2024 (8) TMI 1189 - HC - Income Tax

Validity of Reassessment proceedings - reason to believe - whether any reasonable person could form a belief that income had escaped assessment and that would be adequate to reopen the assessment? - information was the receipt of information from the Deputy Director of Income-tax (Investigation), Mumbai that stock brokers had misused client code modification facility and created fictitious profits and losses to benefit their clients - failure to disclose material facts or not? - HELD THAT - It is a matter of public knowledge that client codes entered by a stock broker at the time of execution of the trades are permitted to be modified within a stipulated time after execution, if the stock broker finds that there had been any error in entering the correct client code. In the instant case, there is nothing to show whether such modification had been effected by the stock broker to deal with his errors in execution or whether the modification was effected under instructions of the Petitioner. Besides, every transaction executed under the Petitioner s client code and thereby captured in his books of accounts have been subjected to scrutiny assessment. If someone else s client code had been entered by the stock broker and that had been changed to the Petitioner s client code, the transaction would get captured in the Petitioner s books and would be part of the material scrutinized. If it is the Petitioner s client code that had been originally entered by the stock broker, leading to it being modified after execution, it would have no bearing on the income of the Petitioner, since it would be the person whose client code was entered upon modification, whose taxation would be impacted. Therefore, without any basis to show that there had been a failure on the Petitioner s part in making a full and truthful disclosure of material facts, the very jurisdiction to initiate reassessment as provided for in Section 147 would not be attracted. It is because the Revenue cannot demonstrate a failure on the part of the Petitioner to make full and truthful disclosure of facts in his possession, that its stance has been moulded to state that such demonstration is not necessary, and it would suffice if the Revenue formulates a reason to believe that income has escaped assessment. We are afraid that we cannot agree to such a proposition, which would require ignoring the explicit provisions of Section 147 and supplanting it with a new formulation as is being canvassed by the Revenue. Section 147 explicitly stipulates the grounds on which, and the framework within which, such reassessment may be initiated. The Revenue has invoked the first proviso to Section 147(1) in order to initiate the reassessment. An essential ingredient of the first proviso is that no action for reassessment can be taken after the expiry four years from the end of the relevant assessment year, unless the income escaping assessment has been caused by the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. That vital element is sorely missing in the instant case. It was the Petitioner who had failed to disclose any material fact fully and truly, there is no scope for initiating reassessment. Consequently, this Writ Petition deserves to be allowed, quashing the proposed reassessment. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reassessment proceedings initiated after the expiry of four years.
2. Compliance with the requirement of disclosing all material facts fully and truly.
3. Justification for "reason to believe" that income had escaped assessment.
4. Validity of the approval process for reassessment.

Issue-wise Detailed Analysis:

1. Validity of reassessment proceedings initiated after the expiry of four years:

The Petitioner challenged the reassessment proceedings initiated for AY-2013-14, arguing that the reassessment was impermissible after four years from the end of the relevant assessment year unless there was a failure to disclose material facts. The Revenue issued a notice under Section 148 on 31st March 2021, seven years after the relevant assessment year. The Court noted that reassessment could only be initiated beyond four years if the income had escaped assessment due to the failure of the assessee to disclose material facts fully and truly. The Court concluded that the reassessment notice was invalid as it did not meet this requirement.

2. Compliance with the requirement of disclosing all material facts fully and truly:

The Petitioner asserted that he had disclosed all material facts during the original assessment, which was subjected to scrutiny and concluded with an assessment order dated 11th March 2016. The Court found that the original assessment involved a detailed scrutiny of the Petitioner's financial statements, bank accounts, and other documentary evidence. The Court held that the Petitioner had indeed disclosed all material facts during the original assessment, and there was no basis to claim otherwise.

3. Justification for "reason to believe" that income had escaped assessment:

The Revenue's basis for reassessment was the modification of client codes by the Petitioner's stock broker, which allegedly led to fictitious profits and losses. The Court noted that the reasons recorded for reassessment were fundamentally flawed, as they incorrectly stated that the original returns had not been subjected to scrutiny assessment. The Court emphasized that the "reason to believe" must be based on concrete evidence and not mere suspicion. The Court found that there was no failure on the Petitioner's part to disclose material facts and that the reassessment was based on an erroneous assumption.

4. Validity of the approval process for reassessment:

The Petitioner questioned the approval process, arguing that it was not conducted by the appropriate senior authority as required under Section 151(ii). The Court noted that the approval of reassessment must be provided by the specified senior authorities, especially when reassessment is proposed beyond four years. The Court found that the Revenue did not provide sufficient evidence of proper approval by the specified authority. Consequently, the reassessment proceedings were deemed invalid.

Conclusion:

The Court concluded that the reassessment proceedings initiated against the Petitioner were invalid due to non-compliance with the statutory requirements under Section 147 and Section 148. The reassessment notice dated 31st March 2021, and subsequent notices under Section 143(2) and Section 142(1), along with the order disposing of the Petitioner's objections, were quashed. The Writ Petition was allowed, and the rule was made absolute in favor of the Petitioner.