2025 (1) TMI 766 - HC - Income Tax

Validity of reopening of assessment - reason to believe that any income chargeable to tax has escaped assessment - Independent application of mind or borrowed satisfaction - profits under the head of future and options to be treated as derivatives - reopening has been resorted to on the basis of information received under Project Falcon from DGIT(Investigation), Mumbai in March, 2021 through Insight Portal regarding coordinated and premeditated trading by brokers on behalf of their clients on the Bombay Stock Exchange by engaging in reversal trades in illiquid stock options resulting in non-genuine business loss/gains to the beneficiary HELD THAT - It cannot be held that the department was justified in reopening the assessment for Assessment Year 2015-16, which, we may add, has been done mechanically without application of mind, in the absence of any tangible material. As appears from the reasons recorded that no verification of the material on record is made by the respondent and there is no independent opinion that any income has escaped assessment due to any failure on the part of the assessee in not disclosing fully and truly all material facts necessary for assessment. From the reasons recorded it appears that the initiation of reopening proceedings are on borrowed satisfaction as no independent opinion is formed and on bare perusal of the reasons recorded, it emerges that the AO considering the information received from the insight portal, has issued the impugned notice forming his reason to believe that the income has escaped the assessment on the presumption that the petitioner has been involved in creating the non-genuine profit which is already reflected in the return of income which is accepted in the regular course of assessment by passing the order u/s 143 (3) of the Act. There is no basis to form reasonable belief for escapement of income except the information made available on the insight portal. AO has not considered the material on record to come to the conclusion that there is failure on the part of the petitioner to disclose truly and fully all material facts to have reason to believe for escapement of income. Therefore, on the basis of the information received from another agency on insight portal or from the SEBI report, there cannot be any reassessment proceedings unless the respondent, after considering such information/material received from other sources, consider the same with the material on record in the case of the petitioner assessee and thereafter, is required to form independent opinion, that income has escaped assessment. Without forming such opinion, solely and mechanically relying upon the information received from the other sources, AO could not have assumed the jurisdiction to reopen the assessment based on such information. See Harikishan Sunderlal Virmani 2016 (12) TMI 1558 - GUJARAT HIGH COURT Thus AO could not have assumed the jurisdiction merely and solely relying upon the information made available on the insight portal without forming any independent opinion on the basis of the material on record vis-a-vis the petitioner is concerned. petitioner had disclosed in its return for the Assessment Year 2015-16 the particulars of the profits under the head of future and options which was subsequently accepted by the Department. Therefore, the notice for re-opening the assessment under the head of derivatives is based on change of opinion. The assessee cannot be said to have failed to have fully and truly disclosed all materials facts which would warrant the re-opening after a period of four years, anyways - Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment revolves around the following core legal issues:

• Whether the reopening of the assessment under Section 148 of the Income Tax Act, 1961, for the Assessment Year 2015-16, was justified.
• Whether the Assessing Officer had a valid "reason to believe" that income chargeable to tax had escaped assessment.
• Whether the reopening was based on a "change of opinion" or on new tangible material.
• Whether the procedural requirements for reopening, especially after four years, were satisfied.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification for Reopening the Assessment

• Legal Framework and Precedents: The reopening of an assessment is governed by Section 147 of the Income Tax Act, which requires the Assessing Officer to have a "reason to believe" that income has escaped assessment. The procedural safeguard under Section 151 mandates that reopening after four years requires sanction from a higher authority.
• Court's Interpretation and Reasoning: The court emphasized that the reopening must be based on tangible material and not merely on a change of opinion. The court found that the reasons provided for reopening were vague and non-specific.
• Key Evidence and Findings: The petitioner had disclosed profits from Futures and Options (F&O) in their profit and loss account, which was accepted in the original assessment. The reopening was initiated based on information from the "Insight Portal" and "Project Falcon," without independent verification.
• Application of Law to Facts: The court held that the reopening was mechanical and lacked independent application of mind. The information from external sources was not corroborated with the petitioner's records.
• Treatment of Competing Arguments: The respondent argued that the petitioner was involved in non-genuine trades. However, the court found that the petitioner's disclosures were adequate and the reopening was unjustified.
• Conclusions: The court concluded that the reopening was not justified as it was based on a change of opinion without any new tangible material.

Issue 2: Procedural Compliance for Reopening

• Legal Framework and Precedents: Section 151 of the Income Tax Act requires that for reopening beyond four years, the Assessing Officer must obtain sanction from a higher authority.
• Court's Interpretation and Reasoning: The court noted that the sanction process should not be mechanical. It found that the sanction in this case was not properly obtained.
• Key Evidence and Findings: The court observed that the reasons for reopening did not demonstrate any failure by the petitioner to disclose material facts.
• Application of Law to Facts: The court found procedural lapses in the reopening process, as there was no independent application of mind by the Assessing Officer.
• Treatment of Competing Arguments: The respondent's argument that the reopening was based on credible information was rejected due to lack of independent verification.
• Conclusions: The court held that the procedural requirements for reopening were not met, rendering the notice invalid.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes: "The reopening of assessment after 4 years period amounts to 'change of opinion' only. Therefore the reopening of assessment invalid in law."
• Core Principles Established: Reopening of assessments must be based on new tangible material and not merely on a change of opinion. Procedural compliance, including obtaining proper sanction, is crucial.
• Final Determinations on Each Issue: The court quashed the notice for reopening the assessment, holding that it was based on a change of opinion and lacked procedural compliance.