2019 (2) TMI 1408 - AT - Income Tax

Re-opening of assessment - Proof of independent application of mind on the material by the AO before recording of reasons that income subject to tax has escaped assessment - information received from the Forward Markets Commission - Borrowed satisfaction - HELD THAT - A perusal of the assessment order demonstrates that in the report of the FMC there is no allegation whatsoever made that the assessee had booked bogus losses. The information was general in nature and the assessee company was not named. The Assessing Officer was duty bound to apply his mind to the information received prior to coming to the conclusion that he has reason to believe that income subject to tax has escaped assessment. This information received and the material had to be prima facie examined and the material has to have live link with the formation of belief that income subject to tax has escaped assessment. When FMC audit does not find fault with the transactions of the assessee company and when the assessee company is not named in the FMC report, to base the reason on such information without verification, is bad in law. The assessee has produced all evidence to prove that the transactions are genuine and that he had participated as an arbitrager. There is no proof of cash changing hands. The FMC audit had cleared the transactions of the company. A plain look at the reasons demonstrates that the re-opening was based on the information which was never examined or verified by the Assessing Officer before recording reasons for reopening of assessment. Re-opening is bad in law as the Assessing Officer has not independently applied his mind to the material and has recorded reasons which are vague and based on borrowed satisfaction. Hence this ground of the assessee for both the Assessment Years are allowed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of re-opening of assessment.
2. Merits of the disallowance of loss claimed by the assessee.

Detailed Analysis:

1. Validity of Re-opening of Assessment:
The primary issue addressed was whether the re-opening of the assessment for the Assessment Years 2010-11 and 2011-12 was valid under the provisions of the Income Tax Act, 1961. The assessee argued that the re-opening was invalid due to a lack of independent application of mind by the Assessing Officer (AO). The AO's reasons for re-opening were based on information from the Forward Markets Commission (FMC), which did not specifically allege that the assessee had booked bogus losses. The Tribunal noted that the AO failed to independently verify the information received and did not form a prima facie conclusion that income had escaped assessment. The Tribunal cited multiple case laws, including judgments from the Delhi High Court and previous Tribunal decisions, emphasizing that the reasons recorded for re-opening must demonstrate the AO's independent application of mind and should not be vague or based on borrowed satisfaction. The Tribunal concluded that the re-opening of the assessment was bad in law as the AO's reasons were vague and lacked independent verification.

2. Merits of the Disallowance of Loss:
On the merits, the assessee contended that the transactions in question were genuine and conducted on the floor of the National Multi-Commodity Exchange of India Ltd. (NMCEI), with all transactions being duly confirmed by the exchange. The assessee provided books of accounts and audit reports, which the AO did not dispute. The assessee argued that the AO's reliance on the FMC report was misplaced as the report did not allege any wrongdoing by the assessee. Furthermore, the assessee's request for copies of statements and an opportunity to cross-examine witnesses was denied, which was a procedural lapse. The Tribunal noted that the FMC audit did not find any discrepancies in the assessee's transactions and there was no evidence of cash transactions or bogus entries. The Tribunal held that the disallowance of the loss was not justified as the transactions were genuine and conducted in the ordinary course of business.

Conclusion:
The Tribunal allowed the appeals of the assessee, holding that the re-opening of the assessments for the Assessment Years 2010-11 and 2011-12 was invalid due to the AO's failure to independently apply his mind to the information received. Consequently, the Tribunal did not delve into the merits of the case, as the invalid re-opening rendered the assessments void. The Tribunal emphasized that in arbitrage transactions, losses in one exchange are typically offset by gains in another, and the assessee's transactions were found to be genuine. The appeals were thus allowed in favor of the assessee.