2025 (1) TMI 1009 - HC - Income Tax

Reopening of assessment u/s 147 - reason to believe - independent application of mind or borrowed satisfaction - non disclosure of share transactions - HELD THAT - Details of shares purchased and sold as per Contract note copy of ledger of broker ASE Capital Markets Ltd and copy of bank statement of assessee for purchase of share and sale of shares were produced by the petitioner and the purchase and sale of share have order number order time trade number and trade time mentioned in the contract. The assessee purchased 60, 000 shares of Kushal Ltd. The assessee has sold 1, 05, 465/- shares for Rs. 1, 09, 98, 307/- leaving the balance of 1, 94, 535 shares as closing investments as on 31.03.2016 which is disclosed in the balance sheet and part of demat statement. It therefore cannot be said that the petitioner has not disclosed fully and truly all material facts relevant for assessment. Also appears from the reasons recorded that the 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 the 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 impugned notice forming 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 offered to tax in the return of income which is accepted in the regular course of assessment by passing the order under section 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. The respondent-Assessing Officer 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. Assessing Officer 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.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the notice issued under Section 148 of the Income Tax Act, 1961, for reopening the assessment of the petitioner for the Assessment Year 2016-2017, was valid and justified.
Whether the Assessing Officer (AO) had "reason to believe" that income had escaped assessment, as required under Section 147 of the Act.
Whether the reopening of the assessment was based on independent application of mind by the AO or merely on borrowed satisfaction from the Investigation Wing's report.
Whether the procedural requirements and safeguards under Sections 147 and 151 of the Act were duly followed by the AO in initiating reassessment proceedings.
Whether the petitioner had adequately disclosed all material facts necessary for the assessment during the original proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Notice under Section 148

Relevant Legal Framework and Precedents: Section 148 of the Income Tax Act allows the AO to issue a notice for reassessment if there is "reason to believe" that income has escaped assessment. The legal requirement is that the AO must have tangible material to justify this belief.
Court's Interpretation and Reasoning: The court scrutinized whether the AO had independently verified the information received from the Investigation Wing or merely relied on it without further inquiry.
Key Evidence and Findings: The court found that the AO had not conducted an independent verification of the material facts and had relied solely on the information from the Investigation Wing.
Application of Law to Facts: The court applied the principle that mere suspicion or borrowed satisfaction is insufficient for reopening assessments. The AO must form an independent belief based on tangible material.
Treatment of Competing Arguments: The petitioner argued that the notice was based on borrowed satisfaction, while the respondent contended that the AO had sufficient reason to believe income had escaped assessment. The court favored the petitioner's argument.
Conclusions: The court concluded that the notice under Section 148 was invalid as it was issued without independent application of mind by the AO.

Issue 2: "Reason to Believe" Requirement

Relevant Legal Framework and Precedents: The "reason to believe" standard requires the AO to have a rational basis for reopening an assessment, supported by tangible material.
Court's Interpretation and Reasoning: The court emphasized that the reasons recorded by the AO must demonstrate a clear link between the information received and the belief that income has escaped assessment.
Key Evidence and Findings: The court found that the reasons recorded by the AO were merely conclusions without supporting evidence or a clear link to the petitioner's case.
Application of Law to Facts: The court applied the principle that the reasons for reopening must be self-evident and not merely conclusions drawn from external information.
Treatment of Competing Arguments: The petitioner argued that the reasons lacked a tangible basis, while the respondent maintained that the information from the Investigation Wing was sufficient. The court sided with the petitioner.
Conclusions: The court held that the "reason to believe" requirement was not satisfied, rendering the reassessment proceedings invalid.

Issue 3: Independent Application of Mind

Relevant Legal Framework and Precedents: The AO must independently assess the information received and form an opinion that income has escaped assessment, without solely relying on external reports.
Court's Interpretation and Reasoning: The court found that the AO had not independently verified the information or formed an independent opinion.
Key Evidence and Findings: The court noted that the AO's reasons for reopening were based on borrowed satisfaction from the Investigation Wing's report.
Application of Law to Facts: The court applied the principle that the AO must independently apply their mind to the information received before reopening an assessment.
Treatment of Competing Arguments: The petitioner argued that the AO's actions were mechanical, while the respondent claimed due diligence was exercised. The court agreed with the petitioner.
Conclusions: The court concluded that the AO had failed to independently apply their mind, leading to the quashing of the reassessment proceedings.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The reopening of assessment under Section 147 is a potent power not to be lightly exercised. It certainly cannot be invoked casually or mechanically."
Core Principles Established: The AO must have tangible material and independently apply their mind to form a "reason to believe" that income has escaped assessment. Borrowed satisfaction from external reports is insufficient.
Final Determinations on Each Issue: The court quashed the notice issued under Section 148 and the consequential order dismissing the objections, ruling that the reassessment proceedings were invalid due to lack of independent application of mind and failure to meet the "reason to believe" standard.

← Previous Next →