Reopening Quashed: Long Term Capital Gains (LTCG) from ‘Penny Stock’ Accepted as Genuine where Assessee Incurred Losses in Same Scrip in Future Years

ORDER

Sanjay Garg, Judicial Member. – The present appeal has been preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘CIT(A)’] dated 12/ 02/ 2024 passed u/ s.250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for the Assessment Year (AY) 2017-2018. The assessee in this appeal has contested the action of the Ld. CIT(A) in confirming the addition of Rs.88,58,203/ – made by the Assessing Officer (AO) u/ s.69A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) treating the sale consideration received on sale of shares of Kushal Group as income of the assessee from explained sources.

2. The brief facts of the case are that the assessee is an individual and filed his return of income for the year under consideration declaring total income of Rs.40,690/-. The assessee had shown tax exempt income under the head of “Long Term Capital Gains” (LTCG) of Rs.80,75,140/-. The AO noted that as per the report of Investigation Wing, the scrip of Kushal Ltd. was found as a penny stock. Even the SEBI had also identified the scrip of Kushal Ltd., wherein synchronized share trading was being done by certain persons. Since it was also found that the assessee had also traded in the scrip of Kushal Ltd., therefore, the AO was of the view that the assessee had shown bogus LTCGs by trading in Kushal Ltd. scrip. He, accordingly, reopened the assessment of the assessee u/ s.147 of the Act r.w.s.148 of the Act and show-caused the assessee as to why the LTCGs/ sales proceeds from the sales of shares of “Kushal Ltd.” be not added to the income of the assessee. In reply, the assessee submitted that she was not engaged in any bogus share trading as alleged. It was submitted that she was a bonafide purchaser of the shares. She furnished the copy of the contract notes containing details of the sharebroker along with Dmat account, client summary report, ledger account in the books of the Broker and investor’s Profit & Loss report for relevant year(s) to the AO. She also furnished the source of the purchase amount by furnishing copy of the savings bank account. It was also submitted that she was the second holder of the shares as her husband “Prashant Patel” was the first holder. It was submitted that the shares were purchased and sold as per the following details:

2.1. It was submitted that the investment in shares of ‘Kushal Ltd.’ was just like any normal investment made for capital appreciation and that the assessee was not indulged in any type of manipulated transaction for earning bogus LTCGs, etc. The AO, however, noted that the assessee, during the year under consideration, had sold shares of Kushal Ltd. for a total sale consideration of Rs.88,58,203/- and claimed LTCGs amounting to Rs.81,24,203/ – on the sale of said scrip. The AO observed that the SEBI had found that certain persons were involved in synchronized share trading in the scrip of Kushal Ltd. and that five persons (as named in the Chart given in the assessment order) were found guilty and the SEBI had levied penalty of Rs.20 lakhs each to the said violators. The AO further observed that even, thereafter, the SEBI had passed one more order dated 31/05/2019 against other 14 persons, who were indulged in price rigging in the scrip price of Kushal Tradelink Ltd., imposing penalty of Rs.3,00,000/- on each person. The AO discussed the unprecedented hike and fall in the share price of the Kushal Group. He, thereafter discussed the financials of the Kushal scrip and observed that since the Kushal Ltd. scrip was identified as a penny stock, therefore, the LTCGs earned by the assessee were bogus. He added the entire sale consideration of Rs.88,58,203/-, on sale of shares of “Kushal Ltd.’ as income of the assessee from unaccounted sources. The Ld. CIT(A) confirmed the addition so made by the AO.

3. Being aggrieved from the order of the Ld. CIT(A), the assessee has come in appeal before us.

4. We have heard the rival contentions of the Ld. Representatives of the parties and gone through the material available on record. The Ld. AR of the assessee has submitted that the assessee was a bonafide regular investor and was not indulged in any activity of rigging of the share price of the Kushal Ltd. He, relying upon a Chart, has submitted that the assessee in the subsequent years had incurred losses in trading of shares of the Kushal Ltd., itself. He, in this respect, demonstrated that the assessee had purchased 5000 shares of Kushal Ltd. on 21/04/2017 for a purchase value of Rs.6,96,250/- and sold the same on 04/06/2019 for a sale value of Rs.1,01,350/- incurring a loss of Rs.5,94,900/-. Similarly, the assessee had purchased 15000 shares of Kushal Ltd. on 01/06/2017 for a purchase value of Rs.31,78,350/-, and sold the same on 04/06/2019 for a sale value of Rs.3,04,050/- thus incurring a loss of Rs.28,74,300/ – He, in this respect, has submitted that the AO had taken note of only the LTCGs earned by the assessee during the year under consideration from sale of shares of Kushal Ltd. and totally ignored that in subsequent years the assessee had incurred heavy losses also. The Ld. Counsel for the assessee has further submitted that the assessee had furnished all the requisite documents before the AO such as the copy of the bank statement of the husband of the assessee from which the amount of purchase of shares was transferred, copy of contract notes (containing details of the share-broker) along with Dmat Account, Client Summary Report, Ledger Account in the books of the Broker and Investor’s P&L report reflecting the transactions of sales and purchases in the shares of Kushal Ltd. He has submitted that even there was no allegation that the broker of the assessee was indulged in providing or arranging any type of accommodation entries in the shape of LTCGs. He has further submitted that there was nothing on the record that the assessee was indulged in any type of rigging of price of shares or had obtained any accommodation entry from any person involved in rigging of share price. The Ld. AR of the assessee has also submitted that the reopening of the assessment, in this case, was bad in law as the AO had reopened the assessment merely on the ground that the assessee had earned LTCGs on account of sale of shares of Kushal Group without pointing out any assessee specific information that the assessee was involved in any bogus transactions as alleged. Even, that the AO had not made any cross-verification regarding the information received from the Investigation Wing, that the assessee was beneficiary of trading in Kushal scrip. The Ld. AR relied upon the decision of Hon’ble Jurisdictional High Court of Gujarat in the case of Nimesh Maheshbhai Shah HUF v. ITO ITR 236 (Gujarat)/C/SCA 2036/2022 vide order dated 07/ 01/2025, wherein, the Hon’ble High Court, while adjudicating the issue of LTCGs relating to scrip of Kushal Ltd. only, has held that merely relying on the information made available in the portal that the assessee had traded in scrip of Kushal Ltd. was not an enough ground/reason for reopening the assessment u/ s.147 of the Act. The relevant part of the order of the Hon’ble High Court is reproduced as under:

“39. Having considered rival submissions made by learned advocates for the respective parties and on perusal of the material on record as well as documents placed by the petitioner, it appears that the details of shares purchased and sold as per Contract nose, copy of lodger of broker ASE Capital Markets Ltd and copy of bank statement of assessee for purchase of share and sale of shares were produced by the petitioner and the purchase and sale of share have order number, order time, trade number and trade time mentioned in the contract. The assesses purchased 60,000 shares of Kushal Lid. The assessee has sold 1,05,465/- shares for Rs. 1,09,98,307 leaving the balance of1,94,535 shares as closing investments as on 31.03.2016 which is disclosed in the balance sheet and part of demat statement. It, therefore, cannot be said that the petitioner has not disclosed fully and truly all material facts relevant for assessment.

40. It also appears from the reasons recorded that the no verification of the material on record is made by the respondent and there is no independent opinion that any income has escaped assessment due to any failure on the part of the assessee in not disclosing fully and truly all material facts necessary for assessment.

41. Moreover, from the reasons recorded it appears that the initiation of reopening proceedings are on the borrowed satisfaction as no independent opinion is formed and on bare perusal of the reasons recorded, it emerges that the Assessing Officer, considering the information received from the insight portal, has issued impugned notice forming reason to believe that the income has escaped the assessment on the presumption that the petitioner has been involved in creating the non-genuine profit which is already offered to tax in the return of income which is accepted in the regular course of assessment by passing the order under section 143(3) of the

42. It is also pertinent to note that there is no basis to form reasonable belief for escapement of income except the information made available on the insight portal. The respondent-Assessing Officer has not considered the material on record to come to the conclusion that there is failure on the part of the petitioner to disclose truly and fully all material facts to have reason to believe for escapement of income. Therefore, on the basis of the information received from another agency on insight portal or from the SEBI report, there cannot be any reassessment proceedings unless the respondent, after considering such undefined information/material received from other sources, consider the same with the material on record in the case of the petitioner assessee and thereafter, is required to form independent opinion that income has escaped assessment. Without forming such opinion solely and mechanically relying upon the information received from the other sources, the respondent-Assessing Officer could not have assumed the jurisdiction to reopen the assessment based on such information. This Court in case of Raajrama Stockholdings Pvt Ltd. v. Assistant Commissioner of Income Tax Circle 1(1)(1) (judgment dated 25.11.2024 rendered in Special Civil Application No 3676 of 2022) in similar circumstances has quashed and set aside the impugned notice issued under section 148 of the Act and consequential order disposing off the objections raised by the petitioner.

43. Considering the facts the case, we are of the opinion that the respondentAssessing Officer could not have assumed the jurisdiction merely and solely relying upon the information made available in the insight portal without forming any independent opinion on the basis of the material on record vis-a-vis the petitioner is concerned.

44. The petitions therefore, succeed and are accordingly allowed Impugned notice dated 31.03.2021 issued under section 148 of the Act and the consequential order dated 13.12.2021 dismissing the objections raised by the petitioner are hereby quashed and set aside. Rule is made absolute to the aforesaid extent. No order as to costs.”

4.1. The Ld. AR of the assessee has also relied upon another decision of the Hon’ble High Court of Gujarat in the case of Deepakbhai Balkrishna Garg v. Income-tax Officer (Gujarat), wherein, the Hon’ble Court in respect of capital gains earned on sale of shares of “Kushal Ltd.” has held as under:-

“Where Assessing Officer issued reopening notice on ground that during search at premises of one ‘K’ Group, it was found that assessee had availed accommodation entries in form of trading in penny scrips of one K, since assessee had included income earned by purchase and sale of shares of K in its return, reopening notice issued merely based on information of price rigging in shares from K was to be set aside.”

4.2. Similar view has also been taken by the Hon’ble High Court of Gujarat in the case of Ashishbhai Jashwantbhai Desai HUF v. Income-tax Officer (Gujarat), relating to the issue of reopening of the assessment on the ground that the assessee had earned LTCGs on sale of shares of Kushal Group and it has been categorically held that in the absence of any other information to the AO that the assessee was indulged in any type of price rigging or any live-link of the information available on portal with the assessee, the reopening of the assessment was bad in law. It was held that the AO has recorded the reasons only on the basis of the borrowed satisfaction without there being any live-link between the information available on the Portal and the assessee, the AO cannot be said to have formed an independent satisfaction regarding the reasons recorded to re-open the assessment to come to the conclusion that there is escapement of income.

4.3. In the case in in hand also, the assessment has been reopened firstly on the ground that the assessee has made sales of shares of Kushal Group and there was no other information available to the AO that the assessee is involved in rigging the price of the shares, etc. Moreover, the assessee had also demonstrated that she was a bonafide investor in the said scrip as she has also incurred losses in subsequent assessment years in respect of the same scrip. Even on merits, there is no evidence on the file that the assessee has shown bogus LTCGs. Even otherwise, the AO was not justified in making the addition on the entire sale consideration. Under the circumstances, not only the reopening of the assessment is bad in law but also the addition is not sustainable on merits. Therefore, the appeal of the assessee is allowed on both the counts and the impugned addition made by the AO is ordered to be deleted.

5. In the result, the appeal of the assessee stands allowed.