2025 (4) TMI 336 - HC - Income Tax

Validity of reopening of assessment - allegations in the notice is against the JM Balanced Fund-Annual Dividend Option Regular Plan of JM Financial which is alleged to have manipulated accounting methodology so as to artificially inflate the distributable surplus - HELD THAT - The petitioner has disclosed the short term capital loss suffered during the year under consideration in the computation of the income as well as return of income. On perusal of the statement placed on record pertaining to the short term capital loss from the mutual fund there is no reference to JM Balanced Fund-Dividend as stated in the reasons forming part of the notice under Section 148A (b) of the Act being the information which led to reopening of the assessment. Perusal of the impugned order u/s 148A (d) also refers to the transaction made by the assessee during the Financial Year 2017-2018 pertaining to Assessment Year 2018-2019 refers to JM Equity Hybrid Fund only and not the JM Balanced Fund whereas the allegations in the notice is against the JM Balanced Fund-Annual Dividend Option Regular Plan of JM Financial which is alleged to have manipulated accounting methodology so as to artificially inflate the distributable surplus. As relying on Karan Maheshwari 2024 (3) TMI 953 - BOMBAY HIGH COURT rendered in the similar facts of transactions for violation of law by JM Financial AO could not have assumed the jurisdiction for reopening the assessment and adopting the same reasoning as per the aforesaid decisions we are also of the opinion that the impugned notice as well as order are required to be quashed and set aside. Accordingly impugned notice issued under Section 148A (b) and the order passed under Section 148A (d) and the notice issued under Section 148 of the Act of the even date are quashed and set aside. Assessee appeal allowed.

2024 (3) TMI 953 - HC

1. **ISSUES PRESENTED and CONSIDERED**

The core legal issues considered in this judgment are:

Whether the notice issued under Section 148A(b) of the Income Tax Act, 1961, and the subsequent order under Section 148A(d) were validly issued based on the information provided.
Whether the petitioner was implicated in sham transactions related to JM Financial Asset Management Limited, thereby justifying the reopening of the assessment for the Assessment Year 2018-2019.
Whether the petitioner was provided with adequate opportunity to respond to the allegations and whether the principles of natural justice were adhered to during the proceedings.

2. **ISSUE-WISE DETAILED ANALYSIS**

Issue 1: Validity of Notice under Section 148A(b) and Order under Section 148A(d)

Relevant legal framework and precedents: The proceedings were initiated under Sections 148A(b) and 148A(d) of the Income Tax Act, which pertain to the reassessment of income that has allegedly escaped assessment. The legal framework requires that the reasons for reopening must have a rational connection with the information received and must not be based on vague or irrelevant data.
Court's interpretation and reasoning: The Court found that the notice and order were based on incorrect facts and did not establish a direct nexus between the petitioner and the alleged sham transactions. The information relied upon was vague, and the petitioner was not directly implicated in any wrongdoing by JM Financial.
Key evidence and findings: The Court noted that the petitioner's transactions did not involve JM Balanced Fund as alleged in the notice, and there was no evidence to suggest that the petitioner participated in any sham transactions to reduce tax liability.
Application of law to facts: The Court applied the legal principles established in earlier cases, such as the Bombay High Court's decision in Karan Maheshwari, emphasizing that mere allegations without concrete evidence do not justify reopening assessments.
Treatment of competing arguments: The petitioner argued that the notice was based on incorrect information and that the transactions were legitimate. The respondent contended that the petitioner would have opportunities to present their case during the reassessment. However, the Court sided with the petitioner, citing the lack of evidence and procedural fairness.
Conclusions: The Court concluded that the notice and order were invalid as they were based on incorrect and insufficient information, lacking a rational connection to the alleged escapement of income.

Issue 2: Implication in Sham Transactions

Relevant legal framework and precedents: The Court referred to the principles of tax law, particularly the need for a clear link between the taxpayer's actions and the alleged tax evasion. The Court also considered the precedent set by the Bombay High Court in similar cases.
Court's interpretation and reasoning: The Court found no evidence that the petitioner was involved in sham transactions or that they had any knowledge of JM Financial's alleged manipulations. The Court emphasized the need for concrete evidence to support such allegations.
Key evidence and findings: The Court noted discrepancies in the notice, such as the incorrect reference to JM Balanced Fund, which was not part of the petitioner's transactions.
Application of law to facts: The Court applied the principle that allegations must be supported by evidence directly linking the taxpayer to the alleged misconduct. Mere suspicion or conjecture is insufficient.
Treatment of competing arguments: The petitioner argued that they were a mere investor without knowledge of any wrongdoing by JM Financial. The respondent's reliance on vague information was insufficient to implicate the petitioner.
Conclusions: The Court concluded that there was no basis to implicate the petitioner in any sham transactions, and the notice and order were therefore unjustified.

Issue 3: Adequacy of Opportunity and Adherence to Natural Justice

Relevant legal framework and precedents: The principles of natural justice require that parties be given a fair opportunity to present their case and respond to allegations. The Court examined whether the petitioner was afforded such an opportunity.
Court's interpretation and reasoning: The Court found that the petitioner was not provided with all the documents and information necessary to respond adequately to the allegations. This lack of disclosure violated the principles of natural justice.
Key evidence and findings: The Court noted that the petitioner had requested additional time and documents to prepare a response, which were not adequately provided by the respondent.
Application of law to facts: The Court applied the principle that procedural fairness requires full disclosure of information relied upon by the assessing officer, which was not adhered to in this case.
Treatment of competing arguments: The respondent argued that the petitioner had opportunities to present their case during reassessment. However, the Court found that initial procedural fairness was lacking.
Conclusions: The Court concluded that the petitioner was not given a fair opportunity to respond, rendering the proceedings procedurally unfair.

3. **SIGNIFICANT HOLDINGS**

The Court held that the notice under Section 148A(b) and the order under Section 148A(d) were invalid due to reliance on incorrect and vague information, lacking a rational connection to the alleged escapement of income.
The Court established that mere allegations of sham transactions, without concrete evidence directly linking the petitioner, do not justify reopening assessments.
The Court emphasized the importance of adherence to principles of natural justice, requiring full disclosure of information and adequate opportunities for the taxpayer to respond.
The final determination was to quash and set aside the impugned notice and order, as they were issued without proper basis and in violation of procedural fairness.

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