Tax dept loses appeal on penny stock scam due to retrospective circular interpretation

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Case Name

Principal Commissioner of Income Tax vs Denisha Rajendra Keshwani (High Court of Gujarat)

R/Tax Appeal No. 265 of 2021

Date: 22nd November 221

Key Takeaways

• CBDT circulars and office memorandums don’t have automatic retrospective effect unless explicitly stated
• Tax department cannot use later circulars to revive appeals that were already dismissed on monetary grounds
• Special orders from CBDT are mandatory for filing appeals in penny stock cases under the new circular
• Section 254(2) of the Income Tax Act requires “mistake apparent from record” for rectification, which wasn’t present here

Issue

Whether the Appellate Tribunal was justified in dismissing the revenue’s appeal due to low tax effect without deciding on merits, even when the case involved alleged bogus LTCG on penny stocks for which no monetary limits were supposed to apply?

Facts

1. The Scam Discovery (April 2013): A search and survey operation was conducted at Mr. S.C. Shah’s residence and offices. They discovered he was running an accommodation entry racket using 212 companies to convert unaccounted cash into legitimate long term capital gains.
2. The Assessment: The Assessing Officer found that shares of Praneta Industries Limited were used for providing bogus LTCG and added Rs. 93,95,042/- to the assessee’s income.
3. First Appeal Success: The CIT (Appeals) deleted these additions, ruling that the transactions couldn’t be treated as sham.
4. ITAT Dismissal (August 14, 2019): The department appealed to ITAT, but their appeal was dismissed due to low tax effect (Rs. 28,31,997/- against the Rs. 50 lakh threshold).
5. New Circulars (September 2019): After the ITAT dismissal, CBDT issued Circular No. 23 of 2019 dated 06.09.2019 and Office Memorandum dated 16.09.2019, stating that monetary limits wouldn’t apply to penny stock cases.

Arguments

Tax Department’s Position:

• The case involved bogus LTCG through penny stocks, which should fall under the exception in Circular No. 23 of 2019
• The circular and office memorandum should have retrospective effect
• ITAT should recall its dismissal order under Section 254(2) as a “mistake apparent from record”

Assessee’s Position (implied):

• The appeal was properly dismissed due to low tax effect under existing rules
• Later circulars cannot retrospectively revive dismissed appeals

Key Legal Precedents

The court relied heavily on its own previous decisions:

1. Special Civil Application No. 7520 of 2021 - The High Court had dealt with the identical issue and dismissed a similar petition on 26.06.2021
2. Special Civil Application No. 8621 of 2021 - Another similar case decided along the same lines

Key Legal Provisions Referenced:

• Section 254(2) of the Income Tax Act - Deals with rectification of mistakes apparent from record by the Appellate Tribunal
• Section 268A of the Income Tax Act - Empowers CBDT to fix monetary limits for appeals
• CBDT Circular No. 23 of 2019 dated 06.09.2019
• Office Memorandum dated 16.09.2019

Judgement

The High Court dismissed the tax department’s appeal. Here’s their reasoning:

1. No Retrospective Effect: The court found that Circular No. 23 of 2019 and the Office Memorandum dated 16.09.2019 don’t have retrospective effect. The language clearly indicates they apply to future appeals, not past ones.
2. Special Order Requirement: The circular requires a specific special order from CBDT for each case or category of cases. This wasn’t done here.
3. Timeline Issue: When ITAT passed its order on 14.08.2019, neither the circular nor the office memorandum existed. Their non-existence at that time cannot be considered a “mistake apparent from record”.
4. Prospective Application: The circular applies only to appeals filed on or after 16.09.2019, not to appeals already dismissed.

The court concluded: “Here also the issue being identical, this appeal merits no consideration and is dismissed accordingly.”

FAQs

Q1: Can the tax department use new CBDT circulars to revive old dismissed appeals?

A: No, unless the circular explicitly states it has retrospective effect. In this case, the circular was clearly prospective.

Q2: What is required for the penny stock exception to apply?

A: The CBDT must issue a special order for each case or category of cases. A blanket circular isn’t enough.

Q3: What constitutes a “mistake apparent from record” under Section 254(2)?

A: It must be an obvious error visible from the record itself. The non-existence of a future circular when the original order was passed doesn’t qualify.

Q4: Does this mean all penny stock cases are now exempt from monetary limits?

A: Only if filed after September 16, 2019, and only with a specific CBDT special order for that case.

Q5: What’s the significance of this judgment?

A: It establishes that tax authorities cannot use retrospective interpretation of circulars to circumvent procedural dismissals, maintaining the finality of tribunal orders.

1. Aggrieved by the order dated 14.08.2019 passed by the Income Tax Appellate Tribunal ‘the ITAT’ hereinafter) the appellant raises the following substantial question of law for the determination of this Court.

“Whether the Appellate Tribunal is justified in law and on facts in disposing the appeal of the revenue on account of low tax effect without deciding the appeal on merits even when the issue under appeal was claimed of bogus LTCG on penny stock for which no monetary limits were applicable?”

2. The search and survey action was carried out at the residence and offices of Mr. S.C. Shah and at the residence of his key employees and associates on 09.04.2013. It was noticed that Mr. S.C Shah was engaged in providing accommodation entries of share capital, share premium, share application

money, unsecured loans, long term capital gain, etc. wherein the cash received by him from various persons. For providing accommodation entries, Shri S.C. Shah created an infrastructure of 212 companies which were used for layering of funds and purchase and sale of shares.

2.1 Mr. S.C. Shah admitted the factum of facilitating the conversion of unaccounted funds received in cash from the beneficiaries into long term capital gain by transacting in shares of various listed companies managed and controlled by him.

2.2 The Assessing Officer was of the

view that the shares of Praneta Industries

Limited were used for providing various

types of accommodation entries i.e. long

term capital gain, short term capital gain

as well as the trading loss. Therefore, the

trading and the shares were considered as

sham transactions and the additions were

made of Rs.93,95,042/- on account of the

bogus long term capital gain.

3. Aggrieved by the assessment order, the

Assessee preferred an appeal before the CIT

(Appeals) which deleted the additions by

holding that these transactions cannot be

treated as sham transactions and allowed

the appeal.

4. The Department challenged it before the

ITAT the order of the CIT (Appeals). The

Appeal came to be dismissed by the Tribunal

of the Department on the low tax effect

since the tax effect was to the tune of

Rs.28,31,997/- and the prescribed monetary

limit of Rs.50 Lakh for filing an appeal

before the Tribunal. The Tribunal at the

same time had given a liberty to the

Department to seek recall of dismissal of

appeal if the matter falls within the

exceptions.

5. The appellant is before this Court

seeking to question the Tribunal’s order

which according to the appellant, has

overlooked the fact that the Assessee had

claimed the bogus LTCG through penny stock

and hence, it falls under the exception

carved out in Circular No.23 of 2019 dated

06.09.2019 and OM dated 16.09.2019 which

provided that the monetary limit for filing

an appeal shall not apply to the cases

where Assessee claimed bogus LTCG/LTCL

through penny stock. Therefore, the

aforementioned question of law before this

Court.

6. We have heard the learned senior

advocate, Mr.Manish Bhatt assisted by the

learned advocate, Mr.Karan Sanghani.

7. This Court in Special Civil Application

No.7520 of 2021 has dealt with the very

issue in detail and dismissed the said

petition on 26.06.2021, which has not been

thereafter challenged further. Yet another

petition being Special Civil Application

No.8621 of 2021 has also been along the

line of Special Civil Application No.7520

of 2021 concluded.

7.1 Apt would be to refer to the

relevant findings and observations of the

Court.

“4. In order to appreciate the submissions made by

the learned Senior Advocate, Mr. M.R.Bhatt it would

be beneficial to reproduce the circular dated

06.09.2019 and Office Memorandum dated 16.09.2019:

Circular No. 23 of 2019.

2. Several references have been received by the Board

that in large number of cases where organised tax

evasion scam is noticed through bogus Long Term

Capital Gain (LTCG)/Short Term Capital Loss (STCL)

on penny stocks and department is unable to pursue

the cases in higher judicial fora on account of

enhanced monetary limits. It has been reported that

in large number of cases, ITATs and High Court have

recognized the unique modus operandi involved in

such scam and have passed judgements in favour of

the revenue. However, in cases where some appellate

fora have not given due considerations to position of

law or facts investigated by the department there is

no remedy available with the department for filing

further appeal in view of the prescribed monetary

limits.

3.In this context, Board has decided that

notwithstanding anything contained in any circular

issued u/s 268A specifying monetary limits for filing

of departmental appeals before Income Tax Appellate

Tribunal (ITAT), High Courts and SLPs/appeals before

Supreme Court, appeals may be filed on merits as an

exception to said circular, where Board, by way of

special order direct filing of appeal on merit in cases

involved in organised tax evasion activity.

5.The petitioner-original applicant having filed the

Miscellaneous Application before the Tribunal under

Section 254(2) of the said Act for rectifying the

mistake apparent from the record, it would be also

beneficial to reproduce the relevant part of Section

254(2) of the said Act.

“254. Orders of Appellate Tribunal (1) *** (2)

The Appellate Tribunal may, at any time

within six years from the date of the order,

with a view to rectifying any mistake

apparent from the record, amend any order

passed by it under sub-section (1), and shall

make such amendment if the mistake is

brought to its notice by the assessee or the

Assessing Officer”

6. So far as the facts of the case are concerned, the

Appeal filed by the petitioner before the Tribunal

against the order passed by the CIT(Appeals) was

dismissed by the Appellate Tribunal by a common

order passed on 14.08.2019, in view of the CBDT

circular dated 08.08.2019. Admittedly, at the relevant

time when the Tribunal passed the order dated

14.08.2019, neither the Circular No. 23 of 2019

dated 06.09.2019 nor the Office Memorandum No.

279 dated 16.09.2019 was in existence. Apart from

the fact that the said circular and the Office

Memorandum being not in existence and therefore

not taken into consideration by the Tribunal while

disposing all the Appeals could not be said to be a

mistake apparent from the record as contemplated

under sub-section (2) of Section 254 of the said Act,

the Court also does not find any substance in the

submission of Mr. Bhatt that the Tribunal should

have recalled the order dated 14.08.2019 in view of

the said Circular dated 06.09.2019 and the Office

Memorandum dated 16.09.2019, which had

retrospective effect. The Court at this juncture does

not think it appropriate to deal with the facts of the

case, as the main issue that falls for consideration

before this Court in the present petition would be, as

to whether the Circular dated 06.09.2019 and the

Office Memorandum dated 16.09.2019 had any

retrospective effect as sought to be submitted by

learned Advocate Mr. Bhatt.

7. From the bare reading of the Circular dated

06.09.2019, it appears that the CBDT had decided that

notwithstanding anything contained in any Circular

issued under Section 268A specifying monetary limits

for filing of departmental appeals before the Income

Tax Appellate Tribunal (ITAT), High Courts and SLPs/

Appeals before the Supreme Court, appeals may be

filed on merits as the exception to the said Circular,

where the Board by way of special order direct filing

of appeals on merits in cases involved in organized

tax evasion activity. The Office Memorandum dated

16.09.2019 was issued pursuant to the said circular

dated 06.09.2019 stating inter alia that by virtue of

the powers of CBDT under Section 268A of the

Income Tax Act, the monetary limits fixed for filing

appeals before ITAT/High Court and SLPs/Appeals

before Supreme Court shall not lie in case of assessees

claiming bogus LTCG/STCL through penny stocks and

appeals/ SLPs in such cases appeals shall be filed on

merits. There is nothing to suggest in the said

Circular/ Office Memorandum that they shall have

retrospective effect. On the contrary, from the

language employed in the said Circular dated

06.09.2019, it clearly transpires that the appeals may

be filed on merits as an exception to the other

Circulars issued earlier, where the Board by way of

special order direct filing of Appeals on merits in the

cases involved in organized tax evasion activity.

Therefore, by virtue of the said Circular dated

06.09.2019, the appeals could be filed on merits,

irrespective of the monetary limits fixed in earlier

cases, if the Board passes special order for filing

appeals in cases involving tax evasion activity. The

said Circular speaks about the Appeals that may be

filed with the special order of the Board in future,

and hence could not be construed to have

retrospective effect. The Tribunal interpreting the said

Circular/ Office Memorandum in the impugned order

has rightly observed that in respect of each case or

category of cases whether an appeal should be filed in

view of the Circular dated 06.09.2019 or not shall be

decided by the Board by way of special order, and

thus a specific requirement of issuance of special

order by CBDT is a must. The Tribunal therefore has

rightly held that the CBDT Circular No. 23/2019 dated

06.09.2019 should be read along with the Office

Memorandum dated 16.09.2019, in respect of the

appeals to be filed pursuant to such special orders of

CBDT and shall apply to all the appeals filed on or

after 16.09.2019 by the revenue, where the tax effect

may be low but the appeal could still be filed by the

revenue on merits.

8. The appeals including the appeal in case of the

respondent, which were disposed of by the Tribunal

vide the common order dated 14.08.2019 could not be

said to have been filed pursuant to the special order

of the CBDT in view of the Circular dated 06.09.2019

read with the Office Memorandum dated 16.09.2019,

and therefore it could not be said that the Tribunal

had committed any mistake apparent from the record,

which would require rectification as envisaged in

Section 254(2) of the said Act.

9. In that view of the matter, the Court does not find

any illegality or infirmity in the impugned order dated

09.09.2020 passed by the Tribunal dismissing the

Miscellaneous Application filed by the petitioner. The

petition being devoid of merits is dismissed in limine.”

8. Here also the issue being identical,

this appeal merits no consideration and is

dismissed accordingly.

Sd/-

(SONIA GOKANI, J)

Sd/-

(NISHA M. THAKORE,J)