2024 (2) TMI 1513 - AT - Income Tax

Reopening of assessment u/s 147 - reopening beyond period of four years - bogus long-term capital gains booked by various persons by way of transaction/sale of shares of penny stock - HELD THAT - Original assessment in this case was completed u/s 143(3) of the Act and the assessment was reopened after four years from the end of the relevant year which is hit by First Proviso to section 147 of the Act and that there was no allegation in the notice that any income chargeable to tax has escaped assessment because of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment year under consideration. In this case the assessee duly disclosed capital loss incurred by the assessee in trading in shares of M/s SV Electric and nothing has been pointed out by the Assessing Officer that the income of the assessee has escaped assessment due to failure on the part of the assessee in disclosing fully and truly all material facts necessary for assessment. As decided in South Yarra Holdings 2019 (3) TMI 582 - BOMBAY HIGH COURT the reopening of the assessment was hit by First Proviso to section 147 of the Act. Since the Assessing Officer has not applied his mind to the information received in the context of the facts on record therefore the notice issued u/s 148 of the Act was also bad in law. Thus we quash the reopening of the assessment and thereby the additions made in the course of such assessment are ordered to be deleted. Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment are:

• Whether the reopening of the assessment under section 147 of the Income Tax Act was valid, given the circumstances of the case.
• Whether the notice under section 148 was issued in the name of a non-existent entity, thereby rendering the subsequent proceedings invalid.
• Whether the Assessing Officer (AO) had valid jurisdiction and satisfied the conditions precedent for reopening the assessment.
• Whether the ex-parte decision by the CIT(A) without affording the assessee a sufficient opportunity to be heard was appropriate.
• Whether the disallowance of the loss incurred upon the sale of shares was justified.

ISSUE-WISE DETAILED ANALYSIS

Validity of Reopening the Assessment under Section 147

The legal framework for reopening assessments is governed by sections 147 and 148 of the Income Tax Act, which require the AO to have a reason to believe that income has escaped assessment. The Court examined whether the AO applied his mind independently to the information received from the DDIT(Investigation) regarding alleged bogus capital gains from transactions involving shares of M/s Nivyah Infrastructure and Telecom Services Limited.

The Court found that the AO's satisfaction was a "borrowed satisfaction" from the information provided by the DDIT without independent verification against the assessee's records. The original assessment was completed under section 143(3), and reopening after four years required showing the assessee's failure to disclose fully and truly all material facts, which was not established.

Notice Issued in the Name of a Non-Existent Entity

The notice under section 148 was issued based on transactions with M/s Nivyah Infrastructure and Telecom Services Limited. However, the assessee contended that they dealt with M/s SV Electric, which later changed its name to M/s Nivyah Infrastructure and Telecom Services Limited. The AO failed to recognize this discrepancy, leading to the issuance of a notice to a non-existent entity, thus questioning the validity of the proceedings.

Jurisdiction and Conditions Precedent for Reopening

The Court scrutinized whether the AO had valid jurisdiction and met the conditions precedent for reopening the assessment. The AO's reliance on external information without correlating it with the assessee's records was deemed insufficient for establishing jurisdiction. The lack of independent satisfaction by the AO rendered the reopening invalid.

Ex-Parte Decision by CIT(A)

The assessee argued that the CIT(A) disposed of the appeal on merits ex-parte, without providing sufficient opportunity for the assessee to present their case. The Court considered this procedural lapse significant, as it potentially affected the fairness of the appellate proceedings.

Disallowance of Loss on Sale of Shares

The disallowance of the loss incurred on the sale of shares was based on the AO's findings, which were influenced by the erroneous belief that the assessee had engaged in transactions with M/s Nivyah Infrastructure. Given the flawed basis for reopening, the Court found the disallowance unjustified.

SIGNIFICANT HOLDINGS

The Court held that the reopening of the assessment was invalid due to the lack of independent application of mind by the AO and the issuance of notice to a non-existent entity. The Court emphasized the requirement for the AO to form his own satisfaction rather than relying solely on external information. The Court quashed the reopening of the assessment and the consequent order framed under sections 147/143(3) of the Act.

Key principles established include:

• Reopening of assessment requires the AO's independent satisfaction and correlation of external information with the assessee's records.
• Issuance of notice to a non-existent entity invalidates subsequent proceedings.
• Procedural fairness in appellate proceedings is crucial, and ex-parte decisions without sufficient opportunity to be heard can be challenged.

The appeal was allowed, and the additions made during the assessment were ordered to be deleted, aligning with precedents set by the Hon'ble Bombay High Court and the Coordinate Bench of the Tribunal in similar cases.