Recently, Income Tax Appellate Tribunal ( ITAT ) of Ahmedabad directed for reassessment of an Assessee’s case, noting that there were inaccuracies in reporting share transactions in the relevant assessment year. Consequently, the lower authority’s order passed under section 263 of the Income Tax Act 1961 ( ITA ) was upheld.
The Assessee, Suresh Kantilal Thakkar, an individual taxpayer, filed a return of income for the assessment year 2016-17, declaring a total income of ₹2,87,000/-.
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The case was reopened under Section 147 of the income tax legislature based on information received from the Deputy Director of Income Tax (Investigation) [DDIT (Inv.)].
The reassessment was finalized on March 29, 2022, with the returned income being accepted by the Assessing Officer (AO).
The Principal Commissioner of Income Tax (PCIT) later scrutinized the assessment records and observed that the Assessee had engaged in trading shares of M/s. Excel Castronics Ltd. (ECL) during the assessment year.
ECL was identified as a penny stock company involved in facilitating the introduction of unaccounted income under the guise of exempt capital gains or short-term capital losses. The PCIT noted that the Assessee was one of the beneficiaries of such transactions.
Upon reviewing the assessment records, the PCIT observed that the AO had failed to properly verify the genuineness of these transactions.
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Specifically, the AO did not thoroughly analyze the documents or take into account the fact that the Assessee had claimed a short-term capital loss (STCL) of ₹3,75,14,478/- from the sale of ECL shares.
This STCL was allegedly set off against a capital gain of ₹18,77,191/-.
PCIT deemed the AO’s assessment as erroneous and prejudicial to the interest of the Revenue, thereby invoking jurisdiction under Section 263 of the Income Tax Act, which is for revision of orders prejudicial to revenue.
Thus, the PCIT set aside the assessment order.
Aggrieved, the Assessee appealed before the ITAT.
Before the ITAT, the Assessee’s Counsel presented several arguments challenging the validity of the Section 263 proceedings.
The Counsel argued that the proceedings under Section 263 of the income tax statute were initiated on an incorrect premise, as there was no revenue loss that would justify invoking this section.
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The Counsel emphasized that one of the prerequisites for initiating proceedings under Section 263 of ITA is a demonstrable loss to the Revenue, which was not evident in this case.
Further, the assessee-counsel contended that the PCIT’s decision was based on incorrect facts.
Specifically, PCIT alleged that the Assessee had set off a bogus long-term capital loss (LTCL) of ₹3.75 crores against a long-term capital gain (LTCG) of ₹18.77 lakhs. However, the Assessee clarified that no such set-off occurred during the relevant assessment year.
The Counsel pointed to the return of income filed by the Assessee, which did not include any set-off of the purported LTCL against LTCG.
The Counsel also argued that the AO had conducted appropriate inquiries during the reassessment proceedings.
It was submitted that the Assessee had provided explanations and documentation regarding the LTCL on the sale of ECL shares, which the AO had duly considered before finalizing the assessment. Therefore, the AO’s decision not to make any additions was legally sound, and there was no lack of inquiry.
The Revenue, represented by the Departmental Representative (D.R.), defended the PCIT’s order.
The D.R. argued that the Assessee was involved in trading penny stocks, specifically ECL, which was delisted from the stock exchange due to non-compliance issues.
The D.R. asserted that the Ld. PCIT’s decision to set aside the assessment order was justified, given the Assessee’s involvement in trading a dubious stock.
The bench of Mr Siddhartha Nautiyal and Mr Makarand V Mahadeokar, after carefully reviewing the case made several observations.
The Tribunal noted that the Section 263 proceedings were initiated by the PCIT based on incorrect facts. Contrary to the PCIT’s claim, the Assessee did not set off an LTCL of ₹3.75 crores against LTCG of ₹18.77 lakhs in the relevant assessment year. The Tribunal found that these facts were not accurately represented by the PCIT.
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However, the Tribunal observed that the Assessee had failed to declare both the LTCL from the sale of ECL shares and the LTCG from the sale of Saya shares in the return of income, raising concerns about the accuracy and completeness of the Assessee’s return.
The Tribunal further observed that the AO did not adequately investigate the discrepancies in the Assessee’s return, particularly the omission of significant transactions involving the sale of shares in ECL and Saya.
It was concluded that the AO’s failure to examine these transactions rendered the assessment order erroneous and prejudicial to the Revenue’s interests.
Based on its findings, the Tribunal dismissed the Assessee’s appeal and upheld the PCIT’s decision to set aside the assessment order.
However, the Tribunal directed the AO to conduct a fresh assessment, taking into account the discrepancies identified during the proceedings. The AO was instructed to give the Assessee a fair opportunity to present their case and to carry out a de novo assessment in accordance with the law.
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