Tribunal’s Quashing of Reassessment for Bogus LTCG Set Aside: AO’s Own Satisfaction and Evidence Not Considered by Tribunal

By | June 24, 2025
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Tribunal’s Quashing of Reassessment for Bogus LTCG Set Aside: AO’s Own Satisfaction and Evidence Not Considered by Tribunal

Issue:

Whether the Income Tax Appellate Tribunal (ITAT) was justified in quashing a reassessment order (under Section 147/148) that made additions under Section 68 (cash credit) for bogus Long-Term Capital Gains (LTCG) from penny stock trading, on the sole ground that the Assessing Officer (AO) acted on “borrowed satisfaction” without recording his own, when the AO’s reasons for reopening explicitly noted specific ITBA data and the assessee’s failure to provide documentary evidence.

Facts:

For assessment year 2015-16, the Assessing Officer (AO) issued a reopening notice under Section 148 on the ground that the assessee had received an accommodation entry in the form of bogus LTCG from trading in a penny scrip. The Tribunal (ITAT) subsequently quashed the assessment order, reasoning that the Assessing Officer had acted on “borrowed satisfaction” without independently recording his own satisfaction regarding the escaped income.

However, it was noted that the Assessing Officer, in his reasons for reopening:

  1. Had taken note of ITBA data (Income Tax Business Application data) which revealed that the assessee had received an accommodation entry from trading in the penny scrip during the relevant year. ITBA data allows tax authorities to analyze and monitor transactions linked to PAN for potential tax evasion.
  2. Had also pointed out that the assessee had not submitted any documentary evidence regarding the alleged transactions.

Decision:

Yes, the court held that since the Tribunal failed to take into consideration the reasoning given by the Assessing Officer and/or by the Commissioner (Appeals), the conclusion arrived at by the Tribunal was factually incorrect. Therefore, the impugned order passed by the Tribunal was set aside. The decision was in favor of the revenue.

Key Takeaways:

  • “Borrowed Satisfaction” vs. AO’s Application of Mind: “Borrowed satisfaction” typically refers to situations where an Assessing Officer mechanically adopts information from an investigation wing or another authority without independently applying his mind to that information and forming his own “reason to believe” that income has escaped assessment. However, if the AO analyses the information (like ITBA data), points out specific discrepancies (like lack of documentary evidence from assessee), and records this in his reasons, it suggests an application of mind, not mere borrowed satisfaction.
  • ITBA Data as Tangible Information: The court implicitly recognized ITBA data as tangible and specific information that can form a valid basis for the AO’s “reason to believe” for reassessment, especially in cases of accommodation entries or suspicious transactions.
  • Assessee’s Onus to Provide Evidence: Once the AO has credible information (like from ITBA) suggesting bogus transactions, the onus shifts to the assessee to provide documentary evidence to prove the genuineness of the transactions and the source of the capital gains. Failure to do so strengthens the revenue’s case.
  • Tribunal’s Duty to Consider All Arguments: The Tribunal, as an appellate body, has a duty to consider and address all the reasons and findings recorded by the lower authorities (AO and CIT(A)) before arriving at its conclusion. Failing to consider the specific reasoning provided by the AO (based on ITBA data and lack of evidence from assessee) was deemed a factual incorrectness.
  • Reassessment for Penny Stock Transactions: This case highlights the continued scrutiny by tax authorities on alleged bogus Long Term Capital Gains (LTCG) arising from penny stock transactions. The emphasis is on the AO having a proper “reason to believe” and conducting a thorough investigation, while the assessee must provide robust evidence of genuine transactions.
  • Favor of Revenue: The outcome is in favor of the revenue, setting aside the Tribunal’s order, which means the reassessment will likely proceed or be re-examined on merits.
HIGH COURT OF CALCUTTA
Principal Commissioner of Income-tax
v.
Reena Jain
T.S. SIVAGNANAM, CJ.
and CHAITALI CHATTERJEE (DAS), J.
ITAT No. 244 of 2024
IA No. GA 2 of 2024
MAY  6, 2025
Vipul Kundalia and Amit Sharma, Advs. for the Appellant.
ORDER
1. This appeal filed by the revenue under Section 260A of the Income Tax Act, 1961 (the Act) is directed against the order dated January 09, 2024 passed by the Income Tax Appellate Tribunal “SMC” Bench, Kolkata (the Tribunal) in ITA/503/Kol/2023/Reena Jain v. Income-tax Officer for the assessment year 2015-16.
2. The revenue has raised the following substantial questions of law for consideration :
“i)Whether in the facts and circumstances of the case the Learned Tribunal erred in law in deleting the addition of Rs.9,16,444/- made by the Assessing Officer by ignoring the larger scam of tax evasion by way of bogus capital gain generated in penny stock?
(ii)Whether the Assessee is entitled to tax exemption under Section 10(38) of the said Act when the records and materials indicate that the alleged income shown as Long Term Capital Gain is result of manipulation and malpractice of an organized tax evasion?
(iii)Whether the Learned Tribunal erred in ignoring the fact that the assessee failed to produce documents/evidences to establish the genuineness of the transaction in the penny stock “NYSSA Corporation Ltd.” and direct and circumstantial evidence brought on record by the Assessing Officer to establish that the assessee had indulged in manipulation of the share prices of “NYSSA Corporation Ltd.” with a view to record fictitious Long Term Capital Gain of Rs.9,16,444/-claiming the same as exempt from taxation?
(iv)Whether the impugned order of the Learned Tribunal has any legal sanctity as it is a “non-speaking order” and passed without considering the fact and circumstances of the case?
(v)Whether the Learned Tribunal erred in law in accepting the transaction in purchase and sale of penny stock as genuine, merely on the basis of documents supplied by the assessee, without piercing the veil of the manipulated and fraudulent transactions entered into by the assessee in collusion with various share brokers and entry operators for the purpose of tax evasion?
(vi)Whether the order of the Learned Tribunal is erroneous in law in deleting the addition made by the Assessing Officer ignoring the larger scam of tax evasion by way of bogus capital gain generated in penny stock and such scam is of such magnitude that the Government was forced to bring an amendment in the Income Tax Act regarding exemption of Long Term Capital Gain?
(vii)Whether the Learned Tribunal erred in law when it failed to give credence to investigations made by the Assessing Officer, Investigation Wing of the Department as well as SEBI on astronomical rise in prices of companies which have no net worth, underlying business activities and financial foundation and thereby failed to apply the test of human probability to ascertain the true nature of transactions resulting in bogus Long Term Capital Gain?
3. We have heard Mr. Vipul Kundalia, learned senior standing Counsel assisted by Mr. Amit Sharma for the appellant/revenue.
4. A notice has been served on the respondent/assessee as early as October, 2024 and affidavit-of-service has been filed, but none appears for the respondent/assessee.
5. The short question which falls for consideration in the instant case is whether the learned Tribunal was right in coming to the conclusion that the assessing officer did not apply his mind while reopening the assessment and recorded certain reasons in a mechanical manner without carrying out any enquiry and, therefore, the reopening being based on bare satisfaction, the same requires to be set aside and, accordingly, the appeal was allowed.
6. To examine the correctness of the decision arrived at by the learned Tribunal, we have examined the assessment order dated 09.09.2021 passed under Section 147 of the Act. It is no doubt true that in paragraph 2 of the assessment order there is a reference regarding the information received to the effect that the assessee has received accommodation entry of bogus LTCG/STCL/Business Loss at the platform Bombay Stock Exchange(BSE)/National Stock Exchange(NSE)/Calcutta Stock Exchange(CSE). Not stopping with that, the assessing officer has referred to ITBA data which reveals that the assessee has received accommodation entry from trading in penny scrip of “NYASSA CORPORATION LIMITED” during the relevant year. This was the basis for issuance of the notice under Section 148 of the Act for which the assessee was given liberty to submit her reply and after examining the reply as well as the return of income filed by the assessee the assessing officer has pointed out that the assessee has not submitted any documentary evidence regarding the alleged transactions. The nature and source of the receipts/information were not furnished and the assessee having failed to discharge the burden upon him, assessment was completed. The assessee carried the matter on appeal before the National Faceless Appeal Centre (NFAC). The NFAC took note of the grounds raised by the assessee before it, the written submission along with paper book and proceeded to take a decision on each and every ground raised by the assessee in the appeal memo. After elaborate reasoning and after referring to various decisions of the Hon’ble Supreme Court, the appeal was dismissed.
7. Aggrieved by the said order passed by the Appellate Authority, the assessee filed appeal before the Tribunal. The learned Tribunal, in our view, failed to take into consideration any of the reasoning given either by the Assessing Officer or by the Appellate Authority and proceeded to allow the assessee’s appeal on only ground that the Assessing Officer did not apply his mind. This conclusion arrived at by the Tribunal is factually incorrect and therefore, the impugned order has to be termed to be perverse.
8. More or less an identical issue was considered by this Court in the case of Principal Commissioner of Income Tax-5, Kolkata v. B.L. Tak & Sons, HUF in ITAT No. 243 of 2024 which was allowed in favour of the revenue by judgment dated May 6, 2025, operative portion of which is quoted below:
“9. Before we examine the correctness of the decision of the Tribunal, we take note of the decision of the Hon’ble Supreme Court in Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers Private Limited reported in (2008)14 SCC 208. The Hon’ble Supreme Court held that Section 147 authorises and permits the assessing officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. It was further pointed out that the word “reason” in the phrase “reason to believe” would mean cause or justification; if the assessing officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. It was further held that the expression cannot be read to mean that the assessing officer should have finally ascertained the fact by legal evidence or conclusion and that the function of the assessing officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. Further, a reference was made to the decision in the case of Central Provinces Manganese Ore Co. Ltd. v. ITO reported in (1991) 4 SCC 166 and it was held that at the initiation stage, what is required is “reason to believe”, but not the established fact of escapement of income. Further, at the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief; whether the materials would conclusively prove the escapement is not the concern at that stage since the formation of belief by the assessing officer is within the realm of subjective satisfaction. It was further held so long as the ingredients of Section 147 are fulfilled, the assessing officer is free to initiate proceeding under Section 147 and failure to take steps under Section 143(3) will not render the assessing officer powerless to initiate reassessment proceedings even when intimation under Section 143(1) had been issued.
10. Bearing the above legal principles, we proceed to examine the facts of the present case qua the findings recorded by the learned Tribunal for allowing the assessee’s appeal. As mentioned above, the learned Tribunal was of the view that the assessing officer has not formed an opinion and he has mechanically followed the report of the investigation wing.
11. We have carefully perused the assessment order dated 25.09.2021. In paragraph 2, the assessing officer sets out the information received from the investigation wing vide letter dated 6.3.2020. It is not in dispute that the assessee’s name also figures in the information furnished by the investigation wing. After setting out those details the assessing officer has taken note of the return filed by the assessee dated 21.10.2020 and thereafter issued notice under Section 143(2) of the Act. In paragraph 3, the assessing officer has discussed the entire facts relating to the transactions done by the assessee in respect of purchase of shares of M/s. Tuni Textiles Mills Ltd. and noted that the value of the shares of the assessee is almost 4.5 times in a span of one year and 2 months resulting in huge capital gains to the assessee. Thereafter, the assessing officer has verified the contract note and the share certificate submitted by the assessee and other details of the transactions done by the assessee as well as the details furnished in the return of income and then has stated that the facts and circumstances surrounding the transaction of shares of M/s. Tuni Textiles Mills Ltd. and subsequent earning of exempt LTCG by the assessee through the transaction in the said shares clearly indicate that the claim of the assessee regarding earning of significant LTCG exempt under Section 10(38) requires deeper investigation and analysis to uncover the real nature of the alleged regular/prudent transaction. Thereafter, the assessing officer has taken note of the background of the investigation done by the department, discussed about the background of the company namely M/s. Tuni Textiles Mills Ltd. and taken note of the profit and loss account of the said company and its balance sheet, asset dt. March 31, 2012, statement of cash flow for the year ended 31.03.2012 and come to the conclusion that the fundamentals of the company are very weak and it clearly indicates that abnormal price rise in the shares of the company is not natural or normal but artificially manipulated. Further, noting the financial strength of the said company the assessing officer has noted that the price of the shares rose astronomically during the period May 2010 to March, 2011 from Rs.16/- to Rs. 271/-. With all these details, show cause notice was issued to the assessee on 03.09.2021 for which the assessee submitted their reply on 10.09.2021 and the assessing officer took into consideration the stand taken by the assessed in their reply and has recorded reasons to hold that the assessee has failed to discharge the onus and, therefore, the only escapable conclusion is that numerous individual assessees have taken entry to LTCG by paying its unaccounted money. Furthermore, that the transaction in shares of M/s. Tuni Textiles Mills Ltd. by the assessee was a pre-arranged transaction in the form of accommodation entry managed through collusive transactions by group of entry operators and shell entities. Thereafter the assessing officer has taken note of the various decisions, namely, CIT v. Durga Prasad More reported in (1971) 82 ITR 540(SC), Sumati Dayal v. Commissioner of Income Tax reported in (1995) 214 ITR 801 (SC), applied the test of human probabilities as propounded in the said decisions and then completed the assessment and has pointed out that before finalizing the assessment a final show cause notice was issued on 18.09.2021 for which the assessee submitted reply on 22.09.2021 and the said reply was also considered and the assessing officer has pointed out that the assessee has not submitted any new evidence in response to the show cause notice. Therefore, the learned Tribunal committed an error in coming to a conclusion that the assessing officer has not applied his mind for reopening the assessment under Section 147 of the Act.
12. That apart, the learned Tribunal has not examined the reasons set out by the appellate authority which has re-examined the factual position, taken note of the grounds raised by the assessee and their oral submissions and has in detail discussed about the lowering of funds and how the funds reached the concerned beneficiaries and has factually found that the assessee is one of the beneficiaries who received accommodation entry which was used to avail bogus LTCG/STCL. The various decisions of the Hon’ble Supreme Court were taken into consideration and the appeal was dismissed. Therefore, we find that the learned Tribunal committed a serious factual error in coming to the conclusion that there was no application of mind of the assessing officer and erroneously elevated the status of CBDT which is meant as a guiding note of the assessing officer to have an effect of regulation. Therefore, the order impugned in this appeal deserves to be quashed.
13. Accordingly, the appeal filed by the revenue is allowed and the substantial questions of law raised by the revenue are answered in favour of the revenue.”
9. In the light of the above conclusion, the order passed by the learned Tribunal is required to be set aside. Accordingly, the appeal filed by the revenue is allowed and the order passed by the learned Tribunal is set aside and the order passed by the Appellate Authority stands restored and the substantial questions of law raised by the revenue are answered in favour of the appellant/revenue.
10. The stay application being IA No:GA/2/2024 stands disposed of.