2015 (12) TMI 305 - HC - Income Tax

Reopening of assessment - genuineness of the loss in respect of shares held as stock-in-trade is perverse and accordingly cannot be sustained - Held that - Interestingly nearly two years prior to the issuance of the notice, the AO had issued a notice on 26th March 2000 under Section 148 of the Act for re-opening of the assessment for AY 1996-97 on account of unexplained credits from two firms but that ended in an order of re-assessment dated 27th March 2002 referring to the unexplained share loss. Therefore, when the AO issued the notice on 26th March 2002 under Section 148 proposing to reopen the assessment for 1995-96, there was no fresh material to enable him to form reasons to believe that income on account of share loss had escaped assessment. Importantly, despite the fact that the reopening was sought to be made after the expiry of four years after the end of the AY 1995-96, no mention was made by the AO of the failure by the Assessee to make a full and true disclosure of all material facts in the original assessment. This is significant in the context of the AO noting in the original order of assessment under Section 143(3) of the Act, passed by the AO on 10th July 1997, that the Assessee had produced the books of accounts which had been checked by the AO. The AO also noted that the Assessee was dealing in shares and securities. The fact that Mr. R.R. Modi, the Director of the Assessee was also the person who floated PPL, could not by itself have constituted tangible material for forming reasons to believe when viewed in the context of the fact that the value of the closing stock of shares had been computed on the basis of the quotation in the Gauhati Stock Exchange which was at ₹ 2 per share. Further, both the CIT (A) and the ITAT have concurrently found as a fact that the Assessee had consistently followed the said method of valuation of shares at cost or at market price whichever is lower and that this method had been accepted by the Revenue for the earlier AYs. Clearly, therefore, the legal requirement that the reason to believe must be predicated on tangible material or information and that the belief must be rational and bear a direct nexus to the material on which such a belief is based was not fulfilled in the present case. - Decided in favour of assessee.

Issues Involved:
1. Validity of reassessment proceedings under Section 147/148 of the Income Tax Act, 1961.
2. Genuineness of the loss in respect of shares held as stock-in-trade.
3. Deletion of penalty under Section 271(1)(c) of the Income Tax Act, 1961.

Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147/148 of the Income Tax Act, 1961:

The primary issue was whether the reassessment proceedings initiated under Section 147/148 for the Assessment Year (AY) 1995-96 were legally valid. The court noted that the original assessment was completed under Section 143(3) of the Act, and the reassessment was sought beyond four years from the end of the relevant AY. The court emphasized the necessity for the Assessing Officer (AO) to record reasons that explicitly state the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.

The court observed that the reasons recorded for reopening the assessment did not mention any failure by the assessee to disclose material facts. The AO had merely noted that the assessee understated its income without providing a tangible link to any new information or material that came to light post the original assessment. The court referred to several precedents, including *Haryana Acrylic Manufacturing Company v. CIT* and *CIT v. Kelvinator of India Ltd.*, to underscore that the reasons to believe must be based on tangible material and must have a direct nexus with the formation of the belief that income has escaped assessment.

The court concluded that the reassessment proceedings were invalid as the AO failed to record the necessary jurisdictional requirement that the assessee did not fully and truly disclose all material facts. Consequently, the reassessment proceedings were held to be bad in law.

2. Genuineness of the Loss in Respect of Shares Held as Stock-in-Trade:

Although the court primarily focused on the validity of the reassessment proceedings, it also touched upon the genuineness of the loss claimed by the assessee in respect of shares held as stock-in-trade. The assessee had consistently followed the method of valuing shares at cost or market price, whichever was lower, which was accepted by the Revenue in earlier AYs. The court noted that the valuation was based on the quoted rate at the Gauhati Stock Exchange, and there was no fresh material to dispute this method.

The court upheld the findings of the CIT (A) and ITAT that the method of valuation was consistent and accepted by the department in previous years. Therefore, the genuineness of the loss could not be challenged at this stage.

3. Deletion of Penalty under Section 271(1)(c) of the Income Tax Act, 1961:

The court also addressed the issue of penalty under Section 271(1)(c), which pertains to the concealment of income or furnishing inaccurate particulars of income. Given that the reassessment proceedings were held to be invalid, the basis for imposing the penalty also fell through. The ITAT had deleted the penalty, and the court affirmed this decision, stating that without a valid reassessment, there could be no grounds for imposing a penalty.

Conclusion:

The appeals by the Revenue were dismissed, and the court held that the reassessment proceedings under Section 147/148 were invalid due to the failure to record the necessary jurisdictional requirement. Consequently, the genuineness of the loss and the deletion of the penalty were upheld in favor of the assessee. The appeals were dismissed with no order as to costs.

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