Uma Chandrashekhar Iyer Vs ITO (ITAT Mumbai)
Summary: The Mumbai Bench of the Income Tax Appellate Tribunal, comprising Shri B.R. Baskaran, Accountant Member, and Shri Anikesh Banerjee, Judicial Member, considered the appeal filed by Uma Chandrashekhar Iyer against the order dated 08.01.2024 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, for Assessment Year 2012-13. The dispute arose from alleged penny stock transactions involving shares of Exelon Infrastructure Limited. Based on information received from the Investigation Wing concerning alleged bogus capital gains generated through certain penny stocks, the Assessing Officer reopened the assessment under Section 147 of the Income Tax Act, 1961. Since the assessee did not cooperate during the assessment proceedings, the Assessing Officer completed the assessment under Section 144 and made three additions: ₹55,96,619 representing share sale proceeds, ₹1,11,932 towards estimated commission expenditure, and ₹22,46,527 relating to profits from transactions in other shares. The CIT(A) confirmed all three additions, prompting the assessee to approach the Tribunal.
Regarding the disputed transactions in Exelon Infrastructure Limited, the assessee submitted that she had purchased 1,00,000 shares through the recognised stock exchange in three lots: 50,000 shares on 22.08.2011, 30,000 shares on 23.08.2011 and 20,000 shares on 24.08.2011. All shares were subsequently sold on 26.08.2011, resulting in a short-term capital loss of ₹3,01,346. The assessee argued that the transactions were undertaken in the normal course of investment activity and that the purchase and sale occurred within four days. She further relied upon contract notes and banking records to substantiate the transactions. According to the assessee, there was no evidence connecting her with any group engaged in manipulating the prices of penny stock companies. Consequently, the Assessing Officer was not justified in treating the sale consideration as unexplained income or estimating commission expenditure for generating bogus capital gains.
The Tribunal examined the transaction records and observed that the purchases and sales were completed through the stock exchange platform within four days. It also noted that the assessee was a regular investor who traded in shares of other companies and had actually incurred a loss on the disputed transactions. All purchases and sales were supported by proper contract notes and routed through bank accounts. Significantly, the Assessing Officer had not identified any defect in the transactions or established that the assessee participated in a share-price manipulation arrangement. The Tribunal found that the Assessing Officer had relied upon the Investigation Wing’s report without independently examining the assessee’s transactions. Applying the Bombay High Court’s decision in PCIT Vs Indravadan Jain, HUF, Income Tax Appeal No. 454 of 2018, the Tribunal held that the CIT(A) was not justified in sustaining the addition of ₹55,96,619. On the same reasoning, the estimated commission addition of ₹1,11,932 was also deleted.
The remaining dispute concerned the addition of ₹22,46,527 relating to profits allegedly earned from transactions in shares of other companies, based on information appearing in the Income Tax Department’s ITS data. The assessee contended that she had actually incurred losses on those transactions and had not been supplied the underlying information collected by the Assessing Officer. The Tribunal observed that the assessee had failed to appear during the assessment proceedings and therefore could not entirely blame the Assessing Officer for not furnishing the details earlier. Nevertheless, in the interest of natural justice, the Tribunal restored this issue to the Assessing Officer for fresh examination. The Assessing Officer was directed to provide the relevant purchase and sale details obtained from ITS data, consider the assessee’s explanation and decide the issue in accordance with law after granting an opportunity of hearing. The assessee was also directed to cooperate fully. The legal challenge to reopening was left open because it was not argued. Accordingly, the Tribunal treated the assessee’s appeal as allowed.
Cases Discussed
1. PCIT Vs Indravadan Jain, HUF (Bombay High Court); Income Tax Appeal No. 454 of 2018. The Tribunal followed this jurisdictional High Court decision while deleting the addition arising from alleged penny stock transactions. It considered the absence of evidence connecting the assessee with price manipulation, together with the stock-exchange transactions, contract notes and banking records.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The assessee has filed this appeal challenging the order dt. 08-01-2024 passed by the Ld. Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi [„Ld.CIT(A)‟] and it relates to AY. 2012-13. In this appeal, grounds urged by the assessee are related to the following issues:
a. Validity of reopening of assessment;
b. Additionof sale value of shares of Rs.55,96,619/-;
c. Addition of estimated commission expenses of Rs.1,11,932/-;
d. Addition of income from sale of shares of Rs. 22,46,527/-;
2. The AO received information that the assessee has purchased and sold shares of M/s.Exelon Infrastructure Limited, which was identified as one of the penny stocks. The report of the Investigation Wing was that some operators have used many penny stocks to generate bogus capital gains. Since the above said company was identified as one of the penny stocks, the AO re-opened the assessmentu/s. 147 of the Income Tax Act, 1961 („the Act‟). Since the assessee did not co-operate with the AO, he completed the assessment to the best of his judgment u/s. 144 of the Act, wherein the AO made the following additions:
a. Sale value of shares of M/s. Exelon Infrastructure Limited, treating the same as „bogus‟ ;
b. Estimated commission expenses for generating bogus capital gains;
c. The profit earned on sale of other shares as per ITS data.
3. The Ld.CIT(A) confirmed all the three additions and hence, the assessee filed this appeal before us.
4. As far as the legal issue of validity of reopening of assessment, the Ld.AR did not address the same. Accordingly, we decline to adjudicate on the legal issue and leave it open.
5. The first issue relates to the addition of sale value of shares of M/s. Exelon Infrastructure Limited. The Ld.AR submitted that these shares were purchased from the stock exchange platform in the normal course of investment. The Ld.AR submitted that that the assessee purchased one lac shares in different lots, viz., 50,000 shares on 22-08-2011, 30,000 shares on 23-08-2011 and 20,000 shares 24-08-2011. Subsequently, the entire one lakh shares were sold on 26-08-2011. In this process, the assessee has actually incurred Short Term Capital Loss of Rs.3,01,346/-. Further, the purchases and sales have taken place within a week‟s time. Accordingly, he submitted thatthe assessee has purchased and sold the shares of above company in the normal course of her investment activity. Accordingly, he contended that there is no reason to suspect that the assessee was part of the group, which was indulging in manipulating the prices of the alleged bogus penny stock companies. Accordingly, he submitted that the tax authorities are not justified in assessing the sale value of shares of M/s. Exelon Infrastructure Limited as un-explained income in the hands of the assessee and further, there is no reason to estimate commission expenses in this regard as the assessee has not incurred any such expenditure.
5.1. On the contrary, the Ld.DR, supported the order passed by the Ld.CIT(A).
5.2. We heard the parties and perused the record.With regard to the issue of addition of sale proceeds of alleged penny stock, we notice that the assessee has purchased the shares of M/s. Exelon Infrastructure Limited on 22-08-2011 and sold the shares on 26-08-2011; meaning thereby the entire transactions of purchase and sale has taken place within four days. Further, we notice that the assessee is a regular investor and has purchased and sold shares of other companies also. Next, the assessee has actually incurred loss in trading in the shares of M/s. Exelon Infrastructure Limited. Another important point to be noted is that the purchase and sale of those shares have taken place in the stock exchange platform. All the purchases and sales were supported by proper contract notes and have also been routed through bank accounts. The AO did not find fault of any of the transactions of the assessee to prove the factum of purchase and sale of shares.
5.3. We notice that the AO has simply relied upon the report given by the Investigation Wing, without objectively analyzing the transactions carried on by the assessee. He has not shown that the assessee was part of the group which was manipulating the prices of the shares of above said company. Under these set of facts, we are of the view that the decision rendered by the Hon‟ble jurisdictional Bombay High Court in the case of PCIT vs. Indravadan Jain, HUF in ITA No. 454/2018 (Bom) would apply to the facts of the present case. Accordingly we hold that the Ld.CIT(A) was not justified in confirming the addition of Rs.55,96,619/- relating to sale value of above said shares. On the very same reasoning, the Ld.CIT(A) was not justified in confirming the addition relating to the estimated commission expenses. Accordingly, we set aside the order passed by the Ld.CIT(A) on the above said two issues and direct the AO to delete both the additions.
6. The last issue relates to addition of Rs. 22,46,527/- relating to profits earned on sale of shares of other companies. The Ld.ARsubmitted thatthe assessee has actually incurred loss from sale of other shares also. He submitted that the AO has not furnished the details collected by him from ITS data to the assessee and hence the assessee could not give proper reply to the AO. However, we notice that the assessee did not appear before the AO and hence, there was no occasion for the AO to supply the details collected by him so that the assessee should explain the same. Hence, the assessee should not find fault with the AO. However, in the interest of natural justice, we are of the view that the assessee may be provided with one more opportunity to present her case properly before the AO. Accordingly, we set aside the order passed by the Ld.CIT(A) on this issue and restore the same to the file of the AO for examining the same afresh. The AO shall furnish the details of purchase and sale of shares collected by him from ITS data to the assessee, who shall submit her explanation to the same. We also direct the assessee to fully co-operate with the AO for expeditious completion of the assessment. After hearing the assessee, the AO may take appropriate decision in accordance with law.
7. In the result, the appeal filed by the assessee is treated as allowed.
Order pronounced in the open court on 24-10-2024
