Rule 46A Error Warrants Re-Verification in Penny Stock Transactions Case: ITAT Puts Commission-Agent Defence Under Scanner [Read Order]

The Income Tax Appellate Tribunal, Mumbai (ITAT) ruled that the deletion of the addition relating to alleged unexplained investment arising from penny stock transactions cannot be sustained, as the first appellate authority had admitted affidavits and other material without adhering to the mandatory procedure prescribed under Rule 46A of the Income Tax Rules, 1963.

In this case, the assessee, Deepak Govindbhai Gangani, a resident individual, filed his return of income for Assessment Year 2011-2012 on 26.03.2013. Based on information received from the Investigation Wing that Aarya Global Shares and Securities Limited, listed on the Bombay Stock Exchange, had been utilised for generating artificial gains or losses to introduce unaccounted money into the financial system, reassessment proceedings were initiated under Section 148 of the Income Tax Act, 1961.

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During the assessment, it was found that the assessee had purchased shares amounting to ₹1,08,09,355 and sold shares of ₹25,65,239 during the relevant year. Since the assessee did not comply with statutory notices in time and failed to produce necessary evidence, the Assessing Officer (AO) proceeded under Section 144 read with Section 147 of the Income Tax Act, 1961 and treated ₹82,44,116 as unexplained investment under Section 69 of the Income Tax Act, 1961.

Before the CIT(A), the assessee, through an affidavit, stated that he was merely a commission agent acting as a name-lender and did not have the financial capacity to undertake such share trading. It was submitted that his demat account and bank account were operated by Mr. Rakesh Doshi, and that the entire operation, including fund arrangement, was handled by third parties.

Another affidavit was filed by Mr. Deepak Rathod, who admitted involvement in opening accounts for various persons for commission. Based on these submissions and observing that the AO failed to verify these aspects from the concerned persons, the CIT(A) deleted the entire addition.

The Revenue, represented by Annavaran Kosuri, argued that the CIT(A) allowed the appeal solely on affidavits without ensuring their authenticity and despite the inability of the AO to verify their genuineness in the absence of original documents during remand proceedings.

It was urged that the assessee was clearly involved as a beneficiary in the alleged penny stock operations and relief could not be granted without a complete enquiry.

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The two-member bench comprising Rahul Chaudhary, Judicial Member and Vikram Singh Yadav, Accountant Member opined that the CIT(A) accepted additional evidence without complying with Rule 46A(2) of the Income Tax Rules, 1963, which mandates recording reasons in writing for admission of such evidence.

The tribunal observed that the CIT(A) criticised the AO for not conducting enquiry but failed to carry out any independent verification while admitting and relying on affidavits. It was remarked that there is no clarity on enquiry in respect of the 81 persons named in the affidavit of Mr. Rathod and therefore, the decision of the CIT(A) suffered from procedural infirmity.

Considering the above, the ITAT set aside the order dated 03.09.2024 passed by the CIT(A) and restored the matter for adjudication afresh, ensuring compliance with Rule 46A of the Income Tax Rules, 1963. The Revenue’s appeal was treated as allowed for statistical purposes.

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