ITAT Mumbai Annuls Reassessments in Penny Stock Allegations: A Complete Jurisdictional Breakdown

Background of the Dispute

The case of Kalpana Ramesh Jain Vs DCIT (ITAT Mumbai) involved three reassessment proceedings for AY 2015-16, AY 2016-17 and AY 2017-18.

The core allegation was that the assessee had claimed Long Term Capital Gains (LTCG) from sale of shares of Toyam Industries Ltd., which the department treated as a “penny stock” used for generating bogus LTCG. The Assessing Officer (AO) regarded the sale proceeds as unexplained cash credits taxable under Section 68 and also made related additions under Section 69C in one year.

However, the Income Tax Appellate Tribunal, Mumbai Bench ultimately did not go into the merits of the penny stock transactions. Instead, it quashed the reassessments for all three years solely on jurisdictional grounds, finding serious legal defects in:

• The reasons recorded for reopening,
• Limitation for issuing notice under Section 148, and
• Sanction obtained under Section 151.

As a result, all additions under Section 68 and Section 69C became purely academic.

AY 2015-16: Reopening Vitiated by Non-Application of Mind

Facts for AY 2015-16

• The assessee, an individual, filed her original return declaring income of ₹24,72,640.
• She claimed exemption of ₹63,24,872 under Section 10(38) in respect of LTCG on shares of Toyam Industries Ltd.
• Based on information on the ITBA / Insight Portal alleging accommodation entry activities in Toyam Industries Ltd. shares, the AO formed a belief that income had escaped assessment.
• A notice under Section 148 was issued on 31.03.2021.
• The assessee filed her return in response on 22.04.2021, reiterating the earlier declared income.
• The AO completed reassessment under Section 147 on 31.03.2022, treating the entire sale consideration of ₹63,77,600 as unexplained cash credit under Section 68.
• The CIT(A) – NFAC confirmed the reopening as well as the addition.

The assessee approached the Tribunal, challenging both jurisdiction and merits. The Tribunal first examined the validity of the reassessment itself.

Assessee’s Objections on Jurisdiction

The assessee’s counsel attacked the reopening primarily on the following grounds:

1. Factually wrong and vague reasons

   • The AO’s recorded reasons mistakenly described the assessee as a “company” when in fact she is an individual.
   • This was argued to be a basic factual error demonstrating complete lack of verification and non-application of mind.

2. Contradiction in characterisation of the assessee

   • In the recorded reasons, the AO alleged that Toyam Industries Ltd. was managed, controlled and operated by the assessee for providing accommodation entries, effectively treating her as an entry provider.
   • In the reassessment order, however, the AO treated the assessee as a beneficiary of alleged accommodation entries, not as the controller of Toyam Industries Ltd.
   • This inconsistency was argued to show that the very basis for the formation of “reason to believe” did not survive.

3. Borrowed satisfaction without independent analysis

   • The AO had merely lifted information from the Insight Portal / Investigation Wing and reproduced it in the reasons.
   • There was no independent examination of the assessee’s specific facts, transactions, or background before recording “reason to believe”.

4. Invalid approval under Section 151

   • Since the reasons themselves suffered from factual errors and mechanical recording, any sanction obtained thereon was also claimed to be mechanical and invalid, undermining the entire assumption of jurisdiction under Section 147.

On this basis, it was argued that the reassessment was void ab initio and should be annulled without looking at the merits of the penny stock transaction.

Revenue’s Stand

The Department contended that:

• The description of the assessee as a “company” was only a minor clerical mistake curable under Section 292BB.
• Substantively, the assessee had availed bogus accommodation entries, and the AO had applied his mind based on available information.

Tribunal’s Analysis of the Recorded Reasons

The Tribunal reproduced the reasons recorded by the AO, which, inter alia, stated that:

• Information from the Insight Portal showed “Toyam Industries Ltd” as a source of beneficiaries of bogus LTCG/STCL with value ₹63,77,600.
• The AO recorded that “the above mentioned bogus entities [are] managed, controlled and operated by M/s KALPANA RAMESH JAIN for providing bogus accommodation entries”, and therefore all transactions between those entities and the assessee/beneficiary are bogus accommodation entries.
• He concluded that the assessee had taken unexplained credits/bogus accommodation entries and that such income had escaped assessment.