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2022 (1) TMI 1416 - HC - Income TaxReopening of assessment u/s 147 - Bogus LTCG - Penny stock transactions - reason to believe - information received from the intelligence being of Kolkata is only information relied upon - independent application of mind v/s borrowed satisfaction - Tribunal allowed the appeal of the assessee by holding that the Assessing Officer s reasons recorded fall in the zone of reasons to suspect and not reasons to believe HELD THAT - Undoubtedly, there exists a material on record that after the original assessment was concluded, the information had been received from the Investigating Wing, Kolkata, which carried on the survey and search operations, where it was established that the large number of penny stock companies share prices were artificially manipulated on the stock exchanges in order to book bogus claims of LTCG/Loss. The statement had also been recorded of Shri Sanjay Vora u/s 131 of the Act, which does not contain the name of the assessee and it also does not relate to the broker of assessee, since the sale is not through M/s.Anand Rathi Shares and Stock Brokers Ltd., but through Arcadia Share and Brokers Pvt.Ltd. Thus, on obtaining this information, there shall need to be a reason for formation of belief that there is a rational connection having live link between the material coming to the income tax officer and his formation of belief that the income chargeable to tax has escaped the assessment of the particular year. Even when the Court is not required to go into the sufficiency or adequacy of the material, it is a must for the AO to establish the rational connection of direct nexus or live link between the material coming to the notice of the officer and formation of his belief. There does not appear to be any material connecting the present assessee, where information in relation to the third party has been used by the AO. There is nothing to indicate as to how in absence of any explicit connection of the assessee with the information received from the another agency, the reassessment proceedings have been initiated. The statement recorded of Shri Sanjay Vora also does not name the assessee nor has there been any link of the broker through whom the assessee has sold the shares. Of course, the company whose share has been purchased by the assessee is alleged to be one of the penny stock companies. Therefore, the reasons recorded were drawn from survey and search operation in relation to the other assessees and therefore, the requirements of the statute does not appear to be satisfied. Even if, there is a needle of suspicion towards the assessee, the Assessing Officer shall need to act upon his own belief that the twin conditions required under the statute are satisfied before he initiates the proceedings of reassessment. this Court cannot be oblivious of the requirement of satisfying these conditions before the reassessment proceedings are initiated, there appears to be a borrowed satisfaction. It has chosen to merely considered the information/material received from other source without forming any independent opinion on the basis of the material on record that income has escaped the assessment. His suspicion of the assessee dealing with the shares and claiming of LTCG would not provide the sufficient grounds for reopening. The exercise which is based on suspicion is not permissible for reopening and any notice for reassessment in such circumstances would need to be termed as a fishing inquiry only. The Apex Court interpreted the word reason to believe in case of Central Prominces Mangnese Ore Company ltd. ( 1991 (8) TMI 4 - SUPREME COURT it held that, the word reason in the phrase reason to believe in Section 147, would mean cause or justification to know that income had escaped the assessment he can be said to have reason to believe. This expression does not mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. AO to form the opinion there shall need to be some link with the material and as discussed above, the same is missing, the challenge needs to fail. Though no rigid format is a must to express application of mind or for formation of belief that income chargeable to tax has escaped assessment and yet, when reliance on the information is mechanical without reassessment for the verification, independent opinion needs to be held to be absent. Decided against revenue.
Issues Involved:
1. Whether the ITAT erred in quashing the reassessment proceedings under Section 147 of the Income Tax Act. 2. Whether the ITAT erred in not deciding the case on merits despite the evidence gathered by the Assessing Officer. Issue-wise Detailed Analysis: 1. Quashing of Reassessment Proceedings under Section 147: The appellant, Principal Commissioner of Income Tax, challenged the ITAT's decision to quash the reassessment proceedings under Section 147. The reassessment was initiated based on information from the Investigation Wing of Kolkata, which indicated that the assessee had shown Long Term Capital Gain (LTCG) from penny stock transactions, suspected to be bogus. The Assessing Officer issued a notice under Section 148 after obtaining necessary approvals. The ITAT held that the reasons recorded for reopening the assessment did not constitute "reasons to believe" but rather "reasons to suspect." The Tribunal noted that the information from the Investigation Wing was not specific to the assessee and lacked a direct link to the assessee's transactions. The Tribunal emphasized that the Assessing Officer must have tangible material directly related to the assessee to form a bona fide belief that income had escaped assessment. The Tribunal also highlighted that the statement of Sanjay Vora, which was part of the investigation, did not mention the assessee and was related to a different broker. The High Court upheld the ITAT's decision, stating that the reassessment proceedings were based on borrowed satisfaction without independent application of mind by the Assessing Officer. The court reiterated that for reopening under Section 147, the Assessing Officer must form an independent opinion based on material directly related to the assessee. The court referenced several judgments, including HariKishan Sunderlal Virmani and Sheo Nath Singh, to emphasize that the belief must be honest, reasonable, and based on tangible material, not mere suspicion. 2. ITAT Not Deciding the Case on Merits: The appellant argued that the ITAT erred by not deciding the case on merits despite the cogent material and circumstantial evidence gathered by the Assessing Officer. The ITAT focused primarily on the technical issue of the validity of reassessment proceedings and did not delve into the merits of the case. The High Court, while addressing this issue, noted that the Tribunal had the authority to adjudicate questions of law arising in the assessment proceedings, even if not raised earlier. The Tribunal admitted the additional ground regarding the validity of reassessment as it went to the root of the matter. The court supported the Tribunal's decision to prioritize substantial justice over technical considerations, referencing the Apex Court's decision in National Thermal Power Company Ltd. vs. CIT. The court concluded that since the reassessment proceedings were quashed due to lack of valid reasons to believe that income had escaped assessment, there was no need for the Tribunal to address the merits of the case. The High Court dismissed the appeal, affirming the ITAT's decision. Conclusion: The High Court upheld the ITAT's quashing of the reassessment proceedings under Section 147, emphasizing the need for tangible material directly related to the assessee to form a bona fide belief of escaped income. The court also supported the Tribunal's decision to prioritize the validity of reassessment proceedings over the merits of the case, ensuring adherence to substantive and procedural law.
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