2022 (2) TMI 568 - HC - Income Tax

Reopening of assessment u/s 147 - concept of change of opinion - HELD THAT - The return filed by the petitioner was accepted under Section 143(1) of the Act. This was done without scrutiny. Under such circumstances, the assessing officer had not formed any opinion and, therefore, the concept of change of opinion while seeking to reopen the assessment would not apply. In cases where the return of an assessee is accepted without scrutiny, the assessing officer enjoys a greater latitude to reopen the assessment. This aspect has been elaborated by the Supreme Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd. 2007 (5) TMI 197 - SUPREME COURT and later on it was reiterated in the case of Deputy Commissioner of Income Tax and another vs. Zuari Estate Development and Investment Company Limited 2015 (8) TMI 480 - SUPREME COURT Reasons recorded by AO are not reflecting the live link or connection for formation of the belief that the income chargeable to tax has escaped assessment - If we peruse the detailed reasons recorded by the assessing officer, we find that he was having information indicating that certain operators, syndicate members and brokers were indulging in providing accommodation entries, often times creating penny stock companies and using them as conduit for converting untaxed income by bringing them on record by paying no tax claiming it to be long term capital gain, tax on sale of shares which was at the relevant time exempted. One such company found to be indulging in such activities was Life Line Drugs and Pharma Limited. The assessee, during the period relevant to the assessment year 2015-2016, had purchased shares in the said company at the very low price. After that, the price of these shares had risen phenomenally and they were sold at high price. AO had sufficient material at his command to form a belief that the income chargeable to tax has escaped assessment. There is a clear link between the information available with the assessing officer and his formation of belief that the income chargeable to tax has escaped assessment. The judgments relied by the learned counsel for the petitioner rest on the individual facts. - Decided against assessee.

Summary

Issues Involved:
1. Validity of the notice of re-assessment issued by the assessing officer.
2. Sufficiency of the reasons recorded by the assessing officer for reopening the assessment.
3. Applicability of the concept of "reason to believe" in the context of reopening assessments.

Detailed Analysis:

1. Validity of the notice of re-assessment:
The petitioner challenged the notice of re-assessment dated 13.02.2020, issued for reopening the assessment for the assessment year 2015-2016. The initial return filed by the petitioner was accepted under Section 143(1) of the Income Tax Act, 1961, without scrutiny. The assessing officer issued the notice based on detailed reasons indicating that the petitioner had claimed an exempt income of ?2,47,99,000 from trading in shares of Life Line Drugs & Pharma Limited, identified as a penny stock involved in a manipulation scam. The court held that in cases where the return is accepted without scrutiny, the assessing officer has greater latitude to reopen the assessment, as elaborated by the Supreme Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd.

2. Sufficiency of the reasons recorded by the assessing officer:
The petitioner argued that the reasons recorded by the assessing officer lacked validity and did not establish a live link between the material available and the belief that income had escaped assessment. The court, however, found that the assessing officer had sufficient material indicating that the petitioner had engaged in transactions involving penny stocks, which were part of a manipulation scam. The reasons included detailed information on the modus operandi of the scam, the financial status of Life Line Drugs & Pharma Limited, and the unusual price movements of its shares. The court concluded that the reasons recorded were adequate to form a belief that income had escaped assessment.

3. Applicability of the concept of "reason to believe":
The court emphasized that the term "reason to believe" does not require the assessing officer to have conclusive evidence of income escapement at the initiation stage. It is sufficient if the assessing officer has cause or justification to believe that income has escaped assessment. The court cited the Supreme Court's decision in Rajesh Jhaveri Stock Brokers P. Ltd., which clarified that the formation of belief is within the realm of subjective satisfaction of the assessing officer. The court found that the assessing officer had a bona fide belief based on the material available, which included detailed investigations and findings by SEBI on the manipulation of penny stocks.

Conclusion:
The court dismissed the petition, holding that the assessing officer had sufficient material to form a belief that income chargeable to tax had escaped assessment. The reasons recorded were found to be valid and demonstrated a clear link between the information available and the formation of belief. The court also noted that the judgments relied upon by the petitioner were based on different factual contexts and did not apply to the present case. The interim order was vacated.