by the syndicates to arrange accommodation entry of bogus LTCG/LTCG and bogus short term capital loss/bogus business loss. As per the report of investigation wing in the penny scrip opted by the assessee – there was no real business, no change in the fundamentals of the company to explain the share rise and consequent fall in the share price, no block of asset and never performed well financially. The assessee is not denying the information. The transactions has to seen by the department as a whole. Apart from this the department given information to assessee as per Apex Court decision by treating the case falling under category exceeding 50 lacs.
8. The payment through banks(purchase/sale), transaction through stock exchange and other features are only apparent features and real feature are the manipulated and abnormal price of off-loan and sudden dip thereafter. The transaction would fall within the realm of suspicious and dubious transaction. When transactions are through cheque it looks like real transaction but the authority is entitled to look behind the transactions and ascertain the motive behind the transaction. The short term capital gain as bogus since derived from rigging of the scrip prices and invariably accommodation entry in collusion with concerned entry operator. The payment through bank for purchase of penny scrip also required verification of source which requires deep scrutiny in this case.”
10. We consider it apposite to set out the relevant extract of the computation of the income, which was filed with the income tax returns. The same is set out below: –
“Statement of Long Term Capital Gain [Transaction Act, Exempt under Section 10(38)]
| Name of Company | Date of Sale | Sales Price | Tr Exp. | Net Sale Price | Purchase date | Purchase cost | Capital Gain |
| Gemstone Investment (100000) | 30.01.2013 | 1510000 | 0 | 1510000 | 29.07.2011 | 908887 | 601113 |
| Priti Mercantile Pvt Ltd (25000) | 07.03.2013 | 3696186 | 0 | 3696186 | 25.10.2011 | 0 | 3696186 |
| TOTAL | 5206186 | 5206186 | 908887 | 4297299 | |||
11. It is apparent from the above that the petitioner had computed the exempt income – LTCG on the sale of shares in the previous year relevant to AY 2013-14 as ₹42,97,299/-. The petitioner had not claimed exemption regarding any other income. The information provided by the AO related to taxing the income claimed as exempt and not that any payment made by the petitioner in the prior year (previous year relevant to AY 2012-13) was required to be taxed as income escaping assessment.
12. It is the Revenue’s case that the said transaction of purchase and sale of shares of Gemstone and PMPL is a sham transaction for the purpose of booking LTCG, which was exempted under Section 10(38) of the Act. The stand of the Revenue also draws support from the report by the investigation conducted by the Stock Exchange Board of India [SEBI] in the trading of shares of Gemstone and PMPL.
13. It is not apposite for this Court to examine the merits of the allegations of purchase and sale as bogus transaction and therefore, income which has escaped the assessment pursuant to the said transaction is required to be assessed and the proceedings for assessment of the said information is required to be initiated.
14. The only question, which needs to be considered is 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 ₹50.00 Lacs.
15. According to the petitioner, the only net income, which is claimed as exempted would be considered as income that has escaped assessment on the basis of transaction of sale and purchase of stock of Gemstone and PMPL as disclosed by the petitioner. However, according to the Revenue, it is not only the income which was claimed as exempt under Section 10(38) of the Act as also the purchase consideration of the said shares, which is likely to be included in the income that has escaped assessment.
16. Mr Panda, learned counsel for the Revenue referred to the counter affidavit filed on behalf of the Revenue contended that consideration paid by the petitioner through banking channel would have received back by the petitioner in cash by way of separate transaction. According to the AO, this assumption would flow from the finding that the transaction of sale and purchase of sales in Gemstone and PMPL were bogus transaction to book LTCG.
17. In our view, the contentions advanced by the Revenue are ex facie We say so for the following reasons. There is no dispute that the payments were made through banking channel, which were reflected as purchase consideration, aggregating ₹9,08,887/-. Mr Panda submits that the particulars of only ₹9,00,000/- has been reflected in the bank statement furnished by the petitioner. However, there is no dispute that the purchase consideration was reflected as paid in the prior period. We note that it is the AO’s assumption that the money had been paid through banking channel has been received back in cash. Therefore, there appears to be no cavil that the consideration of shares of Gemstone and PMPL was paid by the petitioner. Second that these payments had been made and reflected during the Financial Year [FY] 2011-12 relating to AY 2012-13.
18. Even if it is accepted – which we do not – that no purchase consideration in fact had been paid and the money was received back in cash. There is no material to indicate that said transaction was conducted in the FY 2012-13 [relating to AY 2013-14].
19. It is also necessary to bear in mind that any purchase consideration reflected by the petitioner in the books of accounts would necessarily be from the disclosed sources. Thus, the only income that could possibly escape assessment in transaction of sale and purchase of shares to book exempt income would be the difference between the purchase consideration and the sale consideration.
20. 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.
21. Thus, if the information as available with the AO was verified to be correct, the income which the petitioner had claimed as exempt under Section 10(38) of the Act would be the income that was chargeable to tax under the Act and had escaped assessment.
22. Concededly, this amount of ₹42,97,299/- is below the threshold limit of ₹50.00 Lacs for attracting the provision of Section 149(1)(b) of the Act.
23. In view of the above, we find merit in the contentions of the petitioner that 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.
24. The petition is, accordingly, allowed. The impugned order and impugned notice are set aside. Consequently, any order passed pursuant to the impugned notice or impugned order is also set aside as well.
25. The pending application is also disposed of.
