The Hon'ble High Court of Delhi in Harsh Vardhan Bansal v. Assistant Commissioner of Income Tax [D.B. Civil Writ Petition No. 11921 of 2024] dated October 18, 2024, held that where the Assessing Officer issued a reopening notice under Section 148 against the assessee alleging bogus profits through penny stocks, in absence of any material or evidence to suggest that transactions in penny stocks were bogus, and the alleged escaped income falling below the threshold limit of Rs. 50 lakhs after excluding the unsupported allegations, such reopening notice was not valid.
Facts of the Case
The present case concerns reassessment proceedings initiated against Harsh Vardhan Bansal for Assessment Year 2013-14. The Assessing Officer issued a reopening notice claiming that the assessee's income escaping assessment amounted to Rs. 60,46,263/-. This amount comprised two distinct transactions: the sale of shares of Gemstone Investment Ltd. for Rs. 29,75,000/- and transactions in shares of Cubical Financial Services Ltd. resulting in income of Rs. 30,71,263/-.
The notice was accompanied by substantial documentation regarding Gemstone Investment Ltd., including a detailed report indicating that the company had been placed under Graded Surveillance Measure (GSM framework) and faced trading restrictions from SEBI. The report revealed dramatic fluctuations in Gemstone's share prices, which moved from Rs. 98 per share in May 2009 to Rs. 202 in July 2010, then plummeted to Rs. 6 in March 2011, eventually reaching Rs. 0.57 per share. The investigation suggested that share prices were controlled by syndicate members who artificially inflated prices through controlled transactions after beneficiaries purchased shares.
However, concerning Cubical Financial Services Ltd., the notice provided markedly less detail, merely categorizing it as a penny stock without furnishing any evidence or information suggesting fraudulent transactions. The assessee responded by asserting his status as a bona fide investor who regularly invested in various stocks based on price movement tracking. He emphasized the genuine nature of his transactions by pointing out that he neither purchased at the lowest price nor sold at the highest price.
The matter gained additional complexity due to timing considerations. The assessee had originally filed his income tax return for AY 2013-14 on July 31, 2013. The AO issued the first notice under Section 148 on June 30, 2021. Following the Supreme Court's decision in Union of India & Ors. v. Ashish Aggarwal and subsequent CBDT instructions (No. 1/2022 dated May 11, 2022), a fresh notice under Section 148A(b) was issued on May 25, 2022. The assessee challenged these notices and the subsequent order primarily because the AO lacked sufficient information suggesting escaped assessment exceeding the threshold of Rs. 50 lakhs, which was necessary for reopening assessments beyond three years.
Issue
Whether the Assessing Officer can issue a reopening notice under Section 148 for assessment years beyond three years without possessing concrete evidence or material suggesting that income exceeding Rs. 50 lakhs had escaped assessment?
Held by the Court
The Hon'ble High Court of Delhi in D.B. CIVIL WRIT PETITION NO. 11921 OF 2024 held that:
· The Court meticulously examined the legal framework governing reassessment proceedings and observed that for cases beyond three years, Section 149 of the Income Tax Act mandates that the Assessing Officer must possess concrete evidence - either books of account, other documents, or evidence - revealing escaped income amounting to or likely to amount to Rs. 50 lakhs or more. The Court emphasized that this requirement was further reinforced by CBDT Instruction No. 1/2022, which explicitly prohibited issuing notices for Assessment Years 2013-14, 2014-15, and 2015-16 if the escaped income fell below this threshold.
· Analyzing the specific circumstances of the case, the Court opined that while substantial evidence existed regarding Gemstone Investment Ltd.'s transactions suggesting escaped assessment, the situation with Cubical Financial Services Ltd. was markedly different. The Court noted that beyond a mere tabular statement and the label of "penny stock," the AO possessed no concrete evidence or documentation suggesting that these transactions were bogus or represented escaped income. The Revenue's counsel's candid admission that no additional material existed beyond the tabular statement further strengthened this conclusion.
· The Court strongly rejected the proposition that a stock's classification as a "penny stock" alone could justify the presumption of non-genuine transactions or tax evasion. It held that without corroborating evidence or information, such classification cannot lead to the conclusion that transactions were either non-genuine or constituted a subterfuge to introduce undisclosed income as capital gains in the books of account.
· Consequently, the Court determined that due to the complete absence of material evidence suggesting bogus transactions in Cubical shares, the amount of Rs. 30,71,263/- could not be legitimately included in calculating escaped income. Once this amount was excluded, the remaining sum of Rs. 29,75,000/- from Gemstone shares fell significantly short of the mandatory Rs. 50 lakhs threshold required for reopening assessments beyond three years. Based on these findings, the Court set aside both the impugned notices and the order relating to AY 2013-14.
Relevant Sections
- Section 10(38) of the Income Tax Act, 1961
- Section 148 of the Income Tax Act, 1961
- Section 149 of the Income Tax Act, 1961
- Instruction No. 1/2022, dated 11-5-2022
Cases Referred
- Union of India & Ors. v. Ashish Aggarwal: 2022 SCC OnLine SC 543
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