2024 (7) TMI 508 - HC - Income Tax

Reopening of assessment u/s 147 - non-genuine loss on account of the transactions in F O carried out by the assessee - HELD THAT - On perusal of the reasons recorded, it is not disclosed any income which has escaped assessment of income as the effect of loss and profit earned by the petitioner would be nil . There is no any other information recorded by the Assessing Officer, which shows that the petitioner has earned any income which is not offered to tax. It is not in dispute that the transactions referred to by AO were carried out on the Bombay Stock Exchange and no co-relation of the petitioner is established in the reasons recorded between the transactions of loss and profit of the equal amount in the case of the assessee with the observations of the Hon ble Apex Court referred to in the reasons recorded. Even the chief characteristics of manipulative reversal trades, on the basis of the order passed by the SEBI, recorded the fact reasons by the Assessing Officer which has no connection, as stated in the reasons recorded. Therefore, merely referring to the order of the Hon ble Apex Court and the observations of the SEBI, without there being co-relation of the petitioner assessee and only because the two contracts, in which the trades have been undertaken by the assessee, was identical resulting into loss and profit. The Assessing Officer could not have come to the, prima facie, conclusion that the income has escaped assessement to the tune of Rs. 38,40,000/-. There is no effect on the income of the assessee in view of loss and profit incurred on the F O transactions. Thus, reasons recorded by AO therefore, cannot, by any stretch of imagination, be said to form any reason to believe as to escapement of income for assuming the jurisdiction under Section 148 of the Act to reopen the assessment for the year under consideration. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act for reopening the assessment.
2. Whether the reasons recorded for reopening the assessment were sufficient and justified.
3. The legitimacy of the transactions carried out by the petitioner on the Bombay Stock Exchange.
4. Whether the sanction under Section 151 of the Act was properly obtained.
5. The applicability of the observations made by SEBI and the Apex Court in similar cases to the petitioner's case.

Detailed Analysis:

1. Validity of the Notice Issued Under Section 148:
The petitioner challenged the notice dated 31st March 2021 issued by the Assessing Officer under Section 148 of the Income Tax Act for reopening the assessment for the Assessment Year 2015-16. The petitioner contended that the notice was bad, illegal, barred by limitation, and without jurisdiction.

2. Sufficiency and Justification of the Reasons Recorded:
The petitioner argued that there was no escapement of income chargeable to tax to justify reopening the assessment. The reasons recorded by the Assessing Officer were based on information from the Insight Portal regarding coordinated and premeditated trading on the Bombay Stock Exchange, resulting in non-genuine business losses and gains. The petitioner contended that the transactions involved identical "buy" and "sell" trades and thus had no revenue impact. The court found that the reasons recorded did not disclose any income that had escaped assessment since the effect of the loss and profit would be 'nil'.

3. Legitimacy of Transactions on the Bombay Stock Exchange:
The petitioner asserted that the transactions in Futures and Options (F&O) on a recognized stock exchange could not result in non-genuine losses. The court noted that the transactions were carried out on the Bombay Stock Exchange and there was no co-relation established between the petitioner's transactions and the manipulative reversal trades discussed by SEBI and the Apex Court. Therefore, the court concluded that the Assessing Officer could not have come to a prima facie conclusion that income had escaped assessment.

4. Proper Sanction Under Section 151:
The petitioner contended that the required sanction under Section 151 of the Act was not obtained. However, the court found this contention untenable upon perusal of the sanction/approval under Section 151, which was properly obtained.

5. Applicability of SEBI and Apex Court Observations:
The respondent relied on the observations made by SEBI and the Apex Court in similar cases of manipulative reversal trades to justify the reopening. The court found that merely referring to these observations without establishing a direct co-relation with the petitioner's transactions was insufficient. The characteristics of manipulative reversal trades, as discussed by SEBI and confirmed by the Apex Court, did not apply to the petitioner's case in the absence of specific evidence linking the petitioner to such trades.

Conclusion:
The court concluded that the reasons recorded by the Assessing Officer did not form any valid reason to believe that income had escaped assessment. Therefore, the notice issued under Section 148 for reopening the assessment was not sustainable. The petition was allowed, and the impugned notice dated 31st March 2021 was quashed and set aside. Rule was made absolute, with no order as to cost.