Reopening notice was invalid because the AO relied solely on the information from the insight portal without applying their independent mind

By | January 23, 2025
(Last Updated On: January 23, 2025)

Reopening notice was invalid because the AO relied solely on the information from the insight portal without applying their independent mind

Summary in Key Points:

  • Issue: Whether the Assessing Officer (AO) was justified in reopening the assessment solely based on information from the insight portal, without forming an independent opinion and considering the materials already on record.
  • Facts: The assessee, engaged in trading shares and securities, filed its return of income, which was accepted, and an assessment order was passed. Later, the AO received information from the insight portal about potential tax evasion through coordinated trading on the Bombay Stock Exchange. Despite the assessee having disclosed the profits from these transactions in their original return, the AO issued a reopening notice.
  • Decision: The ITAT held that the reopening notice was invalid because the AO relied solely on the information from the insight portal without applying their independent mind and considering the assessee’s disclosures in the original assessment.

Analysis:

The ITAT ruled in favor of the assessee, quashing the reopening notice. The ITAT emphasized the following:

  • Independent Application of Mind: The AO cannot mechanically rely on information from external sources like the insight portal without forming an independent opinion and considering the materials already available on record.
  • Assessee’s Disclosures: The assessee had disclosed the profits from the share trading activities in their original return, tax audit report, and financial accounts.
  • No Escapement of Income: There was no basis to believe that any income had escaped assessment, except for the information from the insight portal, which the AO failed to independently verify.

Important Note: This case highlights the importance of the AO applying their independent mind and conducting a proper inquiry before initiating reassessment proceedings. Relying solely on external information without considering the assessee’s disclosures and forming an independent opinion can invalidate the reopening notice. This decision safeguards taxpayers from arbitrary reassessments and ensures that the AO’s actions are based on a thorough examination of the facts and circumstances of each case.

HIGH COURT OF GUJARAT
Raajratna Stockholdings (P.) Ltd.
v.
Assistant Commissioner of Income-tax
BHARGAV D. KARIA AND D.N. Ray, JJ.
R/SPECIAL CIVIL APPLICATION NO. 3696 of 2022
NOVEMBER  25, 2024
Ms. Vaibhavi K. Parikh, Advs. 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 Parikh for the petitioner and learned Senior Standing Counsel Mr. Varun K.Patel for the respondent.
2. Having regard to the controversy arising in this appeal in narrow compass, with the consent of the learned advocates for the respective parties, the matter is taken up for hearing.
3. By this petition under Article 226 of the Constitution of India, the petitioner has challenged a notice dated 30.03.2021 for reopening of assessment for A.Y.2013-14 issued under section 148 of the Income Tax Act,1961 [for short ‘the Act’].
4. The petitioner-company was engaged in the activity of trading in shares and securities. During the Financial Year 2012-13 relevant to Assessment Year 201314, the petitioner had also entered into transaction in Futures & Options [F & O] and derivatives, which resulted into profit of Rs. 1,52,59,143/-. The petitioner disclosed the same in the Profit and Loss Account and filed return of income for the year under consideration on 30.09.2013 declaring total income at Rs. (-)73,71,104/-. Case of the petitioner was selected for scrutiny and during original assessment proceedings, various details were called for which were duly furnished from time-to-time by the petitioner and the assessment order under section 143(3) of the Act was passed on 17.02.2016 accepting the returned income.
4.1 The respondent thereafter issued the impugned notice for reopening of the assessment on the information received on the insight portal in March 2021 regarding coordinated and premediated trading on the Bombay Stock Exchange by engaging in reversal trade and illiquid stock options resulting in non-genuine business loss/gain to the beneficiary assessee and it was found that the petitioner is a party to such manipulation and from the data made available under Project Falcon on ITBA, it was found that the petitioner has created a profit of Rs. 1,30,47,000/-by buy and sale trades executed on the Bombay Stock Exchange.
4.2 After analysis of the information and report of the Security Exchange Board of India as well as the decision of the Hon’ble Apex Court in case of SEBI v. Rakhi Trading Private Limited delivered on 08.02.2018 in CA No. 1969 of 2011, the Assessing Officer formed a reason to believe that there is escapement of income by the petitioner in generating non-genuine profit amounting to Rs. 1,30,47,000/-.
4.3 The petitioner in response to the notice, filed the same return of income and requested for the reasons recorded and thereafter, raised the objections vide letter dated 12.07.2021 against the reopening of the assessment contending that the respondent has no jurisdiction to reopen the assessment as the petitioner has disclosed fully and truly all material facts relevant for the assessment.
4.4 It was also pointed out that the petitioner has disclosed the profit earned in the F&O and the derivatives transaction carried out during the relevant period and therefore, there is no question of escapement of any income. It was also contended that as the respondent-Assessing Officer has failed to form any independent opinion to come to the primafacie reason to believe that the income has escaped assessment.
4.5 The Respondent-Assessing Officer however, by order dated 25.11.2021, disposed of the objection holding that the reopening was justified.
Being aggrieved, the petitioner has preferred this petition.
5. This Court, by order dated 02.09.2024, admitted the petition and granted interim relief confirming the ad interim relief which was granted earlier vide order dated 21.02.2022.
6. Learned Senior Advocate Mr. Turshar Hemani for the petitioner submitted that the reasons recorded for reopening are incorrect and unreliable as the same are based only upon the information without any nexus with the facts of the case and without independent application of mind on behalf of the respondent.
6.1 It was further submitted that there is no tangible material available on record to form a belief that income of the year under consideration has escaped assessment. It was submitted that impugned notice for reassessment is without jurisdiction in absence of any evidence to substantiate that the petitioner has earned profit which is not disclosed.
6.2 It was further submitted that the transactions carried out by the petitioner are duly supported by the necessary evidence as the same are executed on the Bombay Stock Exchange after payment of STT at the market rate and therefore, the same cannot be prima facie held to be a non-genuine transaction in absence of any contrary material on record.
6.3 It was submitted that on perusal of the reasons recorded, the respondent has failed to provide any specific data against the petitioner which proves that the petitioner is involved in non-genuine transaction as the Assessing Officer has not made any remark or observation that the petitioner is engaged in any transaction which are reported by the SEBI or as per the decision of the Hon’ble Supreme Court relied upon by the Assessing Officer. It was therefore, submitted that on perusal of the reasons recorded for reopening, the same are based only on presumption as the Assessing Officer could not have formed any reasonable belief for escapement of any income more particularly, when the information made available before the Assessing Officer pertains to the loss and not the profit earned by any assessee by involving in any alleged manipulation of the trade in illiquid stock option resulting into non-genuine business loss or gain.It was therefore submitted that the impugned notice being without any jurisdiction, is liable to be quashed and set aside.
7. On the other hand, learned Senior Standing Counsel Mr. Varun Patel for the respondent submitted that the respondent has recorded reasons on the basis of the information made available on the insight portal as well as on the basis of the SEBI report and the decision of the Hon’ble Apex Court in case of SEBI v. Rakhi Trading Private Limited (supra).
7.1 It was further submitted that on similar facts, this Court has not entertained the petition on the basis of the information made available under project Falcon. It was submitted that the profit earned by the petitioner has been primafacie considered as non-genuine by the respondent for coming to the prima facie conclusion that the income has escaped assessment as on the basis of the information made available on the insight portal, the petitioner has entered into non-genuine transaction of Rs. 1,30,47,000/- whereas the petitioner has offered profit of more than Rs. 50 Lakh on currency derivatives and more than Rs. 1 Crore on share transactions. It was further submitted that in similar facts, as held by the Apex Court that when there are identical purchase and sale quantity and huge variation on purchase price and sale price, the information made available to the Assessing Officer has resulted into the fictitious profit/non-genuine profit earned by the petitioner in the 58 unique contracts which are part of the reasons recorded. It was therefore, submitted that on the basis of analysis of the trade data, chief characteristic of reversal trade as discussed by the Assessing Officer, is required to be examined during the course of the assessment proceedings about the genuineness of the transaction as the assessee has indulging into non-genuine profit amounting to Rs. 1,30,47,000/-.
7.2 It was further submitted that when the assessee has challenged the jurisdiction of the respondent to issue the notice under section 148 of the Act for the reopening of the assessment, no interference may be made as the assessment is at large before the Assessing Officer and if the petitioner is aggrieved by any addition which may be made by the Assessing Officer, alternative remedy is available by preferring an appeal. In support of his submissions, learned advocate Mr. Patel has referred to and relied upon the following averments made in the affidavit-in-reply filed on behalf of the respondent:
“7. Since, 4 years from the end of the relevant year has expired in this case, the requirement to initiate proceedings u/s. 147 are reason to believe that income for the year under consideration has escaped assessment because of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment for the assessment year under consideration. It is pertinent to mention here that reasons to believe that income has escaped assessment for the year under consideration have been recorded above. In this regard, it is also pertinent to mention here that above referred details have not been called for by the AO and thus are not been examined by the AO nor such details are furnished by the assessee. It was only after investigation was carried out by Investigation Wing that this scheme of tax evasion could be unearthed. It is pertinent to mention here that the aforesaid information was not in the possession of the undersigned earlier. The said information/scheme of tax evasion could be unearthed only after receiving the information on INSIGHT PORTAL in MARCH 2021 i.e. well after the assessment proceedings have been finalized in the case of assessee company. I have carefully considered the assessment records containing the submissions made by the assessee in response to various notices issued during the assessment proceedings and have noted that the assessee has not fully and truly disclosed the following material facts necessary for assessment for the year under consideration.
It is evident from the above facts that the assessee had not truly and fully disclosed material facts necessary for assessment for the year under consideration thereby necessitating reopening w/s. 147 of the Act.
It is further stated that information from other assessing officer/other charges of the department constitutes information on the basis of which reopening can be done after application of mind and forming reasons to believe. In this regard reliance is placed on the ratio of Supreme Court judgment in case of ITO Vis Purshottamdas Bongur and Gujarat High Court judgment in the case of Peass Industrial Engineers Pvt Ltd v/s. DCIT wherein it was held that information received by DDIT (Inv.) constitutes information on the basis of which reopening can be done after application of mind and forming reasons to believe. Wherein it was held that the facts and information contained in the information letter received, the Income Tax officer, without any further investigation, could have formed ; the opinion that there was reason to believe that the income of the assessee chargeable to tax had escaped assessment).”
7.3 Referring to the above averments, it was submitted that the petition may be dismissed with cost.
8. Having considered rival submissions made by learned advocates for the respective parties and on perusal of the material on record as well as documents placed by the petitioner by way of a separate compilation containing the return of income, tax audit report and financial accounts, copy of ledger account which are on the record of the respondent which were produced by the petitioner at the time of regular assessment, it appears that the petitioner has disclosed the profit earned from the Speculation Profit on currency derivatives of Rs. 50,24,999.94 and Speculation profit on shares of Rs. 1,02,28,243.76 totaling to Rs. 1,52,59,143.70 which is already credited in Profit and Loss Account. It, therefore, cannot be said that the petitioner has not disclosed fully and truly all material facts relevant for assessment.
9. It also appears from the reasons recorded that the no verification of the material on record is made by the respondent and there is no independent opinion that any income has escaped assessment due to any failure on the part of the assessee in not disclosing fully and truly all material facts necessary for assessment.
10. Moreover, from the reasons recorded it appears that the initiation of reopening proceedings are on the borrowed satisfaction as no independent opinion is formed and on bare perusal of the reasons recorded, it emerges that the Assessing Officer, considering the information received from the insight portal, has issued impugned notice forming reason to believe that the income has escaped the assessment on the presumption that the petitioner has been involved in creating the non-genuine profit which is already offered to tax in the return of income which is accepted in the regular course of assessment by passing the order under section 143(3) of the Act.
11. It is also pertinent to note that there is no basis to form reasonable belief for escapement of income except the information made available on the insight portal. The respondent-Assessing Officer has not considered the material on record to come to the conclusion that there is failure on the part of the petitioner to disclose truly and fully all material facts to have reason to believe for escapement of income. Therefore, on the basis of the information received from another agency on insight portal or from the SEBI report, there cannot be any reassessment proceedings unless the respondent, after considering such information/material received from other sources, consider the same with the material on record in the case of the petitioner assessee and thereafter, is required to form independent opinion that income has escaped assessment. Without forming such opinion solely and mechanically relying upon the information received from the other sources, the respondent-Assessing Officer could not have assumed the jurisdiction to reopen the assessment based on such information. This view is fortified by the decision of this Court in case of Harikishan Sunderlal Virmani v. Deputy Commissioner of Income Tax reported in 394 ITR 146 .
12. Considering the facts the case, we are of the opinion that the respondent-Assessing Officer could not have assumed the jurisdiction merely and solely relying upon the information made available on the insight portal without forming any independent opinion on the basis of the material on record vis-a-vis the petitioner is concerned. The petition therefore, succeeds and is accordingly allowed. Impugned notice dated 30.03.2021 issued under section 148 of the Act is hereby quashed and set aside. Rule is made absolute to the aforesaid extent. No order as to costs.