The revenue alleging bogus long-term capital gain (LTCG) from penny stocks and commission, reopened the assessment for the impugned assessment year and made additions. The AO reopened the case after obtaining approval from the competent authority on the basis of information received from the Investigation Wing that the assessee had earned LTCG from transfer of shares of a company which was a penny stock company, and claimed it as exempt under section 10(38) of the Income Tax Act.

The AO added to the assessee’s income under section 68 of the Act an unexplained cash credit and commission for arranging the accommodation entry of LTCG in the assessment order. The assessee challenged the reopening and the additions before the Commissioner of Income Tax (Appeals) (CIT(A)), National Faceless Appeal Centre (NFAC), Delhi, who dismissed his appeal.

The assessee then filed an appeal before the Tribunal where it was contended that the reopening was invalid as the reasons recorded by the AO were vague, contradictory, and based on borrowed satisfaction without any independent application of mind. He also submitted that he had purchased and sold the shares through genuine transactions and had disclosed all the material facts in his return of income. He relied on various judicial precedents to support his case. The Tribunal, after hearing both the parties, found merit in the assessee’s contentions and held that the reasons recorded by the AO were not clear and unambiguous and did not establish any link between the information received and the escapement of income by the assessee. The Tribunal also observed that the AO had stated different amounts of LTCG and commission in the reasons and the assessment order and had used the terms “his/her” and “she” interchangeably, which showed non-application of mind. The Tribunal further noted that the AO had not examined the details of the purchase and sale of the shares, the mode of payment and receipt, and the source of funds of the assessee, and had merely relied on the information from the Investigation Wing without any independent verification. The Tribunal, therefore, quashed the reopening and the additions made by the AO and allowed the appeal of the assessee. (AY.2013-14)