Reassessment Notice for Bogus Long-Term Capital Gains Set Aside Due to Lack of Independent Opinion

JUDGMENT

Bhargav D. Karia, J. – Heard learned Senior Advocate Mr. Tushar Hemani with learned advocate Mr. Dhinal A. Shah for the petitioner and learned advocate Ms. Maithili D. Mehta for the respondent.

2. Having regard to the controversy involved in this petition which is in a narrow compass, with the consent of the learned advocates for the respective parties, the matter is taken up for hearing.

3. Rule returnable forthwith. Learned advocate Ms. Maithili Mehta waives service of notice of rule on behalf of the respondent State.

4. Since the issue involved in both the petitions are identical for different assessment years, they have been heard together and would be disposed of by this common judgment. For the sake of convenience, facts are recorded from Special Civil Application No.2036 of 2022.

5. By this petition under Article 226 of the Constitution of India, the petitioner has challenged notice dated 31.03.2021 issued by the respondent under section 148 of the Income Tax Act, 1961 (For short “the Act”) proposing to reopen the assessment of the petitioner for Assessment Year 2016-2017 as well as order dated 13.12.2021 dismissing the objections raised by the petitioner against reopening of the assessment.

6. Brief facts of the case are that the petitioner is an HUF and is regularly assessed to tax. The petitioner filed its return of income on 30.07.2016 for the Assessment Year 2016-2017 whereby the petitioner claimed Long Term Capital Gain exemption under section 10(38) of the Act.

7. It is the case of the petitioner that petitioner bought 60,000 equity shares of M/s. Kaushal Limited on 10.12.2013 in the Financial Year 2013-2014 relevant to Assessment Year 2014-2015 having face value of Rs.10/- each which were split in face value of Rs. 2/- each in September, 2015. Thus, 60,000 equity shares of face value of Rs.10/- held by the petitioner were split into 3,00,000 equity shares of face value of Rs.2/-. Further it is the case of the petitioner that 1,05,465 equity shares were sold in Assessment Year 2016-2017 against a consideration of Rs.1,09,98,307/- and thereby Long Term Capital Gain of Rs.1,02,74,815/- was earned and was claimed as exempt under section 10(38) of the Act. The equity shares of M/s. Kaushal Limited were held by the petitioner for more than 25 months and were sold in tranches.

8. Respondent issued the impugned notice under section 148 of the Act for Assessment Year 2016-2017 on 31.03.2021 proposing to reassess the total income treating the Long Term Capital Gain shown by the petitioner in the return of income as bogus.

9. The petitioner thereafter filed return of income on 20.04.2021 declaring total income at Rs.17,75,216/- pursuant to the impugned notice for reassessment and claimed exemption in respect of Long Term Capital Gain income on sale of equity shares.

10. Respondent supplied the reasons for reopening the said assessment vide letter dated 10.05.2021.

11. The petitioner filed its objections to such notice for reopening vide reply dated 09.06.2021.

12. Respondent thereafter issued notice under section 143(2) read with section 147 of the Act providing further clarifications on certain issues in the reasons recorded for reopening the assessment proceedings under section 147 of the Act.

13. Respondent by the impugned order dated 13.12.2021 disposed off the objections raised by the petitioner. The petitioner had also filed rejoinder to its objections vide letter dated 20.12.2021.

14. Being aggrieved by the impugned notice as well as order disposing off the objections, the petitioner has preferred the present petition.

15. Learned Senior Advocate Mr. Tushar Hemani with learned advocate Mr. Dhinal Shah for the petitioner submitted that the impugned notice and the consequential order disposing off the objections raised by the petitioner are illegal, bad in law and without jurisdiction as the conditions precedent for reopening under section 147 of the Act are not satisfied.

16. It was submitted that even on a plain reading of the reasons recorded for reopening the assessment, no prima facie finding with respect to discovery/recovery of present petitioners name during the search proceedings at M/s. Kushal Tradelink Limited is reflected.

17. It was submitted that the respondent has merely attempted to establish that Kushal group is involved into accommodation entries and thereafter the respondent has vaguely claimed that the petitioner is also a beneficiary of such actions of Kushal group without any tangible material available with the department since the petitioner was one amongst the buyers who had bought the shares of M/s. Kushal Limited. It was further submitted that issuance of notice is nothing but to initiate action against all the investors of a public listed company thereby imposing liability over all the investors for the alleged wrong committed by the public listed company.

18. It was further submitted that the respondent has issued impugned notice only and solely upon suspicion and has presumed that the alleged capital gain is bogus without there being any nexus or live link with the information gathered and reflected in the reasons recorded for reopening the assessment inasmuch as the respondent has completely failed to establish any nexus between the petitioner and M/s. Kaushal Limited including its agents and representatives. It was also submitted that the respondent in its letter dated 10.05.2021 apprising the reasons for reopening has not reproduced any specific evidence involving petitioner’s name or its role in M/s. Kushal Limited and the related anomalies.

19. It was therefore submitted that the respondent has failed to satisfy the prerequisite of “reason to believe” as prescribed in section 147 of the Act. It was submitted that reassessment is resorted to on the basis of information from Investigation wing which had nowhere stated that petitioner had claimed bogus long term capital gain. Further, there was no independent application of mind by Respondent. In support of his submission, reliance was placed upon decision of Hon’ble Delhi High Court in case of Pr. CIT v. Meenakshi Overseas (P.) Ltd. Reported in(Delhi), wherein it is held as under:

“20. Coming to the second part, this tells us what the AO did with the information so received. He says: “The information so received has been gone through.” One would have expected him to point out what he found when he went through the information. In other words, what in such information led him to form the belief that income escaped assessment. But this is absent. He straightaway records the conclusion that “the abovesaid instruments are in the nature of accommodation entry which the Assessee had taken after paying unaccounted cash to the accommodation entry given (sic giver)”. The AO adds that the said accommodation was “a known entry operator” the source being “the report of the Investigation Wing”.

“22. As rightly pointed out by the ITAT, the reasons to believe’ are not in fact reasons but only conclusions, one after the other. The expression ‘accommodation entry is used to describe the information set out without explaining the basis for arriving at such a conclusion. The statement that the said entry was given to the assessee on his paying “unaccounted cash” is another conclusion the basis for which is not disclosed. Who is the accommodation entry giver is not mentioned. How he can be said to be “a known entry operator” is even more mysterious. Clearly the source for all these conclusions, one after the other, is the Investigation report of the DIT. Nothing from that report is set out to enable the reader to appreciate how the conclusions flow therefrom.

23. Thus, the crucial link between the information available to the AO and the formation of belief is absent. The reasons must be self evident, they must speak for themselves. The tangible material which forms the basis for the belief that income has escaped assessment must be evident from a reading of the reasons. The entire material need not be set out. However, something therein which is critical to the formation of the belief must be referred to. Otherwise the link goes missing.

24. The reopening of assessment under Section 147 is a potent power not to be lightly exercised. It certainly cannot be invoked casually or mechanically. The heart of the provision is the formation of belief by the AO that income has escaped assessment. The reasons so recorded have to be based on some tangible material and that should be evident from reading the reasons.”

20. It was submitted that the respondent has completely relied upon the information of Investigation Wing, Ahmedabad and has completely failed to apply its own mind and therefore, it amounts to borrowed satisfaction, meaning that there is no satisfaction recorded by Assessing officer himself, which is a precondition as per section 147 of the Act.

21. Reliance was placed on the decision of this Court in case of Harikishan Sunderlal Virmani v. Deputy Commissioner of Income Tax, reported in Circle-2(1) 394 ITR 146 wherein it is held as under:

“Thus from the reasons recorded, the reopening of the assessment is on the information/data supplied by the office of the Principal Director of Income Tax (Investigation), Ahmedabad. From the information received, it appears that though the client code of the assessee with the broker Guinness Securities Limited was WW/2647, modified client code was found to be WW/2108 and therefore, to verify the genuineness of the modification of the client code, by applying Lavenshtein Distance Analysis or digit edit analysis utility, distance was found to be 3 and therefore, it is believed that the code is not wrongly typed and it is termed as deliberate change and establishing non-genuineness and contrived nature of the code change. From the reasons recorded, it does not appear that verification of the material on record there is independent formation of opinion by the A.O. and that any income has escaped assessment due to any failure on the part of the assessee in not disclosing truly and correct facts/material necessary for assessment. From the reasons recorded, it appears that the impugned reopening proceedings are on the borrowed satisfaction. No independent opinion is formed. On the plain reading of the reasons recorded what emerges is that the A.O. on considering the information received from the Principal Director of Income Tax (Investigation), Ahmedabad, reassessment proceedings have been initiated on the ground that the income escaped assessment. However, there is no assertion regarding the basis on which material on record, he has come to such conclusion. Therefore, the material on the basis of which the A.O. seeks to assume the jurisdiction under section 147 if the Act is the information received from the external source viz. the Principal Director of Income Tax (Investigation), Ahmedabad. It cannot be disputed that on the basis of the information received from another agency, there cannot be any reassessment proceedings. However, after considering the information/material received from other source, A.O. is required to consider the material on record in case of the assessee and thereafter is required to form an independent opinion on the basis of the material on record that the income has escaped assessment. Without forming such an opinion, solely and mechanically relying upon the information received from other source, there cannot be any reassessment for the verification.”

22. Reliance was also placed on the judgment of Hon’ble Supreme Court in the case of ACIT v. Rajesh Zaveri Stock Brokers Pvt. Ltd. reported in [2007] wherein it is observed as under:

“………At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief……”

23. Learned Senior Advocate Mr. Hemani invited the attention of the Court to an RTI application dated 24/12/2021 whereby the Petitioner sought information about the documents which have been relied upon in issuing the Impugned Notice.

24. Reliance was also placed on the decision of Hon’ble Calcutta High Court in case of S.P. Agarwalla alias Sukhdeo Prasad Agarwalla v. ITO reported in(Calcutta).

25. It was therefore, submitted that the respondent has not formed any independent opinion about escapement of income nor does it appear that there stands any belief upon which the respondent has issued the Impugned Notice for escapement of Income and the respondent has wholly on the basis of information received, initiated the reassessment proceedings and therefore, the impugned reassessment proceedings have been initiated only and solely upon borrowed satisfaction of the investigation wing, which is not permissible.

26. Reliance was also placed on the decision of this Court in the case of Varshaben Sanatbhai Patel Versus Income Tax Officer, reported in (Gujarat).

27. It was further submitted that the crucial link or nexus between the information available to the respondent and the formation of belief is absent in the reasons recorded. The formation of belief by the respondent that income of the petitioner chargeable to tax had escaped assessment, was unreasonable and irrational, as it could not be related to the underlining information, something which is discernible from a bare reading of the letter recording reasons. It was submitted that the expression “reason to believe” which is found in Section 147 of the Act does not have the same connotation as “reason to suspect”. It was therefore, submitted that the impugned notice is liable to be quashed as illegal and without jurisdiction on this ground itself.

28. It was submitted that as per section 10(38) of the Act, capital gain on sale of equity shares in a company is exempted provided the capital assets (being shares) are long term in nature i.e. period of holding of shares is more than one year. However, in the given case, the petitioner has held the shares for a period of around 25 months, which aspect has been completely ignored by the respondent and reassessment is sought to be initiated merely on the basis of suspicion.

29. It was further submitted that a perusal of the reasons recorded would indicate that the higher authorities had granted approval in a mechanical manner without any application of mind or cogent reasoning which is not permissible in law as held in case of Mohinder Singh Malik v. CCIT reported in (Punjab & Haryana))(PH). It was submitted that the satisfaction arrived at by the concerned officer should be discernible from the sanction- order passed under Section 151 of the Act. In support of such contention, reliance was placed on decision of this Court in case of Chhugamal Rajpal v. S.P. Chaliha, reported in (1971) 1 SCC 453 wherein it is held as under:

“… Further the report submitted by him under Section 151(2) does not mention any reason for coming to the conclusion that it is a fit case for the issue of a notice under Section 148. We are also of the opinion that the Commissioner has mechanically accorded permission. He did not himself record that he was satisfied that this was a fit case for the issue of a notice under Section 148. To Question 8 in the report which reads “whether the Commissioner is satisfied that it is a fit case for the issue of notice under Section148”, he just noted the word “yes” and affixed his signatures thereunder. We are of the opinion that if only he had read the report carefully, he could never have come to the conclusion on the material before him that this is a fit case to issue notice under Section 148. The important safeguards provided in Sections 147 and 151 were lightly treated by the Income Tax Officer as well as by the Commissioner. Both of them appear to have taken the duty imposed on them under those provisions as of little importance. They have substituted the form for the substance.”

30. It was further submitted that in the impugned order it is categorically stated that “It would be relevant to mention that a detailed enquiry was made by the investigation wing through which it has been revealed that a large scale of tax evasion had been made in the form of bogus long term capital gain by providing accommodation entries and as per the information, you are one of the beneficiaries out of them.”. However, the said enquiry report has neither been reflected in the reasons for reopening nor has been furnished to the petitioner.

31. It was submitted that without prejudice to the case of the petitioner, even if it is assumed though not admitted, that the petitioner herein is involved into any accommodation entries and such information has been recovered from the search and seizure carried at M/s Kushal Ltd., even then the petitioner’s assessment can be reopened for assessment under Section 153C of the Act. Thereby, any action pursuant to search and seizure, as is the case of the Petitioner, proceedings under Section 153C of the Act are required to be followed. It was further submitted that the construct of Section 153 C of the Act, incorporates a notwithstanding clause relevant to Section 148 of the Act and thereby the present Impugned Notice and consequential proceedings are bad in law and thereby are required to quashed by this Court.

32. On the other hand learned advocate Ms. Maithili D. Mehta for the respondent submitted that as per the information available, a search and seizure under section 132 of the Act was carried out in Kushal group of Ahmedabad on 05.02.2019 wherein incriminating evidences in the form of digital data, loose papers, diaries etc. were found and seized and said entity was providing accommodation entries and the assessee was such beneficiary of accommodation entries provided by Kaushal group.

33. Learned advocate Ms. Mehta placed reliance on decision in case of Lalita Ashwin Jain v. Income tax officer reported in (Gujarat) wherein it was held that Assessing Officer while placing reasons recorded for approval of Commissioner prior to issuance of notice under section 148, recorded in Form No.ITNS 10 that income which escaped assessment was more than Rs. One lakh and therefore, statutory bar imposed against reopening of assessment would not operate in such a case. Further it was held that where Joint Commissioner nodded in favour of Assessing Officer by writing ‘yes’ to reasons recorded and accorded permission for reopening of assessment, notice of reopening on that count alone cannot fail holding that assumption of jurisdiction under section 147 was invalid, if application of mind is otherwise demonstrable from material on record. It was therefore, submitted that assessee’s contention regarding issuance of notice without jurisdiction is not tenable and the notice issued under section 148 of the Act is as per law.

34. Relying upon the decision in case of ACIT v. Rajesh Jhaveri Stock Brokers Pvt. Ltd. reported in and in case of GVK Gautami Power Ltd. v. Asstt. CIT reported in [2012] 336 ITR 451 (Andhra Pradesh) it was submitted that the phrase “reasons to believe” means cause or justification for the Assessing Officer to know or suppose that income had escaped assessment. It does not mean that the Assessing Officer should have finally ascertained the facts by legal evidence or conclusion. At the stage of reopening of assessment, the final outcome of the proceedings is not relevant. The only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether or not the material would conclusively prove escapement is not the aspect or concern at the stage of initiation of reassessment proceedings but this aspect has to be examined subsequently during the course of reassessment proceedings.

35. It was further submitted that a detailed inquiry was made by the investigation wing through which it has been revealed that a large scale of tax evasion had been made in the form of bogus long term capital gain by providing accommodation entries and therefore, the proposed action of holding the LTCG of the assessee as non-genuine and liable for tax under section 68 of the Act was legal and valid. In support of such contention reliance was placed on decision in case of CIT v. Durga Prasad More reported in and in case of Sumati Dayal v. Commissioner of Income Tax reported in wherein it is held that even if a transaction or entry prima facie appears to be legal and is duly supported by documentary evidence, the tax authorities not only have the right but also an obligation to make deeper inquires and examine the transaction in the light of surrounding circumstances and test to uncover its real nature. Reliance was also placed on decision in case of ITAT, Nagpur Bench in ITA No.61/Nag/2013 in case of Shri Sanjay Bimalchand Jain v. ITO Ward 4(2), Nagpur delivered on 18.07.2016, wherein the Bench upheld the addition of LTCG claimed exempt by the assessee.

36. It was submitted that said judgment of ITAT Nagpur has also been upheld by Hon’ble Bombay High Court in Income Tax Appeal No.18/2017 delivered on 10.04.2017.

37. It was submitted that issue of LTCG was also confirmed by ITAT Chennai Bench in case of Mrs. Vidya Reddy v. ITO Int. Taxation 1(2) Chennai in ITA No.2016/Chny/2017 dated 15.05.2018.

38. Reliance was also placed on decision in case of Narendra Shrikishan Agarwal v. ITO reported in TS-670-4TAT2019(PUN) as well as in case of Shri Sandeep Bhargava v. ACIT Circel- 60(1), New Delhi passed in ITA No. 420/Del/2019 vide judgment dated 20.08.2019. Further reliance was placed on decision of Delhi High Court in case of Suman Poddar v ITO, Delhi passed in ITA No. 841/2019 dated 17.09.2019 wherein it was held that Cressanda Solutions Ltd was in fact identified by the Bombay Stock Exchange as a penny stock being used for obtaining bogus Long Term Capital Gain. It was submitted that Special Leave to Appeal No.26864/2019 against the said judgment of Delhi High Court was also dismissed vide order dated 22.11.2019. It was therefore, submitted that notice issued under section 148 of the Act is legal and valid and requires no interference by this Court.

39. 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, it appears that the details of shares purchased and sold as per Contract note, copy of ledger of broker ASE Capital Markets Ltd and copy of bank statement of assessee for purchase of share and sale of shares were produced by the petitioner and the purchase and sale of share have order number, order time, trade number and trade time mentioned in the contract. The assessee purchased 60,000 shares of Kushal Ltd. The assessee has sold 1,05,465/- shares for Rs. 1,09,98,307/- leaving the balance of 1,94,535 shares as closing investments as on 31.03.2016 which is disclosed in the balance sheet and part of demat statement. It, therefore, cannot be said that the petitioner has not disclosed fully and truly all material facts relevant for assessment.

40. 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.

41. 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.

42. 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 Court in case of Raajratna Stockholdings Pvt. Ltd. v. Assistant Commissioner of Income Tax Circle 1(1)(1) (judgment dated 25.11.2024 rendered in Special Civil Application No.3696 of 2022) in similar circumstances has quashed and set aside the impugned notice issued under section 148 of the Act and consequential order disposing off the objections raised by the petitioner.

43. 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.

44. The petitions therefore, succeed and are accordingly allowed. Impugned notice dated 31.03.2021 issued under section 148 of the Act and the consequential order dated 13.12.2021 dismissing the objections raised by the petitioner are hereby quashed and set aside. Rule is made absolute to the aforesaid extent. No order as to costs.