Reopening Notice for F&O Loss Reversal Quashed; Independent Opinion Required for Reassessment
Issue I: Whether a reopening notice under Section 148 of the Income-tax Act, 1961, is valid when it is based on information from an insight portal about non-genuine transactions in Futures & Options (F&O) trading, but the assessee had disclosed particulars of the loss under the head ‘F&O’ in its return, and the Assessing Officer (AO) did not verify the material on record.
Facts I:
- The assessee was engaged in the business of purchase and sale of shares.
- The assessee filed a return declaring a certain loss from F&O trading, which was reflected in the profit and loss account.
- The assessment was completed under Section 143(3).
- After four years, the AO issued a reopening notice based on information from an insight portal that the assessee had entered into non-genuine transactions in F&O trading.
- The assessee had disclosed particulars of the loss under the head ‘F&O’ in its return, which was accepted by the department.
- The AO did not verify the material on record.
Decision I:
- The court held that since there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment, the impugned reopening notice issued against the assessee was unjustified.
Issue II: Whether reassessment proceedings can be initiated solely based on information received from another agency on an insight portal or from a SEBI report, without the AO independently considering such information/material with the material on record in the case of the assessee and forming an independent opinion that income has escaped assessment.
Facts II:
- The AO issued a reopening notice based on information received from another agency on an insight portal.
Decision II:
- The court held that on the basis of information received from another agency on an insight portal or from a SEBI report, there cannot be any reassessment proceedings unless the AO, after considering such information/material received from other sources, considers the same with the material on record in the case of the assessee and thereafter forms an independent opinion that income has escaped assessment.
Key Takeaways:
- Disclosure of Facts: If the assessee has disclosed all material facts relevant for assessment in their return, reopening is not justified.
- Independent Opinion: The AO must form an independent opinion that income has escaped assessment based on their own examination of the facts and evidence, and cannot solely rely on information from other agencies.
- Verification of Material: The AO is required to verify the material on record and cannot issue a reopening notice without doing so.
- Reopening Justification: Reopening notices must be justified and based on a valid reason to believe that income has escaped assessment.
- Procedural Compliance: The AO must follow due process and consider all relevant information before initiating reassessment proceedings.
- The court is emphasizing the need for the AO to apply their own mind, and to not just rely on information received from other sources.
HIGH COURT OF GUJARAT
Ashvin Dye-Chem Industries
v.
Income-tax Officer
BHARGAV D. KARIA and D.N. Ray, JJ.
R/SPECIAL CIVIL APPLICATION NO. 4884 of 2022
DECEMBER 24, 2024
Tushar Hemani, Sr. Adv. and Ms. Vaibhavi K. Parikh, Adv. for the Petitioner. Varun K. Patel, Adv. for the Respondent.
JUDGMENT
D.N.Ray, J.- Heard learned Senior Advocate Mr.Tushar Hemani with learned Advocate Ms.V.K.Parikh for the petitioner and learned Senior Standing Counsel Mr. Varun K.Patel for the respondent No.1.
2. Rule returnable forthwith. Mr.Varun Patel, learned Senior Standing Counsel waives service of notice of rule on behalf of the respondent No.1. Since the controversy involved is short, the matter is finally heard and disposed of.
3. This petition is filed under Article 226 of the Constitution of India with a prayer to quash and set aside the impugned notice dated 30.03.2021. Accordingly, the following prayers have been made :-
“(a) quash and set aside the impugned notice at “Annexure A” at to this petition.
(b) Pending the admission, hearing and final disposal of present petition, to stay the implementation and operation of the notice at Annexure “A” to this petition and stay the further proceedings for the Assessment Year 2014-15.
(c) any other and further relief deemed just and proper be granted in the interest of justice;
(d) to provide for the cost of this petition.”
3.1 The brief case of the facts are as under:-
3.2 The Petitioner is a partnership firm, during the year under consideration, entered into certain transactions in Futures & Options (hereinafter referred to as “F & O” for the sake of brevity) which resulted into loss of Rs.41,56,218/- and such loss is duly reflected in the Profit & Loss account. Such transactions were carried out through the broker namely “ASE Capital Markets Ltd.”.
3.3 Suddenly thereafter, the Respondent issued the impugned notice dated 30.03.2021 under section 148 of the Act seeking to reopen the case of the Petitioner for the year under consideration.
3.4 The Petitioner, in response to the impugned notice, filed return of income on 02.04.2021 and further requested the Respondent to supply copy of reasons for reopening.
3.5 The Respondent supplied copy of reasons for reopening vide notice dated 06.05.2021 issued under section 143(2) read with section 147 of the Act. Perusal of reasons for reopening reveals that the case has been reopened broadly on the count that the Petitioner has entered into transactions with ASE capital Markets Ltd. Briefly, the case of the Respondent is that the case of the Petitioner has been identified as potential case flagged by the Directorate of Income Tax (Systems) after risk profiling based on enquiry reports and findings of the Directorate of Income Tax (Investigation) and Directorate of Intelligence & Criminal Investigation. The said information was sent to the office of the Respondent from the insight portal wherein enquiry reports and findings have been uploaded by the field officers of the respective directorate. In view of the same, the Respondent has reason to believe that income of Rs.27,61,650/- has escaped assessment. Hence, the case has been reopened.
3.6 The reasons for reopening the assessment as can be found from the notice dated 06.05.2021 under Section 143(2) of the Act are as under:-
“2. Brief details of information collectd/received by the AO. In this case, information was reflected on insight Portal. On verification of the information, it is noticed that assessee entered into transaction in Fictitious Losses In Equity/Derivative Trading (BSE Equity Derivative Loss) of ASE CAPITAL MARKETS LTD. (PAN-AADCA4635P) amounting to Rs.27,61,650/- 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 assesse entered into transaction in Fictitious Losses in Equity/Derivative Trading (BSE Equity Derivative Loss) of ASE CAPITAL MARKETS LTD. (PAN-AADCA4635P) amounting to Rs.27,61,650/- during the year under consideration. In view of the above facts, I have reason to believe that income of Rs. 27,61,650/-has escaped assessment within the meaning of section 147 of the Act. Therefore it is a fit case for reopening 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.
3.7. The Petitioner, vide letter dated 06.09.2021, raised objections against reopening. In view of the same, the Respondent was requested to drop the reassessment proceedings.
3.8 The Respondent, vide order dated 28.02.2022 disposed off such objections and, inter-alia, held that the reopening is justified.
4.1 Learned Senior Advocate Mr. Hemani submits that the reasons for reopening are absolutely vague, scanty and non-specific. According to him, the respondent has not provided details of the date of receipt of information which is the foundation for reopening the petitioner’s case. Neither has the department provided any clarity either on the date of transactions or the nature of transactions. Further, it is not clear that the transactions pertain to an item reflected in the balance-sheet or profit and loss account and therefore, it can be safely concluded that the reopening is in a mechanical manner without any independent application of mind and devoid of any prima facie belief as to the escapement of income chargeable to tax.
4.2 Mr. Hemani, learned Sr. Advocate further submitted that there is crucial difference between ‘Futures & Option’ (F&O) and
“stocks”. According to the petitioner,
| (a) | “Derivatives” are assets values of which are derived from the underlying assets. |
| (b) | “Futures” and “Option” fall within the ambit of “Derivatives”; |
| (c) | Futures” are essentially a contract which casts an obligation on the buyer to purchase / sell a specific asset at a specific future date and at a specific price unless holder’s position is closed prior to expiration; |
| (d) | “Option” is a contract which gives its buyer an option, but not obligation, to purchase / sell a specific asset at a specific price at any time during the life of contract, |
| (e) | Transactions in “Futures” & “Option” (hereinafter referred to as “F&O”) are carried out on the floor of “recognized stock exchange”; |
| (f) | “Transactions in F&O” are very much different from “transactions in shares”; |
| (g) | Transactions in F&O are “strictly regulated by SEBI and have “no connection with the underlying shares”; |
| (h) | Unlike “stocks”, there are very few “F&O” wherein trading is permissible on recognized stock exchange; |
| (I) | Unlike “stocks” (where there can be a “penny stock”), there is nothing like “penny F&O”. |
4.3 In view of the aforesaid vital differences between F&O and ‘stocks’ there could never be any ‘non genuine loss’ in F&O transaction and thus there could not be any escapement of income chargeable to tax on the aforesaid basis. Lastly, it was submitted that the assessment for the year under consideration was framed under Section 143(3) of the Act and the same is sought to be reopened beyond the period of four years from the end of the relevant assessment year and therefore, the petitioner having filed a return under Section 139 of the Act and disclosed fully and truly all material facts necessary for its assessment for that Assessment Year, the impugned notice issued by the respondent deserves to be quashed.
5.1 Mr. Varun Patel, learned Senior Standing Counsel appearing for the respondent submitted that the petition is filed at a premature stage, inasmuch as, only a notice u/s 148 read with section 147 of the Income Tax Act (‘the Act’ for short) for A.Y. 2014-15 has been issued. In the event, the petitioner is aggrieved by the reassessment, alternative efficacious remedy is available by way of an Appeal to the CIT(A) and thereafter to the Tribunal as per the provisions of the Act. On this ground alone, learned Senior Standing Counsel Mr. Patel submitted that the petition is devoid of any merit and be summarily rejected.
5.2 He has further submitted that the reopening has been resorted to on the basis of information received under “Project Falcon” from DGIT (Investigation), Mumbai in March, 2021 through Insight Portal regarding coordinated and premeditated trading by brokers on behalf of their clients on the Bombay Stock Exchange by engaging in reversal trades in illiquid stock options resulting in non-genuine business loss/gains to the beneficiary. He has further submitted that the present petitioner is a party to such manipulation through ASE Capital Markets Ltd. and is the beneficiary of such fictitious loss and the petitioner had consistently recorded losses for each contract.
5.3 He has further submitted that thus, based on the analysis of trade data and comparing with chief characteristics of reversal trades, the Assessing Officer is of the prima-facie belief that the petitioner has indulged in generating non-genuine loss amounting to Rs. 27,61,650/- by trading in illiquid stock options on the BSE during the year under consideration and such amount has escaped assessment on account of failure on part of the petitioner to disclose truly and fully all material facts necessary for assessment.
5.4 Learned Senior Standing Counsel Mr. Varun Patel for the respondent submitted that the contention of the petitioner that the losses are genuine are merely self serving, inasmuch as, there is coordinated and pre-meditated trading by brokers on behalf of their clients on the Bombay Stock Exchange by engaging in reversal trade in il-liquid stock options resulting in non-genuine business loss/gains to the beneficiary since the petitioner is one of such beneficiary,their case must be dealt with during the course of reassessment proceedings, strictly on merits.
5.5 Learned Senior Standing Counsel Mr. Patel vehemently stressed that since the assessee is the beneficiary of a non-genuine loss, that by itself goes to show that there is a failure on the part of the petitioner with regard to full and true disclosure. It is further submitted that since the Assessing Officer has based the reopening on new and tangible material available with the office and armed with the knowledge based on the report of the investigation wing that the petitioner has booked fictitious losses and illegal trade, the reopening of assessment on the basis of such newly disclosed material is fully justified. Mr. Patel, learned Senior Standing Counsel concluded by submitting that there are many cases under investigation (Project Falcon) where there have been no losses booked by the assesses. However, in the present case, where a huge loss has been booked by the petitioner, the petitioner’s case must stand on a different footing.
5.6 In view of the aforesaid Mr.Patel submitted that this Court must not interfere in the reassessment proceedings and present petition deserves to be dismissed..
6. Having heard learned advocates appearing for the respective parties and on perusal of the records, this Court arrives at the following findings :-
| (i) | It will be seen from the profit and loss account for Assessment Year 2014-15 that the petitioner had shown the losses on futures and Options amounting to Rs.41,56,218/-in the profit and loss account for the relevant year. Based upon such disclosure the assessment proceedings of the petitioner came to be finalized. |
| (ii) | Thereafter, the notice under Section 148 of the Act was issued on 30.03.2021 and the reasons were supplied on 06.05.2021. |
7. We find that the petitioner had categorically responded to the issues raised against the petitioner in respect of the F&O trading loss as under :-
8. “In this connection, on going thoroughly the observations/contents for re-opening the completed assessment for A.Y. 2014-15, we could notice in Para-3 the observation and conclusion reproduced as under:
“Para 3
On perusal of the details and information, it is very clear that the asessee entered into transaction in fictitious losses in equity/derivative Trading (BSE Equity Derivative Loss) of ASE Capital Markets Ltd (PAN-AADCA4635P) amounting to Rs.27,61,650/- during the year under consideration. In view of the above facts, I have reason to believe that income of Rs.27,61,650/-has escaped assessment within the meaning of section 147 of the Act. Therefore, it is a fit case for re-opening of the assessment by invoking the provision of section 147 of the IT Act, 1961.
Accordingly, it is fit case for issuing notice uls 148 of the Act.
Your observation as re-produced hereinabove carries many flaws in so far as the alleged amount of transaction entered with ASE Capital Market Ltd as mentioned by you is incorrect as against the correct amount of Rs.41,56,218/- being Future & Option trading loss incurred debited to P&L account. Hence, details available on your records for forming your opinion for bringing the said alleged amount to tax is fallacious since, your observation based on your records simply refers to the transaction and not F&O trading loss. Hence, on the basis of such wrongful observation, no alleged amount of Rs.27,61,650/- could be brought to tax.
Observations made under Para-2 and Para-3 are nothing but based on simple wild allegation which does not conclusively prove as to how the transactions entered into with ASE Capital Market Ltd has provided accommodation entries to the beneficiaries were unearthed as a result of Investigation and hence, such incorrect and Invalid observations cannot termed as your independent satisfaction capable of invoking provisions of Section 147 of the IT Act, 1961.
8. The aforesaid objections were disposed of by order dated 28.02.2022 wherein, the respondent has categorically held as under :-
“4. Assessee vide its letter dated 06/09/2021 has filed its objection on 10/09/2021 for re-opening of the assessment. The relevant portion of the same are reproduced hereunder:
In this connection, on going through thoroughly the observations/contents for re-opening computed assessment for A.Y. 2014-15, we could notice in Para-3 your observation and conclusion being basis of forming reasons to believe and details of escapement of income is reproduced as under:
On perusal of the details and information, it is very clear that the asesse entered into transaction in fictitious losses in equity/derivative Trading (BSE Equity Derivative Loss) of ASE Capital Markets Ltd (PAN – AADCA4635P) amounting to Rs.27,61,650/- during the year under consideration. In view of the facts, I have reasons to believe that the income of Rs.27,61,650/-has escaped assessment within the meaning of section 147 of the Act. Therefore, it is a fit case for re-opening of the assessment by invoking the provisions of section 147 of the IT Act, 1961. Accordingly, it is fit case for issuing notice u/s 148 of the Act.
Your observation as re-produced hereinabove carries many flaws in so far as the alleged amount of transaction entered with ASE Capital Market Ltd in Fictitious Losses in Equity/ Derivatives Trading as mentioned by you is incorrect as against the correct amount of Rs.41,56,218/ being Future & Option trading loss incurred and debited to P&L account. Hence, details’s available on your records for forming your opinion for bringing the said alleged amount to tax is fallacious since, your observation based on your records simply refers to the transaction and not F&O trading loss. Hence, on the basis of such wrongful observation, no alleged amount of Rs.27,61,650/- could be brought to tax.
9. Thus, we find that at no point of time, was there any failure on the part of the petitioner:
“(i) to make a return u/s. 139 or in response to the notice issued under sub-section (1) of section 142 or section 148;
(ii) to disclose fully and truly all material facts necessary for his assessment for that Assessment Year”
10. It cannot be held that the department was justified in reopening the assessment for Assessment Year 2014-15, which, we may add, has been done mechanically without application of mind, in the absence of any tangible material.
11. It also appears from the reasons recorded that 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.
12. Moreover, from the reasons recorded it appears that the initiation of reopening proceedings are on 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 the impugned notice forming his reason to believe that the income has escaped assessment on the presumption that the petitioner has been involved in creating the non-genuine losses which is already reflected 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. Besides, there is no clarity in the reasons whether the transaction value in question or the loss that resulted from such transaction, amounts to Rs. 27,61,650/-. Further, the petitioner had reported a total loss of Rs. 41,56,218/- in F&O Trade in its return. Why only a portion thereof, namely, Rs.27,61,650/- is considered to be non-genuine loss and the rest of the loss is considered to be genuine, is also baffling.
13. 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 respondentAssessing 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 .
14. 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.
15. This Court has held in its decision in the case of The Principal Commissioner of Income Tax-1 v. M/s. Farmson Pharmaceuticals Gujarat Pvt. Ltd. passed in Tax Appeal No. 229 of 2024 following the decision in the case of CIT v. The Kelvinator of India Ltd. reported in(Kerala))
“9. Respectfully following the above judicial precedents, we have no hesitation in holding that when there is no failure on the part of the assessee in disclosing the income and No new tangible material on record, the reopening of assessment after 4 years period amounts to “change of opinion” only. Therefore the reopening of assessment invalid in law. Thus the finding arrived by the Ld. CITIA) does not require any interference. Therefore the grounds raised by the Revenue is devoid of merits and the same is hereby dismissed.
10. In the result, the appeal filed by the Revenue is hereby dismissed.”
16. In view of the foregoing reasons, this Court is of the opinion that the petitioner had disclosed in its return for the Assessment Year 2014-115 the particulars of the loss under the head of “future and options” which was subsequently accepted by the Department. Therefore, the notice for re-opening the assessment on the exact entry under the head of “future and options” is based on change of opinion. The assessee cannot be said to have failed to have fully and truly disclosed all materials facts which would warrant the reopening after a period of four years, anyways. Therefore, this petition succeeds and impugned notice issued under Section 148 of the Income Tax Act, 1961 dated 30th March, 2021 is hereby quashed and set aside. Rule is made absolute to the aforesaid extent. No order as to costs.