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Judgment
O R D E R
PER SUDHIR KUMAR, JM:
This is appeal filed by the revenue against the order of Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 27/11/2025 for Assessment Year 2016-17.
The revenue has raised the following ground of appeal:
“On the facts and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 57,51,130/- made by the AO on account of bogus LTCG, without properly appreciating the facts and material available on record. The Ld. CIT(A) has erred in holding that the reassessment proceedings initiated under sections 147 to 151 of the Income Tax Act, 1961 are invalid due to alleged non-application of mind and violation of mandatory procedure, as the alleged inconsistencies were purely clerical/inadvertent errors.”
The brief facts of the case are that assessee filed an original return of income on 29.07.2016 declaring income of Rs. 3,90,470/- after claiming exemption u/s 10(38) of Rs. 57,27,916/- on account of long-term capital gain (LTCG) from sale of 17,500 equity shares of M/s Panafic Industrials Ltd. The return was processed under section 143(1) of the Act. Subsequently, based on information from the Investigation Wing that the assessee had availed bogus LTCG of Rs. 59,26,130/- through penny stock transactions in the scrip of M/s Panafic Industrials Ltd., a notice u/s 148 was issued on 30.03.2021. The assessee filed a return in response declaring the same income. Notices u/s 143(2) and 142(1) were issued, and partial responses were received, including copies of allotment letter, bank statements, and Form 26AS. The Assessing Officer treated the LTCG as bogus, added Rs. 57,51,130/- (sale consideration Rs. 59,26,130/- minus purchase cost Rs. 1,75,000/-) to the income, and completed the assessment u/s 147 r.w.s. 144B on 09.03.2022 at Rs. 61,41,600/-.
In first appeal, the Ld. CIT(A) allowed the appeal of the assessee on jurisdictional as well as on merits of the case. Aggrieved, revenue is in appeal before us.
Ld. Sr. DR vehemently supported the order of the Assessing Officer and reiterated the contentions raised in the grounds of appeal.
On the other hand, Ld. AR of the assessee relied upon the order of the Ld. CIT(A).
We have heard both the sides and perused the records. We find that the reasons recorded by the AO for reopening read as follows:
“Information was received from Insight Portal from Investigation Wing stating that the assessee has purchase equity/derivative share of penny scrips in the term of bogus LTCG/STCG amounting to Rs. 59,26,130/- from M/s Panafic Industrials Ltd. during the year under consideration. I am satisfied that amount of Rs. 44,42,840/- has been undisclosed income of the assessee during the year under consideration which has escaped assessment for the F.Y. 2013–14 relevant to A.Y. 2014–15.”
In view of above reasons, it shows an internal inconsistency, however, the AO has referred to escapement pertaining to A.Y. 2014–15 while reopening the assessment for A.Y. 2016–17. The assessee argued that such inconsistency reveals non-application of mind and that no valid “reason to believe” existed. The assessee further pointed out that despite repeated requests, the copy of the sanction obtained under Section 151(1) was never supplied, which vitiates the proceedings. We refer the relevant statutory provision, Section 151(1), states:
“No notice shall be issued under section 148 by an Assessing Officer after the expiry of four years from the end of the relevant assessment year, unless the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer, that it is a fit case for the issue of such notice.”
We note that the Hon’ble Supreme Court in GKN Driveshafts (India) Ltd. v. ITO (259 ITR 19) held:
“When a notice under section 148 is issued, the proper course of action for the noticee is to file the return and, if he so desires, to seek reasons for issuing the notice. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections, and the Assessing Officer is bound to dispose of the same by a speaking order.”
Further, the Hon’ble Bombay High Court in Arvind Sahdeo Gupta v. ITO observed:
“If the Assessing Officer has proceeded on fundamentally wrong facts to form a reasonable belief and while disposing of the objections does not deal with the factual position asserted by the assessee, it would be safe to conclude that the Revenue does not dispute facts stated by the assessee.”
Applying these principles, the reasons recorded in this case clearly suffer from factual inconsistency, mechanical sanction, and non-supply of the approval copy. Therefore, the reopening proceedings are invalid for non-application of mind and violation of the mandatory procedure under Sections 147–151. Thus, we affirm the action of the Ld. CIT(A) on this count and reject the ground raised by the Revenue.
As regards merits of the case is concerned, we note that the assessee has sold shares of M/s Panafic Industrials Ltd. through online platform (BOLT) of the recognized stock exchange, i.e., BSE. The sale consideration was received through banking channels, STT was duly paid, and the holding period of shares exceeded one year. Therefore, exemption under section 10(38) of the Act is fully available.” The relevant statutory provision, Section 10(38), reads:
“Any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, where— (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and (b) such transaction is chargeable to securities transaction tax under that Chapter, shall not be included in the total income of the previous year.”
It is noted that the Assessing Officer denied the claim on the ground that Panafic Industrials Ltd. was a “penny stock” company used for providing accommodation entries. However, the AO did not bring any cogent material or statement linking the appellant with any entry provider. We note that the assessee, on the other hand, furnished the following primary evidences:
Allotment letter dated 04.02.2014 showing purchase of 17,500 equity shares.
Proof of payment by cheque No. 52134 drawn on Canara Bank for Rs. 1,75,000.
Contract notes issued by registered stockbroker evidencing sale through BSE (BOLT).
Bank statements showing receipt of sale proceeds through NEFT.
Payment of STT and reflection of the transaction in Form 26AS.
We find that the Hon’ble Delhi High Court in PCIT v. Krishna Devi [ITA No. 125/2020] held that mere reliance on general investigation reports without proving nexus between the assessee and alleged entry operators cannot justify treating genuine LTCG as bogus. Similarly, in CIT v. Smt. Pooja Agarwal (Raj HC), it was held that where the assessee produced documentary evidences, exemption u/s 10(38) could not be denied merely based on the scrip being identified as “penny stock.”
Considering the above statutory provision, evidences, and precedents, the assessee has fulfilled all conditions of Section 10(38). The AO’s rejection based on suspicion is untenable, hence, the addition was rightly been deleted by the Ld. CIT(A), hence, we affirm the same and reject the ground raised by the revenue.
In the result, Revenue’s Appeal is dismissed.