2020 (12) TMI 394 - AT - Income Tax

Reopening of assessment u/s 147 - eligibility of reasons to believe - HELD THAT - It is a legal necessity that a foundation based on information is a must before the AO has reason to believe escapement of income. So here the appraisal report on which the AO builds the reason to belief was absent when he recorded the reason before invoking the reopening jurisdiction u/s. 147 by issuing notice u/s. 148 on 31.03.2016. We are inclined to uphold the contention of the Ld. AR that the foundation on which the AO based his belief that income chargeable to tax had escaped assessment was absent at the material time when he issued notice u/s. 148 of the Act on 31- 03-2016 and therefore the basic legal requirement of reopening u/s. 148 of the Act i.e. AO s formation of reasons to believe escapement of income prior to reopening of assessment was absent in the given facts of the present case. AO did not comply with the requirement of law set out in Section 147/148 of the Act before reopening the assessment for AY 2009-10 originally completed u/s. 153A/143(3) of the Act dated 31.03.2015 and as a consequence thereto the order dated 29-12-2016 passed by the AO being without jurisdiction is held to be a nullity in the eyes of law. The assessee therefore succeeds on this legal issue. The cross objections taken by the assessee for AY 2009-10 is thus allowed. As relying on Hon ble Supreme Court in the case of NDTV Ltd. 2020 (4) TMI 133 - SUPREME COURT and other case laws we hold that the reopening of the assessments for AYs 2010-11 2011-12 are bad in law in as much as the AO did not satisfy the condition precedent in first proviso to Section 147 of the Act which was sine qua non for usurping jurisdiction u/s 147 . Bogus loss incurred in trading of commodities on the National Multi Commodity Exchange ( NMCE ) - HELD THAT - AO had simply copy-pasted his reasoning of AY 2009-10 and did not even bother to examine the assessee s commodity transactions for AY 2014-15. Unlike AY 2009-10 to AY 2012-13 in the assessment order for AY 2014-15 there was no allegation by the AO that the assessee had engaged in synchronized trading in this year. The charts and tables extracted by the AO analyzing the trades of the assessee pertained only to FYs 2008-09 to 2011-12 and there was nothing contained in the assessment order for AY 2014-15 which would even remotely suggest that the AO had applied his mind to the assessee s commodity transactions for AY 2014-15 and then arrived at a conclusion that it was contrived or bogus. When confronted with the aforesaid fact even the Ld. CIT DR could not controvert the same. We therefore find merit in the assessee s alternate plea for AY 2014-15 that the reasoning given by the AO to disallow the loss incurred in commodity transactions in that year was factually perverse and therefore rightly deleted by the Ld. CIT(A).

Summary

Issues Involved:

1. Disallowance of loss incurred by the assessee in trading of commodities on the National Multi Commodity Exchange (NMCE) treating it as bogus.
2. Legal validity of reopening of assessments under sections 147/148 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Loss Incurred in Trading of Commodities on NMCE:

The sole issue in these appeals is the disallowance of loss incurred by the assessee in trading of commodities on NMCE, treating it as bogus. The facts of the case reveal that a search under section 132 of the Income Tax Act was conducted against the 'Drolia' Group on 30-11-2012, to which the assessee belongs. Notices under section 153A were issued for assessment years (AYs) 2007-08 to 2012-13, and assessments were completed under sections 153A/143(3) on 31-03-2015. The Assessing Officer (AO) disallowed the losses incurred by the assessee in commodity transactions conducted on the NMCE platform. The Commissioner of Income Tax (Appeals) [CIT(A)] provided relief to the assessee on merits for all assessment years, leading to the Revenue's appeal before the Tribunal.

The Tribunal noted that the AO's conclusions were based on the premise that the transactions were synchronized and executed with a deliberate intention to book contrived losses. However, the Tribunal found that the AO did not bring on record any evidence or material to support this conclusion. The assessee had provided all necessary documentation to substantiate its commodity transactions, including time-stamped contract notes and payment records. The Tribunal emphasized that the AO's suspicion alone could not take the place of evidence. The Tribunal upheld the CIT(A)'s decision, finding no merit in the Revenue's grounds.

2. Legal Validity of Reopening of Assessments under Sections 147/148:

The assessee challenged the legal validity of reopening the assessments under sections 147/148 for AYs 2009-10 to 2012-13. The Tribunal first adjudicated this legal issue, as it goes to the root of the matter. For AY 2009-10, the Tribunal noted that the AO issued a notice under section 148 on 31-03-2016, based on an appraisal report received on 05-04-2016. The Tribunal held that the AO's action of recording reasons without having the appraisal report at the time of issuing the notice was bad in law. Additionally, the Tribunal found that the AO did not demonstrate in the recorded reasons that income had escaped assessment due to the assessee's failure to disclose fully and truly all material facts necessary for assessment, as required by the first proviso to section 147.

For AYs 2010-11 and 2011-12, the Tribunal found that the AO's recorded reasons did not satisfy the condition precedent in the first proviso to section 147. The AO did not specify which material facts the assessee failed to disclose. The Tribunal held that the reopening of assessments was bad in law and quashed the reassessment orders for these years.

For AY 2012-13, the Tribunal noted that the reopening was within four years, but the AO's reasons were based on borrowed satisfaction from the Investigation Directorate's appraisal report. The Tribunal held that the AO did not independently apply his mind to the information received and quashed the reassessment order for AY 2012-13.

Conclusion:

The Tribunal allowed the assessee's cross objections for AYs 2009-10 to 2012-13, holding that the reopening of assessments was bad in law. The Tribunal dismissed the Revenue's appeals for AYs 2009-10 to 2012-13 and 2014-15, upholding the CIT(A)'s decision to delete the disallowance of losses incurred in commodity transactions on NMCE. The Tribunal emphasized that suspicion alone could not replace evidence and that the AO failed to bring on record any material to support the disallowance of losses.