2022 (11) TMI 724 - AT - Income Tax

Revision u/s 263 by CIT - Bogus LTCG - Penny stock purchases - HELD THAT - In the present case, in fact the margin of gain varies from shares bought at the rate of Rs.50/- being sold at Rs.100/- almost hundred percent margin throughout the year with numerous transactions being taking place; that even in the last sale of VIL shares at very high rate of Rs.125/- per share is demonstrated to be genuine by the fact that the assessee subsequently purchased these shares at this very high rate and held on to them. If the assessee was indulging in taking accommodation entry, he would not have subsequently purchased these shares at a very high rate, because, that would have defeated the purpose of introducing his own unaccounted money into his own books of accounts. Based on the evidence that were furnished before the AO, we find that the AO had taken a plausible view that the impugned transaction was not a penny stock trading, but in fact was a genuine trading transactions of VIL shares and accordingly allowed the claim of short term capital gain returned by the assessee. CIT has not controverted any of the facts which the assessee has demonstrated before the AO in support of its claim of genuineness of the transactions. In fact, he does not even point out what exact information was there with the AO which he should have used against the assessee. He merely makes general reference to the investigation report of the Department stating to have contained information regarding these shares. With the assessee having sufficiently demonstrated genuineness of the transaction of trading in shares of VIL and also that it was not a mere penny stock traded in, and the ld.Pr.CIT having not pointed out insufficiency in the explanation and the evidence filed by the assessee, and also not specificying what information was there with the AO against the assessee, there could be no finding of error at all in the order of the AO accepting the assessee s claim of the transactions being genuine. The order passed by the Pr.CIT therefore, we hold, is without any basis and is therefore set aside. The grounds of appeal of the assessee are allowed.

Issues Involved:
1. Legality of the order passed under Section 263 of the Income Tax Act.
2. Whether the assessment made by the AO was erroneous and prejudicial to the interest of the Revenue.
3. Genuineness of the transaction of shares of VAS Infrastructure Ltd. and its classification as penny stock.

Issue-wise Detailed Analysis:

1. Legality of the order passed under Section 263 of the Income Tax Act:

The assessee challenged the order passed by the Principal Commissioner of Income-Tax (Pr.CIT) under Section 263 of the Income Tax Act, 1961, arguing that it was wholly illegal, unlawful, and against the principles of natural justice. The Pr.CIT had revised the assessment order passed under Section 143(3) read with Section 147, claiming that the AO failed to correctly observe facts on record or refer to the DDIT report concerning the transaction of shares of VAS Infrastructure Ltd. The assessee contended that the assessment made by the AO was neither erroneous nor prejudicial to the interest of the Revenue, thus making the Pr.CIT's action illegal and unlawful.

2. Whether the assessment made by the AO was erroneous and prejudicial to the interest of the Revenue:

The Pr.CIT found the assessment order erroneous and prejudicial to the interest of the Revenue because the AO had not made proper inquiries and investigations regarding the alleged penny stock scrip traded by the assessee, despite being in possession of information from the Investigation Wing about the same. The Pr.CIT argued that the entire amount received from trading the scrip of VAS Infrastructure Ltd. (VIL) should have been treated as income of the assessee, rather than the short-term capital gain returned by the assessee, which was accepted by the AO.

3. Genuineness of the transaction of shares of VAS Infrastructure Ltd. and its classification as penny stock:

The assessee argued that the reopening of the assessment was based on the information that the shares of VIL were penny stock. During the reassessment proceedings, the assessee filed a revised return declaring capital gain on the sale of 69,191 shares of VIL, which the AO accepted. The assessee provided detailed responses to specific queries raised by the AO during the assessment proceedings, including details of bank accounts, copies of bills related to short-term and long-term capital gains, ledger accounts, and information about the purchase and sale of VIL shares. The assessee demonstrated that the transactions were genuine, conducted through recognized stock exchanges, and payments were made via cheques.

The assessee further substantiated the transactions with evidence such as the ledger account of the broker, investor reports from BSE, corresponding invoices issued by BSE, and bank statements. The assessee showed that the trading in VIL shares was continuous throughout the year, with multiple transactions and varying purchase and sale rates. The assessee also pointed out that the short-term capital gain was returned for taxation, and taxes were paid thereon.

The Tribunal found that the AO had taken a plausible view that the transactions were genuine and not penny stock trading. The Pr.CIT did not provide specific information or evidence to counter the assessee's claims or demonstrate the insufficiency of the evidence provided by the assessee. Thus, the Tribunal held that the order passed by the Pr.CIT was without basis and set it aside, allowing the appeal of the assessee.

Conclusion:

The Tribunal concluded that the order passed by the Pr.CIT under Section 263 was without any basis, as the AO had made sufficient inquiries and accepted the assessee's claim of genuine transactions. The appeal of the assessee was allowed.

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