Reassessment Invalid Where Alleged Penny Stock Transactions Belonged to Client: ITAT

The Hon’ble Income Tax Appellate Tribunal (ITAT) held that reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961, cannot be sustained where the reasons recorded by the Assessing Officer are based on transactions that do not pertain to the assessee. A Bench quashed the reassessment proceedings initiated against the assessee in this case for AY 2016-17.

The Assessing Officer reopened the assessment on the basis of information alleging that the assessee had traded in penny stock scrips of another company involving transactions of Rs 28.66 lakh. The Department alleged that the assessee had availed accommodation entries in the nature of bogus long-term capital gains and thereby treated the amount as unexplained income under Section 68 of the Act.

The CIT (A) upheld the reopening of the matter and also the addition, saying that the transactions were a sham and made to generate artificial exempt gains through penny stock dealings.

The assessee submitted that he had never claimed any long-term capital gain or exemption under Section 10(38) in his return of income. It was argued that the impugned transactions did not belong to the assessee but to one of his clients, since the assessee was merely acting as a sub-broker earning commission income.

The Tribunal examined the computation of income, tax audit report, and profit and loss account placed on record and found that the assessee had disclosed only broking and commission income. It was observed that no LTCG transaction relating to the other company was reflected in the return of income or the books of account.

“The assessee has never shown long-term capital gain, and the long-term capital gain mentioned in the reasons recorded under section 147 of the Act does not pertain to the assessee under consideration; therefore, reasons were recorded by the assessing officer without application of mind.”

The Bench thereby held that the transactions referred to in the reasons recorded belonged to the assessee’s client and not to the assessee himself. It further held that there was no tangible material available with the Assessing Officer to form a valid “reason to believe” that income had escaped assessment in the hands of the assessee.

Relying on the Supreme Court judgement in ITO v. Lakhmani Mewal Das, the Tribunal reiterated that reassessment cannot be initiated merely on suspicion and that the expression “reason to believe” is stronger than “reason to suspect”.

“The words of the statute are ‘reason to believe’ and not ‘reason to suspect’.”

The Tribunal held that the reassessment proceedings were initiated without proper application of mind and lacked any live nexus between the material available and the belief regarding escapement of income. Therefore, the reassessment proceedings were quashed and the appeal of the assessee was allowed.

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