Loss of penny stock: Section 263 revision not valid if twin conditions not fulfilled

PCIT Vs Kaushalya Dealers Pvt Ltd (Calcutta High Court)

In the case of PCIT Vs Kaushalya Dealers Pvt Ltd, the Calcutta High Court delivered a significant judgment regarding the loss of penny stock and the validity of Section 263 revision. This analysis delves into the Court’s decision, focusing on the essential aspects of the judgment, and the implications for tax law.

Background

The appeal was filed by the revenue under Section 260A of the Income Tax Act, 1961, against the order dated 10th December 2021 by the Income Tax Appellate Tribunal, “B” Bench, Kolkata, for the assessment year 2015-16. The core issue revolved around the validity of the revisionary powers exercised by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Act.

Substantial Question of Law

The primary question addressed was:

• Whether the Tribunal was justified in holding that the revisionary powers under Section 263 were invalidly exercised by the PCIT, considering the provisions of Explanation-2 to Section 263 of the Act.

Court’s Observations

• The Court noted that the PCIT’s exercise of power under Section 263 was based on the premise that the Assessing Officer (AO) did not conduct a proper verification of the loss incurred from penny stock transactions.
• The Court examined the detailed records and found that the AO had issued multiple notices under Sections 143(2) and 142(1) and received comprehensive responses from the assessee, including detailed documentation and explanations supporting the transactions.
• The AO had engaged in thorough verification and discussion with the assessee before completing the assessment, indicating that it was not a case of ‘no enquiry’ or improper verification.

The Court concluded that the twin conditions necessary for exercising jurisdiction under Section 263 were not fulfilled in this case. The AO had conducted a detailed enquiry, and thus, the Tribunal was correct in its decision.

The appeal filed by the revenue was dismissed, and the substantial question of law was answered against the revenue. Consequently, the application for stay was also closed.

FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT

This appeal by the revenue filed under Section 260A of the Income Tax, 1961 (the Act, for brevity) is directed against the order dated 10^th December, 2021 passed by the Income Tax Appellate Tribunal, “B” Bench, Kolkata in ITA No. 419/Kol/2020 for the assessment year 2015-16.

The revenue has raised the following substantial question of law for consideration :-

“Whether in the facts and circumstances of the case, the Learned Tribunal was justified in law to hold that the revisionary powers under Section 263 of the said Act had been invalidly exercised by the Pr. Commissioner of Income Tax, ignoring the provisions of the Explanation-2 to 263 of the said Act ?”

We have heard Ms. Smita Das De, learned standing counsel appearing for the appellant/revenue and Mr. S.M. Surana, learned senior counsel assisted by Mr. Bhaskar Sengupta, learned advocate for the respondent/assessee.

The short issue which falls for consideration is whether the assumption of jurisdiction by the Principal Commissioner of Income Tax under Section 263 of the Act was justified. The learned Tribunal has pointed out that on four grounds the PCIT exercised power under Section 263 of the Act of which three issues have become academic and the only surviving issue was in respect of loss of penny stock.

On going through the order passed by the PCIT under Section 263 of the Act dated 23^rd March, 2020, we find that the allegation is that the Assessing Officer has not done proper verification. To examine the correctness of the same, we have perused the paper book filed by the respondent/assessee from which we find the Assessing Officer at the first instance issued notice under Section 143(2) dated 17^th March, 2016. In the said notice the assessee was directed to furnish documents and details on 10 issues of which one is pertaining to sale of shares during the financial year 2014-15. Thereafter, notice under Section 142(1) dated 9^th March, 2017 was issued. In response to this notice, the assessee had submitted a reply dated 26t^h April, 2017 along with the details and documents in support of the transaction in shares and such other details which were called for by the Assessing Officer. Thereafter, another notice under Section 142(1) dated 2ⁿd August, 2017 was issued calling for further information and particulars. This was furnished by the assessee by reply dated 10t^h August, 2017. Thereafter, the assessee had submitted an explanation on 14^th August, 2017 in respect of allowability of the loss and also explained various queries raised by the Assessing Officer on the said issue. The copy of the explanation has been filed in the paper book and we find it is an elaborate explanation not only on facts but also setting out various decisions of the High Courts and that of the Tribunal contending that the loss as reported by the assessee was permissible. After such elaborate discussion of the case with the assessee, the Assessing Officer has completed the assessment. Thus, the learned Tribunal rightly held that it is not a case of ‘no enquiry’ or no proper verification but a detailed enquiry had been done by the Assessing Officer. The learned Tribunal has noted the factual position as put forth by the assessee before it in paragraph 6 of the order.

Thus, we are of the view that the twin conditions which are required to be fulfilled before exercising jurisdiction under Section 263 of the Act have not been fulfilled in the facts and circumstances of the case on hand.

Thus, we are of the view that no interference is called for with the order passed by the learned Tribunal.

In the result, the appeal filed by the revenue is dismissed and the substantial question of law is answered against the revenue.

Consequently, the application for stay being IA No.GA/1/2022 stands closed.