No Reassessment to Tax Notional Capital Gains on Shares if They Weren’t Sold During Relevant Year | HC

Case Details: Aditya Vijay Mirchandani vs. Income Tax Officer - [2024] 164 taxmann.com 161 (Bombay)

Judiciary and Counsel Details

• G.S. Kulkarni & Somasekhar Sundaresan, JJ.
• Madhur Agarwal, Jas Sanghavi, Fenil Bhatt & Bhushan Kanchan for the Petitioner.
• Suresh Kumar & Dr. Dhanalakshmi Iyer for the Respondent.

Facts of the Case

The assessee-individual was allotted 2 lakh equity shares of a company at Rs.13 each. Thereafter, the market price of the shares went up to Rs. 659. The Assessing Officer (AO) received a report passed by SEBI for investigation of penny stock being allotted on a preferential allotment basis, and after said allotment, prices of shares were manipulated upwards to make a profit on the sale of such shares.

Based on the report, the AO issued a notice under section 148A(b) contending that there was a substantial difference between the allotment price and the market price of the shares. He passed an order under section 148A(d) holding that since the market price during the financial year had gone up to over Rs. 650 per share, notionally, it could be said that the assessee had gained Rs. 13 crores (approximately) and income had escaped assessment.

Aggrieved by the order, the assessee filed a writ petition before the Bombay High Court.

High Court Held

The High Court noted that the AO’s basis for proposing reassessment was an ex parte ad-interim order from SEBI, linked to the investigation of ‘penny stocks’ allotted on a preferential basis and subsequently manipulated for profit. The report indicated that the assessee was listed as an allottee of the shares.

However, there was no dispute that the shares were not sold during the relevant financial year, meaning no capital gains had arisen. The reassessment was solely based on the notional profit of Rs. 13 crores derived from the market price appreciation. Since the shares were not sold during the financial year, no taxable event occurred to trigger capital gains tax.

In this case, it was evident that no sale of the shares took place within the financial year. Thus, no income from the sale of shares had escaped assessment. Therefore, the foundation for the impugned order under section 148A(d) was invalid, and the writ petition was allowed.