2024 (9) TMI 83 - AT - Income Tax

Revision u/s 263 - treatment of LTCL on sale of shares of ECL and LTCG on sale of shares of Saya - HELD THAT - On perusal of return of income filed by the assessee such Long Term Capital Loss on sale of shares of ECL has not been declared by the assessee. We are of the considered view that ostensibly, ECL is a penny stock company (which was also delisted from stock exchange) and the shares of such company had also been delisted on the stock exchange subsequently. Further, another notable aspect which we have observed is that the assessee had also sold shares of Saya on which LTCG had been gained by the assessee. However, in the return of income, such LTCG has also not been declared by the assessee. Therefore, evidently, from the facts placed on record we observe that the assessee apparently has dealt in shares relating to penny stock companies and further, the assessee has filed the correct return of income in which the assessee has neither declared Long Term Capital Losses on sale of shares of ECL and neither has assessee declared LTCG on sale of shares of Saya. Therefore, clearly the assessee has not filed it s return of income correctly, wherein both Long Term Capital Losses as well as Long Term Capital Gains on sale of shares with respect to ECL and Saya have not been declared by the assessee in it s return of income. It is not clear as to why such sale of shares these companies for substantial sums of money had not been reflected by the assessee in it s return of income. There seems to have no justifiable reason as to why the assessee had not declared details regarding profit / loss on sale of shares of Saya and ECL respectively in the returns of income filed by the assessee for the impugned assessment year under consideration before us. From the facts placed on record it is not coming out clearly whether the assessee had effectively set off the Long Term Capital Losses on sale of shares of ECL against Long Term Capital Gains on sale of shares of Saya and therefore, did not declare the details of sale of shares of these two alleged penny stocks in it s return of income. Therefore, on perusal of the case records, evidently, the assessee has not filed the correct return of income and has only declared part details regarding sale of shares in it s return of income and hence the return filed by the assessee for the impugned year under consideration lacks for certain apparent inaccuracies. AO, in our considered view, has failed to inquire into this essential aspects during the course of assessment proceedings, which could be for the simple reason that both the details regarding sale of shares of Saya (on which the assessee had earned LTCG) and details of sale of ECL (on which the assessee had earned LTCL) had not been declared by the assessee in it s return of income and therefore, the Assessing Officer failed to analyze whether such LTCG on sale of shares of Saya had been set off against LTCG on sale of shares of ECL. We also concur with the argument of the assessee that Ld. PCIT has erred in giving a specific direction to the Ld. AO to assess the income u/s 69A r.w.s. 115BBE of the Act, since then the A.O. would be bound to assess income in a manner, as directed by the Ld. PCIT, without independent application of mind. Accordingly, we are of the considered view that in the assessment order the AO has failed to enquire into these important aspects regarding treatment of LTCL on sale of shares of ECL and LTCG on sale of shares of Saya which were both not reflecting in the return of income, and therefore, the assessment order passed by the AO is erroneous in so far as prejudicial to the interest of Revenue. AO is, therefore, directed to carry out a de-novo assessment in accordance with law, after giving due opportunity of hearing to the assessee. Decided against assessee.

Issues:
1. Jurisdiction under Section 263 without showing prejudice to revenue.
2. Direction to disallow capital loss and invoke Section 69A.
3. Source of unexplained money and invocation of Section 69A.
4. Investment in shares in a specific financial year.
5. Principles of natural justice in passing orders.
6. Correctness of initiating Section 263 proceedings.
7. Verification by Assessing Officer during 147 proceedings.
8. Alleged lack of inquiry by Assessing Officer.
9. Correctness of PCIT's directions to Assessing Officer.
10. Correctness of the assessment order and direction for de-novo assessment.

Analysis:

1. The appeal was filed against the order passed by the Ld. Principal Commissioner of Income Tax-3 under Section 263 of the Act for Assessment Year 2016-17. The grounds of appeal included challenging the jurisdiction under Section 263 without showing how the lack of inquiry by the Assessing Officer prejudiced the revenue.

2. The PCIT observed that the assessee had traded in shares of a company involved in generating bogus LTCG and STCL. The PCIT found the assessment order erroneous and prejudicial to revenue, directing disallowance of capital loss and invoking Section 69A. The PCIT concluded that the assessee failed to explain the genuineness of transactions, leading to unexplained amounts.

3. The appeal argued that the initiation of Section 263 proceedings was based on incorrect facts, as there was no set-off of LTCL against LTCG as alleged by the PCIT. The Counsel highlighted discrepancies in the PCIT's allegations and the actual return of income filed by the assessee.

4. The Counsel further contended that the Assessing Officer had conducted necessary verifications during the 147 proceedings, and the assessee had provided explanations regarding the LTCL on the sale of shares. The Counsel argued that the Assessing Officer had made due inquiries and taken a legally correct view.

5. The PCIT's observations regarding the assessee's trading activities in penny stocks were highlighted by the DR, supporting the PCIT's order. The DR argued that the PCIT's decision was justified due to the assessee's engagement in trading penny stocks.

6. The Tribunal noted discrepancies in the PCIT's presumption of facts and the actual return of income filed by the assessee. The Tribunal observed that the assessee had not correctly declared details of transactions involving penny stocks in the return of income, leading to inaccuracies.

7. The Tribunal found that the Assessing Officer had failed to inquire into crucial aspects of the case, such as the treatment of LTCL and LTCG not reflected in the return of income. The Tribunal agreed with the Counsel's argument that the PCIT erred in directing the AO to assess income under Section 69A without independent application of mind.

8. Consequently, the Tribunal concluded that the assessment order was erroneous and prejudicial to the interest of Revenue. The Assessing Officer was directed to conduct a de-novo assessment after providing the assessee with a hearing opportunity.

9. The appeal was dismissed, and the Assessing Officer was instructed to conduct a fresh inquiry based on the observations made by the Tribunal.

This detailed analysis covers the various issues raised in the judgment, providing a comprehensive overview of the arguments presented and the Tribunal's decision.

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