Calcutta High Court Upholds ITAT Order Quashing Penny Stock Reassessment — PCIT Vs Nikunj Dhanuka
Overview of the Dispute
The Calcutta High Court, in PCIT Vs Nikunj Dhanuka, dismissed an appeal preferred by the Revenue under Section 260A of the Income Tax Act, 1961, challenging an order passed by the Income Tax Appellate Tribunal "C" Bench, Kolkata in ITA No. 345/Kol/2024 for Assessment Year 2012-13. At the heart of the controversy was whether the reassessment proceedings initiated by the Assessing Officer against the assessee in connection with penny stock transactions involving VMS Industries Ltd. were legally sustainable.
The Tribunal had previously ruled in favour of the assessee, setting aside additions framed under Section 68 and Section 69C of the Income Tax Act, 1961, and holding the reopening itself to be fundamentally flawed. The Revenue, dissatisfied with this outcome, approached the High Court raising purported substantial questions of law — all of which were ultimately rejected.
Background and Factual Matrix
Original Assessment and Return Processing
The assessee had filed a return of income which was initially processed under Section 143(1) of the Income Tax Act, 1961. In that return, the assessee had disclosed long-term capital gains amounting to Rs. 41,98,896/-, arrived at after setting off long-term capital losses of Rs. 4,62,646/-, and had claimed the resultant net gain as exempt under Section 10(38) of the Act.
Additionally, the assessee had declared short-term capital gains of Rs. 57,46,787/–, which were duly offered to tax in the original assessment proceedings — a fact that became central to the dispute during the reassessment challenge.
Trigger for Reassessment Under Section 147
The Assessing Officer subsequently initiated reassessment proceedings under Section 147 of the Income Tax Act, 1961, relying upon specific intelligence received from the Principal Directorate of Income Tax (Investigation), Mumbai, dated 28th March, 2019. This information purportedly indicated that the assessee had claimed an amount of Rs. 90,95,000/- as exempt under Section 10(38) of the Act, allegedly arising from transactions in the scrip of VMS Industries Ltd.
Based on this input, the Assessing Officer concluded that the claimed exemption was the product of manipulation and price rigging in penny stocks, and proceeded to frame additions under Section 68 (unexplained cash credits) and Section 69C (unexplained expenditure) of the Income Tax Act, 1961. The assessment order in this regard was passed on 27th December, 2017 under Section 143(3) of the Act.
Proceedings Before First Appellate Authority and Tribunal
Ex Parte Order by CIT(A)
When the matter came up before the first appellate authority, the order dated 22nd December, 2023 was passed on an ex parte basis, with the appellate authority recording that the assessee had not responded to notices of hearing. Accordingly, the assessment order was affirmed without examining the merits of the assessee's position.