2025 (4) TMI 1475 - AT - Income Tax

Validity of reopening of assessment - notices issued u/s 148 challenged on the basis that same are beyond the limitation period prescribed u/s 149 - HELD THAT - Similar issue pertaining to the challenge against notices issued u/s 148 for the assessment year 2015-16 on the basis that same are beyond the limitation period prescribed u/s 149 of the Act has been decided in favour of the taxpayers after noting the submission of the Revenue before the Hon ble Supreme Court in Rajeev Bansal 2024 (10) TMI 264 - SUPREME COURT (LB) wherein it was conceded by the Revenue that for the assessment year 2015-16 all notices issued on or after 1st April 2021 will have to be dropped as they will not fall for completion during the period prescribed under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act 2020 ( the TOLA ). We find that in Pratishtha Garg 2024 (12) TMI 1540 - DELHI HIGH COURT allowed the writ petition filed by the taxpayer and set aside the notice issued u/s 148. Thus the re-assessment notice issued u/s 148 of the Act for the assessment year 2015-16 is barred by limitation. Decided in favour of assessee.

Summary

The core legal questions considered in the judgment are as follows:

1. Whether the reassessment proceedings initiated under section 147 of the Income Tax Act, 1961 (the Act) for the assessment year 2015-16 were validly initiated within the prescribed limitation period under section 149 of the Act, particularly in light of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) and subsequent judicial pronouncements.

2. Whether the learned Commissioner of Income Tax (Appeals) was justified in deleting additions made by the Assessing Officer (AO) relating to alleged accommodation entries and bogus short-term capital losses through transactions in penny stocks and derivative trading, including fictitious dividend income.

3. Whether the findings of the Investigation Directorate and survey action under section 133A of the Act, which alleged manipulation of share prices and accounting practices by entities involved, were correctly considered or ignored by the CIT(A).

4. Whether the transactions in question were genuine commercial trades or sham/circular trades designed to generate fictitious capital gains/losses for tax evasion.

5. Whether the AO and CIT(A) correctly applied the legal framework and evidence in assessing the legitimacy of the transactions and the resulting additions.

Issue-wise Detailed Analysis

1. Validity of Reassessment Proceedings under Section 147 and Limitation under Section 149

Legal Framework and Precedents: Section 147 of the Act allows reopening of assessments if income has escaped assessment. Section 149 prescribes the limitation period for issuance of notices under section 148 for reassessment. The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) introduced certain relaxations in limitation periods due to the COVID-19 pandemic. The Supreme Court's decision in Union of India vs. Rajeev Bansal (2024) clarified the applicability of TOLA to notices issued for AY 2015-16 and other years, including the limitation period for issuance of reassessment notices. The Delhi High Court in Pratishtha Garg vs. ACIT and IBIBO Group Pvt. Ltd. vs. ACIT also set aside reassessment notices issued beyond the limitation period for AY 2015-16.

Court's Interpretation and Reasoning: The Court examined the timeline of the reassessment proceedings, noting that the notice under section 148 was issued on 25.07.2022, which was beyond the limitation period prescribed under section 149 for AY 2015-16 (which expired on 31.03.2022). The Court relied heavily on the Supreme Court's ruling in Rajeev Bansal, where the Revenue conceded that notices issued on or after 1 April 2021 for AY 2015-16 would have to be dropped as they would not fall within the period prescribed under TOLA.

Key Findings: The reassessment notice was issued after the limitation period expired. Judicial precedents consistently held that such notices are void ab initio. The Court also noted that the reassessment order under section 147 read with section 144B was consequently invalid.

Application of Law to Facts: The Court applied the limitation framework to the facts, found the reassessment notice time-barred, and quashed the reassessment proceedings and order.

Treatment of Competing Arguments: The Revenue argued in favor of the reassessment's validity, relying on the AO's order and investigation findings. The Court, however, gave precedence to the limitation issue and binding precedents, rejecting the Revenue's submissions.

Conclusion: The reassessment proceedings and order were quashed as barred by limitation, and the cross-objection challenging the reassessment initiation was allowed.

2. Legitimacy of Transactions and Additions Deleted by CIT(A)

Legal Framework and Precedents: The law prohibits accommodation entries and circular trading designed to create artificial capital gains or losses to evade taxes. The Income Tax Act empowers the AO to make additions where transactions are found to be sham or fictitious. Investigations under section 133A and reports such as "Project Bogus LTCG/STCG through BSE listed Penny Stock" provide evidentiary basis for such findings.

Court's Interpretation and Reasoning: The Revenue challenged the CIT(A)'s deletion of additions relating to accommodation entries in shares of M/s Pine Animation Limited, fictitious short-term capital losses, and dividend income from JM Equity Hybrid Fund. The Revenue contended that the CIT(A) ignored the investigation findings, including manipulation of share prices and artificial inflation of distributable surplus by JM Financial, which were part of a larger scheme to generate bogus capital gains/losses.

Key Evidence and Findings: The AO had relied on investigation reports, survey actions, and the modus operandi of entry operators manipulating penny stocks and mutual fund accounting to make additions. The CIT(A) deleted these additions on merits, presumably finding the evidence insufficient or the transactions genuine.

Application of Law to Facts: Since the Court quashed the reassessment on limitation grounds, it did not delve into the merits of these issues. The Court noted that the deletion of additions by the CIT(A) was rendered academic due to the quashing of reassessment proceedings.

Treatment of Competing Arguments: The Revenue's detailed submissions on the investigation and modus operandi were not addressed substantively due to the jurisdictional issue prevailing.

Conclusion: The appeal on merits by the Revenue was dismissed as infructuous, and the CIT(A)'s deletion of additions stood unchallenged.

3. Consideration of Investigation Reports and Survey Findings

Legal Framework and Precedents: Investigation reports and survey findings under section 133A are relevant materials for the AO to form a prima facie opinion for reassessment. However, the validity of reassessment depends on compliance with limitation and procedural safeguards.

Court's Interpretation and Reasoning: The Revenue argued that the CIT(A) erred in ignoring the detailed investigation report titled "Project Bogus LTCG/STCG through BSE listed Penny Stock" and survey findings regarding JM Financial's accounting manipulation. The Court acknowledged these contentions but emphasized that since the reassessment notice was issued beyond limitation, the merits of these findings need not be examined.

Conclusion: The Court did not decide on the merits of investigation findings due to the jurisdictional defect in reassessment initiation.

4. Nature of Transactions: Genuine vs. Sham/Circular Trading

Legal Framework and Precedents: The Income Tax Act and judicial decisions condemn transactions that are colorable devices or circular trades without commercial substance, intended solely for tax evasion.

Court's Interpretation and Reasoning: The Revenue contended that transactions in penny stocks and derivatives were not governed by market forces but were designed to create artificial gains/losses. The CIT(A) found otherwise and deleted the additions. The Court did not adjudicate this issue due to the limitation bar on reassessment.

Conclusion: The Court left this issue open as the jurisdictional defect rendered the merits academic.

Significant Holdings

"The reassessment notice dated 25.07.2022 issued under section 148 of the Act for the assessment year 2015-16 is liable to be quashed being time-barred under the provisions of the Act."

"In view of the aforesaid, the impugned order dated 19.07.2022 issued under Section 148(A)(d) of the Income Tax Act,1961 as well as the notice dated 19.07.2022 issued under Section 148 of the Act in respect of AY 2015-16 are liable to be set aside."

"The entire re-assessment proceedings and assessment order passed under section 147 r.w. section 144B of the Act are also quashed."

"The appeal by the Revenue on merits has been rendered academic and, therefore, is dismissed as infructuous."

Core principles established include the binding effect of limitation provisions under section 149 read with TOLA and relevant Supreme Court rulings, emphasizing that reassessment notices issued beyond the prescribed period are void ab initio and cannot be sustained regardless of the merits of the case.

The final determination was to allow the assessee's cross-objection challenging the reassessment initiation and dismiss the Revenue's appeal on merits as infructuous, effectively setting aside the reassessment proceedings and assessment order for AY 2015-16.