ITAT Delhi Quashes Assessment for Invalid Manual Scrutiny Selection under CBDT Instruction No. 5/2017
Background of the Dispute
The case of Ajay Kumar Vs DCIT/ACIT came before the Income Tax Appellate Tribunal, Delhi Bench, arising from an assessment framed under Section 143(3) read with Section 263 of the Income Tax Act 1961. The core issue ultimately decided by the Tribunal was not on the merits of alleged bogus Long-Term Capital Gain (LTCG) from penny stock transactions, but on the very jurisdictional validity of the scrutiny assessment itself, in light of CBDT Instruction No. 5/2017.
The assessee had e-filed a return of income on 14.09.2016, disclosing total income of ₹16,76,97,150. This disclosure included LTCG of ₹8,74,51,109 claimed as exempt under Section 10(38) from sale of equity shares of M/s CCL International Ltd. The return was processed, and thereafter the case was selected for compulsory manual scrutiny.
The Department issued a notice under Section 143(2) dated 25.09.2017, clearly stating that the case had been picked for scrutiny in terms of Para 1(i) of CBDT Instruction No. 5/2017 dated 07.07.2017. Subsequent to detailed proceedings, the original assessment was concluded under Section 143(3) on 31.12.2018 without any addition on the LTCG issue.
Later, Section 263 revision proceedings were triggered on the basis of an Investigation Wing report treating CCL International Ltd. as a so-called penny stock involved in accommodation entries. This led to a fresh assessment under Section 143(3) read with Section 263, in which significant additions were made and subsequently upheld by the CIT(A).
Before the Tribunal, the assessee, apart from contesting the additions on facts and law, pressed an additional pure legal ground attacking the validity of the Section 143(2) notice and consequently the entire assessment order, on the footing that the manual selection was contrary to CBDT Instruction No. 5/2017.
Chronology of Events
Original Return and Initial Scrutiny
- The assessee filed the income-tax return on 14.09.2016 declaring income of ₹16,76,97,150.
- The return included an LTCG of ₹8,74,51,109 from sale of shares of M/s CCL International Ltd., claimed exempt under
Section 10(38). - A notice dated 25.09.2017 was issued under
Section 143(2), specifically mentioning:- The basis of selection was the return filed on 14.09.2016.
- The scrutiny was manual compulsory selection under Para 1(i) of CBDT Instruction No. 5/2017.
- During the course of assessment, the AO issued a notice under
Section 142(1)on 09.10.2018 and subsequently, on 14.11.2018, called for detailed information regarding:- Purchase of CCL International Ltd. shares,
- Holding period,
- Demat details,
- Sale transactions,
- Claim of exemption under
Section 10(38).
The assessee furnished the required documentary evidence, including contract notes, bank statements, demat statements, and supporting explanations. After considering these, the AO completed the assessment under Section 143(3) on 31.12.2018 without any addition in respect of the LTCG from CCL International Ltd. shares.
Triggering of Revision under Section 263
Subsequently, on 22.03.2021, the Principal Commissioner/Commissioner invoked Section 263 based on an Investigation Wing, Kolkata report, which had allegedly identified CCL International Ltd. among 84 scrips used for providing accommodation entries and bogus LTCG.
The assessee responded to the Section 263 show-cause with a detailed reply dated 25.03.2021, enclosing:
- Judicial precedents of various benches of the Tribunal,
- Other relevant case law,
- The SEBI adjudication order concerning CCL International Ltd., in which proceedings were disposed of.
Nevertheless, an order under Section 263 dated 27.03.2021 was passed, holding that the AO failed to adequately consider the Investigation Wing report and that the original assessment was erroneous and prejudicial to the interests of the Revenue.
The assessee carried this Section 263 order in appeal to the Tribunal, but the appeal was dismissed on 30.05.2025, thereby affirming the revisional jurisdiction.