Reassessment Quashed: Reason to Suspect Cannot Substitute Reason to Believe — Calcutta High Court Rules in Penny Stock LTCG Case

Case Overview

PCIT Vs Pradip Kumar Jajodia HUF (Calcutta High Court)

The Calcutta High Court recently dismissed a Revenue appeal challenging a favourable order obtained by the assessee before the Income Tax Appellate Tribunal, Kolkata Bench. The appeal, filed under Section 260A of the Income Tax Act, 1961, pertained to the assessment year 2016-17 and centred on the critical legal question of whether the reopening of assessment under Section 147/Section 148 of the Act was legally sustainable in a penny stock long-term capital gains (LTCG) case.

The judgment serves as a significant precedent reaffirming the well-established legal distinction between "reason to believe" and "reason to suspect" — a distinction that directly governs the validity of reassessment proceedings.

Procedural Background

Delay Condonation

At the threshold stage, the Court was confronted with a preliminary application seeking condonation of delay. The Revenue had filed the appeal with a delay of 40 days. Since an adequate explanation for the delay was placed on record and the respondent-assessee had already been served — though no one appeared on their behalf — the Court condoned the delay and disposed of the application, IA NO: GA/1/2025, in favour of the Revenue.

Journey Through Appellate Forums

The assessee, Pradip Kumar Jajodia HUF, had originally contested the order passed by the National Faceless Appeal Centre (NFAC) under Section 250 of the Income Tax Act, 1961. The NFAC's order had sustained the reassessment and the addition made therein. Aggrieved, the assessee carried the matter to the Income Tax Appellate Tribunal, A-Bench, Kolkata, which passed its order on December 30, 2024, in ITA/191/Kol/2024. The Tribunal ruled in favour of the assessee by holding that the reopening itself was invalid. The Revenue then approached the Calcutta High Court under Section 260A, giving rise to the present proceedings.

Substantial Questions of Law Raised by the Revenue

The Revenue, represented by Mr. Tilak Mitra, learned Senior Standing Counsel, proposed the following substantial questions of law for the Court's consideration:

"(a) Whether in facts and circumstances of the case the Ld. Income Tax Appellate Tribunal was not justified in law in deleting the addition of Rs.9,87,300/- without considering the larger scam of tax evasion by way of bogus Capital Gain Generated in penny stock?"

"(b) Whether in facts and circumstances of the case the Ld. Income Tax Appellate Tribunal's order was erroneous in law and in fact when it failed to give credence to investigations made by the Assessing Officer, Investigation Wing of the Income Tax Department as well as SEBI on astronomical rise in prices of shares of companies which have no net worth and no financial foundation and thereby failed to apply the test of human probability to ascertain the true nature of transactions resulting in bogus LTCG in view of the fact that the departmental appeal is allowed by the Hon'ble High Court at Calcutta of Bogus LTCG (Penny Stock) case in ITAT No.31 of 2020 of Pr. CIT-5 Vs. Swati Bajaj on June 14, 2022?"

In essence, the Revenue's argument rested on three pillars: