2021 (5) TMI 691 - HC - Income Tax

Reopening of assessment u/s 147 - Penny stock transaction of assessee - proof of independent application of mind by AO - Whether AO has recorded the reasons on the basis of borrowed satisfaction? - HELD THAT - As assessing officer himself was satisfied with regard to the information and other material on record, he formed an opinion that, the income has escaped assessment. Therefore, when the information was specific with regard to transactions of penny stock entered into by the assessee with the Karma Ispat Ltd., and the AO had applied his independent mind to the information and upon due satisfaction, led to form an opinion that, the amount of claim of LTCG claimed by the assessee is chargeable to tax has escaped assessment, which facts suggests that, there is live link between the material which suggested escapement of income and information of belief. Under the circumstances, we are satisfied that, there was enough material before the AO to initiate proceedings under Section 147 of the Act. We do not agree with the contention that, merely on the information, the AO has recorded the reasons and on the basis of borrowed satisfaction, he formed an opinion with respect to the income chargeable to tax has escaped assessment. As examined the issue of valid sanction as raised by the learned counsel for the writ applicant. We take the notice of the fact that, the copy of the approval has been provided to the assessee at the stage of passing the order of disposing the objections raised by the assessee. Therefore, it is evident that, in the instant case, the authorities concerned have given approval after due application of mind and expressed their satisfaction with regard to the reasons recoded for reopening of the assessment. Thus no hesitation to hold that it could not be said to have that there was no material or grounds before the AO and the assumption of jurisdiction on the part of the AO under Section 147 of the Act to reopen the assessment by issuing impugned notice under Section 147 of the Act is without authority of law, which render the notice unsustainable. Therefore, the assessee failed to make out a case.

Issues Involved:
1. Validity of sanction under Section 151 of the Income Tax Act.
2. Accuracy of reasons for reopening the assessment.
3. Existence of 'reason to believe' that income has escaped assessment.
4. Connection between received information and gathered material.
5. Legitimacy of reopening the assessment for investigation purposes.
6. Independent application of mind by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Validity of Sanction under Section 151:
The writ applicant contended that the necessary sanction required under Section 151 of the Income Tax Act before issuing the notice was not obtained by the AO. However, the court found that the authorities concerned had given approval after due application of mind, and the approval copy was provided to the assessee at the stage of passing the order disposing of the objections. Thus, the sanction was deemed valid.

2. Accuracy of Reasons for Reopening the Assessment:
The applicant argued that the reasons for reopening were factually incorrect and based on borrowed satisfaction without any independent application of mind. However, the court observed that the AO had received information from the Investigation Wing regarding penny stock transactions and conducted independent enquiries. The AO noticed that the shares sold by the assessee were penny stocks and formed a belief that income had escaped assessment. The court found the reasons recorded by the AO to be sufficient and accurate.

3. Existence of 'Reason to Believe' that Income has Escaped Assessment:
The applicant argued that there was no 'reason to believe' that income chargeable to tax had escaped assessment. The court noted that the AO had received specific information about the assessee's transactions in penny stocks and conducted independent enquiries. The AO's belief that income had escaped assessment was based on this information and the findings from the enquiries. The court held that the AO had a valid reason to believe that income had escaped assessment.

4. Connection between Received Information and Gathered Material:
The applicant contended that there was no live nexus or link between the information received and the material gathered from different sources. The court found that the AO had made specific references to the information received from the Investigation Wing and conducted independent enquiries. The AO's findings were based on the gathered material, which suggested that the transactions were penny stock transactions. The court concluded that there was a live link between the information and the material gathered.

5. Legitimacy of Reopening the Assessment for Investigation Purposes:
The applicant argued that reopening was not permissible for proving or fishing inquiry or investigation without specific findings of income escape. The court held that the AO had sufficient cause and justification to believe that income had escaped assessment based on the information and independent enquiries. The court emphasized that the AO's formation of belief is an administrative decision and does not require final adjudication of the matter at the initial stage.

6. Independent Application of Mind by the Assessing Officer:
The applicant argued that the AO had not independently applied his mind while recording the reasons for reopening and merely relied on the materials provided by the Investigation Wing. The court found that the AO had conducted independent enquiries and verified the data of the assessee. The AO formed an opinion based on the information and materials gathered, indicating an independent application of mind.

Conclusion:
The court concluded that the AO had valid reasons to believe that income had escaped assessment, and the reopening of the assessment was justified. The court dismissed the writ application, holding that the assessment reopening was within the jurisdiction of the AO and based on sufficient material and grounds. The impugned notice under Section 147 of the Act was deemed sustainable and lawful.

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