Reopening Notice for Bogus LTCG Set Aside Due to Lack of Prima Facie Belief

Issue: Whether a reopening notice issued under Section 148 of the Income-tax Act, 1961, for alleged bogus Long Term Capital Gains (LTCG) is valid when the Assessing Officer fails to establish a prima facie belief of income escaping assessment.

Facts:

The assessee filed a return of income disclosing short-term capital gains from the sale of shares.
The Assessing Officer issued a reopening notice based on information that the assessee had claimed bogus LTCG.
The reasons recorded for reopening merely mentioned information from credible sources about a search operation in the ‘K’ group case, where incriminating documents were found, suggesting that the assessee was a beneficiary of accommodation entries.
The Assessing Officer did not provide specific details or evidence to support the claim of bogus LTCG.

Decision:

The court held that the Assessing Officer failed to demonstrate a prima facie belief that income had escaped assessment.
The reasons recorded lacked specific details and evidence to support the allegation of bogus LTCG.
The court emphasized that a mere mention of information from credible sources without any basis for forming a belief is not sufficient to justify reopening an assessment.
The reopening notice was set aside.

Key Takeaways:

This case highlights the importance of establishing a prima facie belief of income escaping assessment before issuing a reopening notice under Section 148.
The Assessing Officer must provide specific details and evidence to support the reasons for reopening, and a mere mention of information without any basis for forming a belief is insufficient.
This decision safeguards taxpayers from arbitrary reopening of assessments and ensures that the Assessing Officer has a valid reason to believe that income has escaped assessment before initiating reassessment proceedings.

HIGH COURT OF GUJARAT

Ashishbhai Jashwantbhai Desai HUF

Income-tax Officer

BHARGAV D. KARIA and D.N. Ray, JJ.

R/Special Civil Application Nos. 1998 & 3963 of 2022

JANUARY 7, 2025

Tushar Hemani, Sr. Adv. and Ms. Vaibhavi K. Parikh, Adv. for the Petitioner. Varun K. Patel, Adv. for the Respondent.

JUDGMENT

Bhargav D. Karia, J.- Heard learned Senior Advocate Mr.Tushar Hemani with learned advocate Ms.Vaibhavi K. Parikh for the petitioners and learned Senior Standing Counsel Mr.Varun K. Patel with learned advocate Mr.Dev D. Patel for the respondents.

2. Rule, returnable forthwith. Learned Senior Standing Counsel Mr.Varun K. Patel waives service of notice of rule for and on behalf of the respondents.

3. Learned advocate Mr.Dev Patel for the respondents sought permission to place on record the Annexure-R/1 to the affidavit-in-reply in Special Civil Application No.1998 of 2022. Permission is granted.

4. By this petition Article 226 of the Constitution of India, the petitioners have challenged the notice dated 30^th March, 2021 issued under Section 148 of the Income Tax Act, 1961 (for short ‘the Act’) for Assessment Year 2017-18. Special Civil Application No.1998 of 2022 pertains to the HUF while, Special Civil Application No.3963 of 2022 pertains to the individual.

5.1. The petitioners filed return of income for the year under consideration disclosing the Short Term Capital Gains on sale of shares of Kushal Tradelink Limited and paid the tax on such Short Term Capital Gains.

5.2. Thereafter, the impugned notices are issued for re-opening. The respondentAssessing Officer has recorded the following reasons in case of the HUF :

“2. Brief details of Information collected/received by the AO: In this case, information was reflected on Insight Portal. On verification of the information, it is noticed that assessee has availed bogus LTCG amounting to Rs.68,03,303/- through Kushal Group of Ahmedabad during the year under consideration.

3. Basis of forming reasons to believe and details of escapement of income :

On perusal of the details and information, it is very clear that the assessee has availed bogus LTCG amounting to Rs.68,03,303/- through Kushal Group of Ahmedabad during the year under consideration. During the course of search proceedings it was found that Kushal Group of Ahmedabad is involved in providing bogus LTC Gain/Loss entries. In view of the above facts, I have reason to believe that income of Rs.68, 03,303/- has escaped assessment within the meaning of section 147 of the Act. Therefore it is a fit case foreopening of the assessment by invoking the provision of section 147 of the I.T. Act 1961, Accordingly it is fit case for issuing notice u/s. 148 of the I.T. Act.”

5.3. The Assessing Officer has recorded the following reasons for re-opening in case of the individual:

“As per the Information received from the credible sources that a search action u/s.132 of the Income-tax Act, 1961 was carried on 05.02.2019 in the case of Kaushal Group. During the course of search action various incriminating documents were found and seized from the premises of Kaushal Group (Kaushal Limited). It is further worth to mention here that, on going through the information available in Insight Portal, it can be seen that, Investing Wing, Ahmedabad during the investigation found that the Kaushal Group are managing and controlling multiple companies and concerns which are not carrying out any genuine business activity. These concerns are involved Into activity of providing accommodation entries of various kinds such as bogus Long Term Capital Gain/loss or Short Term Capital Gain/Loss, Unsecured Loans, Share Premium, Bogus Gains, Contrived Losses etc.

On perusal of information so received from Investigation Wing, Ahmedabad, it is noticed that the assessee Ashish Jashwantbhai Desai (ACUPD9673J) is one of the beneficiaries who has availed/obtained accommodation entries to the tune of Rs.61,83,737/- from Kaushal Limited (AABCK7885P) under various head such as bogus Long, Term Capital Gain/loss or Short Term Capital Gain/Loss, Unsecured Loans Share Pienium Bogus Gains, Contrived Losses etc. who has controlled and managed by Kaushal Group of companies. Failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment, the income of the assessee has escaped assessment to the tune of Rs:61,83,737/- for the AY 2017-18 within the meaning of Section 147 of the Income-tax Act 1961. I have therefore, reason to believe that this is a fit case for reopening the assessment u/s. 147 of the Act and for issue of notice u/s. 148 of the Incometax Act, 1961.”

5.4. The petitioners filed their objections before the respondent-Assessing Officer contending that the petitioners have duly disclosed the transactions carried out for purchase and sale of the shares of Kushal Tradelink Limited in the books of accounts and tax showing the short term capital gain is arising out of such transactions and there is no long term capital gains earned by the HUF during the year under consideration.

5.5. It was further contended that the Assessing Officer did not form any reason to believe on basis of any specific information relatable to the transactions carried out by the petitioners and in absence of such information of reason to believe, the impugned notices are without jurisdiction.

6.1. Learned Senior Advocate Mr.Tushar Hemani for the petitioners submitted that the respondent-Assessing Officer, without any basis, has formed a reason to believe that the petitioners, being one of the beneficiaries, are availing the Long Term Capital Gain/loss or Short Term Capital Gain/Loss, Unsecured Loans, Share Premium, Bogus Gains, Contrived Losses etc., out of the transactions with Kushal Tradelink Limited. It was submitted that such vague reasons given by the Assessing Officer clearly depict that there is no clarity to the nature of transaction, date of transaction, accounting treatment or reflection in the balance-sheet and profit and loss account of the petitioners for the year under consideration.

6.2. Learned Senior Advocate Mr.Tushar Hemani referred to the computation of the income placed on record to point out that the petitioners have offered the Short Term Capital Gains as income and have also paid the tax. It was therefore submitted that the impugned notices are issued in a mechanical manner without application of mind and therefore, there is no prima-facie belief as to escapement of income chargeable to tax.

6.3. It was therefore submitted that in absence of any live-link recorded by the respondent-Assessing Officer, the reasons are based only on the borrowed satisfaction and therefore, the respondent-Assessing Officer cannot assume jurisdiction to re-open the assessment.

7.1. On the other hand, learned Senior Standing Counsel Mr.Varun K. Patel for the respondent-Assessing Officer submitted that there was no scrutiny assessment for the year under consideration and the impugned notices are issued within a period of four years and there was only an intimation issued under Section 143(1) of the Act accepting the returned income. It was submitted that there was an information available on Insight Portal pertaining to the petitioners to the effect that the petitioners had availed accommodation entry from the Kushal Tradelink Limited.

7.2. It was further submitted that the petitioners have not denied the transactions with the Kushal Tradelink Limited who has provided the accommodation entries to the various assessees and petitioners are one of such beneficiaries of such entries.

7.3. It was therefore submitted that the Assessing Officer on the basis of such information has formed reason to believe to re-open the assessment and therefore, no interference is required to be made while exercising extra-ordinary jurisdiction under Article 226 of the Constitution of India.

8. Considering the submissions made by learned advocates for both the sides and on perusal of the reasons recorded, it appears that the Assessing Officer has failed to give the requisite details in the reasons recorded so as to form a requisite prima-facie belief that income has escaped assessment. The reasons recorded only refer to the information received from the credible sources that the search was carried out in case of Kushal Group and during course of search, incriminating documents were found and seized and on going through the information available on Insigight Portal, it was found that the petitioners are one of the beneficiaries of the accommodation entries in form of different types of income like Long Terms Gains/Loss/Short Terms Gains/Loss and also beneficiary of unsecured loans etc., without there being any basis for forming such belief.

9. Therefore, it is clear that the respondent-Assessing Officer has recorded the reasons only on the basis of the borrowed satisfaction without there being any live-link between the information available on the Insight Portal and the data available on the record of the petitioners-assesses. In such circumstances, the Assessing Officer cannot be said to have formed an independent satisfaction regarding the reasons recorded to re-open the assessment to come to the prima-facie conclusion that there is escapement of income.

10. In view of the foregoing reasons, the petitions succeed and accordingly, allowed. The impugned notices dated 30^th March, 2021 are hereby quashed and set aside. Rule is made absolute to the aforesaid extent with no orders as to cost.