Facts of the Case

The petitioner, Manjeet Kaur Duggal, filed a writ petition challenging the order dated 15.07.2022 passed under Section 148A(d) of the Income-tax Act, 1961 and the consequential notice dated 15.07.2022 issued under Section 148 for Assessment Year 2013–14.

The petitioner had filed her return of income for AY 2013–14 declaring income from salary, house property, business/profession, and other sources, and had also disclosed Long Term Capital Gain claimed as exempt under Section 10(38) on sale of shares of Gemstone Investment Limited and Priti Mercantile Private Limited. An original notice dated 06.04.2021 was issued under Section 148 under the unamended regime, which was later deemed to be a notice under Section 148A(b) pursuant to the Supreme Court decision in Union of India vs. Ashish Agarwal. A supplementary notice dated 21.05.2022 was thereafter issued alleging that the petitioner had booked bogus LTCG through penny stock transactions.

The petitioner furnished detailed replies along with contract notes, bank records, and computation of income. However, the Assessing Officer passed the impugned order under Section 148A(d), holding that it was a fit case for issuance of notice under Section 148.

Issues Involved

Whether reassessment proceedings for Assessment Year 2013–14 were barred by limitation under Section 149, whether the alleged income escaping assessment exceeded the threshold of ₹50 lakhs so as to attract extended limitation under Section 149(1)(b), and whether the impugned notice under Section 148 could be sustained in law.

Petitioner’s Arguments

The petitioner contended that the only income alleged to have escaped assessment was the net Long Term Capital Gain claimed as exempt under Section 10(38), amounting to ₹42,97,299/-, which was below the statutory threshold of ₹50 lakhs. It was argued that the Assessing Officer wrongly treated the gross sale consideration as escaped income and erroneously assumed that the purchase consideration was received back in cash without any material. Since the escaped income did not exceed ₹50 lakhs, the reassessment notice issued beyond three years was barred by limitation under Section 149(1)(a).

Respondent’s Arguments

The Revenue contended that the entire transaction of purchase and sale of shares was bogus and that not only the exempt LTCG but also the purchase consideration ought to be treated as income escaping assessment. It was argued that in penny stock cases, payments made through banking channels are often received back in cash, and therefore the gross amount exceeded ₹50 lakhs, justifying invocation of Section 149(1)(b).

Court Order / Findings

The Delhi High Court held that the Revenue’s assumptions were ex facie erroneous and unsupported by any material. The Court noted that the purchase consideration was paid through banking channels in an earlier assessment year and there was no allegation or evidence that such amount was received back in cash during the relevant previous year. The only transaction during the previous year relevant to AY 2013–14 was the sale of shares.

The Court held that even if the transactions were assumed to be sham, the only income that could possibly escape assessment was the net gain claimed as exempt under Section 10(38), amounting to ₹42,97,299/-, which was below ₹50 lakhs. Consequently, the conditions for invoking extended limitation under Section 149(1)(b) were not satisfied and the reassessment notice was barred by limitation.

Important Clarification

The Court clarified that in alleged penny stock cases, the Assessing Officer cannot mechanically treat gross sale consideration or purchase cost as escaped income without material. For the purpose of limitation under Section 149, only income chargeable to tax that has actually escaped assessment can be considered, and speculative assumptions cannot justify extended limitation.

Final Outcome

The writ petition was allowed. The Delhi High Court set aside the impugned order dated 15.07.2022 passed under Section 148A(d), the notice dated 15.07.2022 issued under Section 148 for Assessment Year 2013–14, and all proceedings initiated pursuant thereto. The pending application was also disposed of accordingly.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769676767_MANJEETKAURDUGGALVsINCOMETAXOFFICERWARD521DELHI.pdf

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