ITAT Ahmedabad Deletes ₹1 Crore Section 69A Addition on Alleged Penny Stock / Accommodation Entry

Background of the Dispute

This case concerns an appeal filed by the assessee against an order passed by the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi for Assessment Year 2014-15, where an addition of ₹1,00,00,000/- was made under Section 69A of the Income Tax Act 1961, alleging unexplained money arising from accommodation entries routed through penny stock transactions.

The central controversy revolved around:

  • Reopening of assessment under Section 147/Section 148 based on information from the Investigation Wing;
  • Characterisation of ₹1,00,00,000/- as unexplained money under Section 69A; and
  • Absence of any specific, assessee-linked material to justify such reopening and addition.

The assessee had originally filed its return of income on 06.09.2014 declaring total income of ₹20,06,810/-. The case was later reopened on the ground that the assessee allegedly benefited from accommodation entries of ₹1,00,00,000/- connected with entities controlled by Shri Sanjay Shah and Shri Jignesh Shah, who were subjected to search under Section 132 on 11.09.2018.

Reasons Recorded for Reopening Under Section 147

The Assessing Officer recorded reasons for reopening primarily on the basis of a report received from the DDIT (Investigation), Unit-1(3), Ahmedabad. According to that information:

  • A search operation under Section 132 in the case of Sanjay Shah and Jignesh Shah revealed:

    • Seizure of unaccounted cash of ₹19.37 crores;
    • Digital data and documents suggesting accommodation entries of bogus LTCG, contrived losses, and unsecured loans;
    • A secret Tally file (“123”) allegedly recording synchronized trading, cash movements through angadiyas, and commission under the head “LTCG COMMISSION”.

  • The Investigation Wing concluded that the duo were engaged in:

    • Generating bogus LTCG in multiple BSE listed scrips through synchronized trades;
    • Providing accommodation entries of LTCG, losses, unsecured loans and similar arrangements using shell entities and dummy directors.

  • Based on such material, it was stated in the reasons that the assessee was “one of the beneficiaries” who had obtained an accommodation entry of ₹1,00,00,000/- in the garb of a fictitious loan from Shri Jignesh Shah during AY 2014-15.

The Assessing Officer, proceeding on this broad information, recorded that the assessee had failed to make full and true disclosure of all material facts and accordingly initiated reassessment proceedings by issuing notice under Section 148 on 30.03.2021.

Assessee’s Objections to Reopening

The assessee challenged the validity of reopening through a detailed objection letter dated 31.05.2021, raising, inter alia, the following core points:

  1. Non-supply of complete sanction and satisfaction records

    • Only typed reasons for reopening were shared;
    • The assessee requested copies of:
      • The original reasons duly signed by the then Assessing Officer with date; and
      • The sanction / approval given by the higher authority with signatures and dates;
    • It was argued that without these, it could not be verified whether statutory procedure for reopening had been followed.

  2. Change of Officer and lack of fresh application of mind

    • The reassessment proceedings were being continued by an officer other than the one who recorded the original reasons;
    • It was contended that the continued reliance on earlier reasons without independent application of mind resulted in invalid reassessment.

  3. Reliance on third-party statements without copies

    • The information was allegedly based on statements of third parties, namely Shri Sanjay Shah and Shri Jignesh Shah;
    • Copies of their statements were not furnished to the assessee despite request;
    • The assessee requested copies of these statements and sought an opportunity to cross-examine them.

  4. Dispute on factual foundation of alleged entry

    • The assessee categorically denied having:
      • Any transaction of ₹1,00,00,000/- with Shri Jignesh Shah during the relevant year; or
      • Any accommodation entry or unsecured loan from him in any form;
    • It was pointed out that such fact could be verified from audited financial statements and audit reports already on record;
    • Hence, the assessee submitted that the information used for reopening was factually incorrect, making the entire basis of “reason to believe” invalid and rendering the reopening a mere roving and fishing inquiry.