Reassessment Notice After 01.04.2021 for AY 2015-16 Held Invalid: ITAT Mumbai on Penny Stock Addition Under Section 68

Overview of the Decision

The Income Tax Appellate Tribunal, Mumbai Bench, in the case of Sandip Sadanand Narkar Vs ITO, set aside the entire reassessment framed for Assessment Year (AY) 2015–16. The Tribunal held that the notice issued under Section 148 on 29.07.2022 was hit by limitation as per the amended Section 149, read in light of the Supreme Court ruling in Union of India vs. Rajeev Bansal [2024] 167 taxmann.com 70 (SC).

Since the reassessment itself was declared void ab initio on the ground of limitation, the addition made under Section 68 on alleged penny stock transactions involving shares of M/s Kabra Drugs Ltd. was treated as academic and left unexamined on merits.

Background: Facts Leading to Reopening

Nature of Income and Initial Non-filing

  • The assessee is an individual engaged in salaried employment and investment in equity shares.
  • For AY 2015–16, the assessee did not file any original return of income.

Information on Penny Stock from Insight Portal

  • The case surfaced through High Risk CRIU/VRU alerts on the Insight Portal.
  • The scrip of M/s Kabra Drugs Ltd. was flagged as a “penny stock” allegedly used to introduce unaccounted income as exempt Long Term Capital Gain (LTCG).
  • The Assessing Officer (AO) recorded that a list of penny stock-related cases was received from CBDT under PMO reference, in which M/s Kabra Drugs Ltd. was identified as an accommodation entry provider.

Survey and Investigation in Kabra Drugs Ltd.

  • A survey under Section 133A was carried out on 23.08.2017 at the premises of M/s Kabra Drugs Ltd.
  • During this survey, the Department allegedly found that the company was involved in providing accommodation entries to various beneficiaries.
  • On the Insight Portal, it appeared that the assessee had traded in the scrip and the trade value linked to him was recorded as Rs. 98,95,700/-.
  • The AO also noted that the assessee had not filed any return for the relevant year.

Initiation of Reassessment under Section 147

  • After obtaining administrative sanction, the AO initiated reassessment under Section 147 by issuing a notice under Section 148.
  • In response, the assessee filed a return of income on 26.08.2022 declaring total income of Rs. 1,06,850/- and claimed exemption under Section 10(38) of Rs. 47,34,058/- towards LTCG on sale of shares.

Assessee’s Explanation in Assessment Proceedings

Story of Share Acquisition and Sale

The assessee’s explanation before the AO was as follows:

  • He claimed to have purchased 70,500 physical shares of M/s Kabra Drugs Ltd. in 2009, after the 2008 market crash, at very low prices with a long-term investment perspective.
  • The shares, according to the assessee, remained in physical form for several years and did not appreciate significantly.
  • Due to the lapse of time, the assessee contended he was no longer holding purchase bills or relevant bank statements to prove the acquisition in 2009.
  • During FY 2014–15, the assessee observed a sharp increase in the share price and therefore:
    1. Opened a demat account,
    2. Dematerialised the shares in tranches, and
    3. Sold 48,500 shares through registered broker M/s Arihant Capital Market Ltd. for Rs. 49,47,850/-.

The assessee submitted demat statements, broker ledger and bank statements, asserting that the sale transactions and receipt of consideration were fully accounted and verifiable.

Objections to Reopening and Penny Stock Allegation

The assessee also:

  • Disputed the correctness of the trade value of Rs. 98,95,700/- as appearing in departmental information and contended that the actual sale value was only Rs. 49,47,850/-.
  • Argued that the information used by the AO was vague and that his name was not part of any specific investigation material.
  • Sought cross-examination of persons whose statements were recorded during the survey in M/s Kabra Drugs Ltd., as their statements were relied upon by the AO.

AO’s Findings and Addition Under Section 68

Rejection of Assessee’s Explanation

The AO did not accept the assessee’s explanation, observing that:

  • The assessee failed to furnish purchase invoices for shares, bank statements evidencing original investment, or any convincing material to show that shares were indeed acquired in 2009.
  • Based on the survey and investigation in M/s Kabra Drugs Ltd., the AO concluded that the scrip was used as an instrument for accommodation entries and bogus LTCG.
  • The AO denied the assessee’s request for cross-examination of persons whose statements were recorded.

Addition of Entire Sale Proceeds as Unexplained Cash Credit

  • The AO held that the source of investment and the nature of LTCG claim remained unexplained.