2024 (7) TMI 833 - AT - Income Tax

Penalty u/s 271(1)(c) - exemption u/s 10(38) withdrawn - Bogus LTCG on Penny stock purchases - claim for exemption u/s 10(38) of the Long Term Capital Gain (LTCG) on sale of shares withdrawn and offered the corresponding amount as his income from Other sources in its return of income filed in response to notice u/s. 148 - HELD THAT - AO had failed to dislodge the bonafide of the assessee's explanation based on which it had withdrawn its claim of exemption u/s 10(38) of LTCG on sale of shares of CCL International Ltd. , and had offered the corresponding amount as his income from Other sources in its return of income filed in response to notice u/s. 148 of the Act, therefore, we are of the view that there was no justification on his part to have imposed penalty u/s. 271(1)(c) of the Act. Although, Explanation 3 to Section 271(1)(c) of the Act takes within its sweep the income disclosed by the assessee in its return of income filed u/s. 148 of the Act as deemed concealed income of the assessee, but the same is only concerning specific circumstances therein provided, i.e. where the assessee had failed to file his return of income within the period specified in sub-section (1) of Section 153 of the Act and until expiry of period aforesaid, no notice was issued to him under Clause (i) to sub-section (1) of Section 142 or 148, which, however, is not the case of the assessee before us. No such facts that reveal the furnishing of inaccurate particulars of income or concealment of income by the assessee, but this is a case, where a claim for exemption of LTCG u/s. 10(38) of the Act in the original return of income was withdrawn initially vide letter filed with the department to buy peace of mind and to avoid protracted litigation, which, thereafter, was followed by offering of the said amount as income in the return of income filed in response to notice u/s. 148 of the Act We, thus, are of the view that as the penalty proceedings u/s. 271(1)(c) of the Act as held in the case of M/s Hindustan Steel Ltd. 1969 (8) TMI 31 - SUPREME COURT are quasi-criminal proceedings, therefore, the assessee in absence of any material which would conclusively prove that it had raised a false claim of LTCG on purchase/sale of shares of CCL International Ltd. a penny stock, which was claimed as exempt u/s. 10(38) of the Act, thus, could not have been saddled with penalty u/s. 271(1)(c) of the Act - Decided in favour of assessee.

Issues Involved:
1. Imposition of penalty under Section 271(1)(c) of the Income-tax Act, 1961.
2. Legitimacy of the assessee's claim for exemption under Section 10(38) of the Income-tax Act, 1961.
3. Genuineness of the Long Term Capital Gain (LTCG) transactions on the sale of shares of "CCL International Ltd."
4. Whether the assessee's withdrawal of the exemption claim was voluntary and bona fide.
5. Evaluation of the documentary evidence provided by the assessee.
6. The role of the surrounding circumstances and modus operandi in determining the genuineness of the transactions.
7. The applicability of judicial precedents and the principles established therein.

Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c):
The Assessing Officer (A.O.) imposed a penalty of Rs. 93,88,640/- on the assessee for deliberate concealment of income under Section 271(1)(c) of the Income-tax Act, 1961. The penalty was based on the conclusion that the assessee had concealed particulars of income by claiming exemption of LTCG on the sale of shares of "CCL International Ltd." The Commissioner of Income-Tax (Appeals) [CIT(A)] upheld the penalty, stating that the assessee's claim was not bona fide and that the assessee had voluntarily offered the income only after being cornered by the Department.

2. Legitimacy of the Assessee's Claim for Exemption:
The assessee initially claimed exemption under Section 10(38) for LTCG of Rs. 2,78,42,063/- on the sale of shares of "CCL International Ltd." in its original return of income filed on 26.07.2014. The claim was later withdrawn by the assessee through a letter dated 23.03.2020, stating that the withdrawal was to avoid protracted litigation and to buy peace of mind after the exemption claim was rejected in the case of a co-parcener.

3. Genuineness of the LTCG Transactions:
The A.O. questioned the genuineness of the LTCG transactions, labeling "CCL International Ltd." as a penny stock and alleging that the assessee had laundered unaccounted money through bogus LTCG transactions. The A.O. observed that the shares were purchased through off-market transactions and later sold at significantly higher prices, which was against human probabilities. The CIT(A) supported this view, emphasizing that the assessee's transactions were part of a pre-arranged scheme to convert black money into white money.

4. Voluntariness and Bona Fides of Withdrawal:
The assessee argued that the withdrawal of the exemption claim was voluntary and bona fide, prompted by the desire to avoid litigation and based on the rejection of a similar claim in a related case. The assessee had paid the due taxes before filing the letter of withdrawal. The Tribunal found that the A.O. failed to dislodge the bona fides of the assessee's explanation and that the withdrawal was made in good faith.

5. Evaluation of Documentary Evidence:
The assessee provided extensive documentary evidence to substantiate the genuineness of the transactions, including purchase invoices, demat account statements, bank statements, and contract notes. The Tribunal observed that the A.O. did not disprove the authenticity of these documents and relied on general observations and modus operandi to draw adverse inferences.

6. Surrounding Circumstances and Modus Operandi:
The A.O. referred to the modus operandi adopted for laundering money through penny stocks, citing the bell-shaped trading pattern, the financials of "CCL International Ltd.," and the offline purchase of shares. However, the Tribunal noted that the A.O. failed to conclusively establish the involvement of the assessee or its broker in price rigging or any fraudulent activities.

7. Applicability of Judicial Precedents:
The Tribunal considered various judicial precedents, including the Supreme Court's rulings in cases such as CIT v. Suresh Chandra Mittal and MAK Data (P) Ltd. v. CIT. The Tribunal distinguished the facts of the present case from these precedents, emphasizing that the assessee had provided a bona fide explanation and that the A.O. had not discharged the burden of proving concealment.

Conclusion:
The Tribunal concluded that the penalty under Section 271(1)(c) was not justified as the A.O. failed to disprove the authenticity of the documentary evidence provided by the assessee and did not establish that the assessee's explanation was not bona fide. The Tribunal set aside the order of the CIT(A) and quashed the penalty of Rs. 93,88,640/-. The appeal of the assessee was allowed.

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