2025 (1) TMI 649 - AT - Income Tax

Validity of reopening of assessment - case was reopened after the expiry of four years - Reason to believe or suspect - tangible material for the purpose of reopening the assessment - as alleged assessee is a beneficiary in the penny-stock cases HELD THAT - Bald statement of AO in the reasons recorded that based on information received from office of CCIT, Coimbatore that assessee is a beneficiary in the penny-stock cases cannot be considered as a tangible material for reopening the assessment. No details about the contents of the purported information received from the office of CCIT, Coimbatore is stated in the reasons recorded . There is no mention about which all shares were classified as penny-stock; and what is the link between the shares that assessee sold and the alleged bogus claim made by assessee in this regard; and whether the stock-exchange found any mischief on the part of the assessee/broker regarding sale of shares; whether SEBI carried out any enquiry etc; No relevant information is discernable from reading of the reasons recorded, to connect assessee with any wrong doing to claim LTCG from one line statement given by the AO of his reasons recorded, which is cryptic and is extremely scanty and vague; and abruptly holds assessee to have dealt with penny-stock to claim bogus LTCG. Thus we find that there is absolutely no relevant details available in the reasons recorded to form such adverse conclusion; and in the light of the same, the initiation of proceedings u/s. 147 of the Act by the AO cannot be held to be valid and justified in law. According to us, the information given by the Office of the CCIT can only be at the most a basis to ignite/trigger an enquiry. The information given by CCIT only constitutes the starting point of AO to enquire; and such an information can only be termed as a foundation to form reason to suspect and not reason to believe escapement of income which is the jurisdictional fact law required to enable the AO to successfully assume jurisdiction to reopen an assessment as per section 147 of the Act. Thus the material/information referred to by the AO in his reasons recorded cannot be held to be a tangible material for reopening the assessment. Furthermore, the information referred to in the reasons recorded at the most can trigger only reasons to suspect ; and it is settled position that reason to suspect cannot be the basis for usurping jurisdiction to reopen u/s. 147 of the Act, and enable the AO to conduct roving/further examination in order to strengthen the suspicion to an extent which can later transform the suspicion to create the belief in his mind that income chargeable to tax has escaped assessment. Moreover, we find that the reasons recorded by the AO is riddled with factual inaccuracies. It would be gainful to refer to the decision of CIT v. Avadh Transformers (P.) Ltd. 5 2013 (3) TMI 645 - ALLAHABAD HIGH COURT wherein holding that in absence of failure on the part of the assessee in disclosure of material facts, the reassessment proceedings could not be initiated after expiry of four years. Appeal filed by the assessee is allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal issues presented and considered in this judgment are:

Whether the Assessing Officer (AO) was justified in reopening the assessment under Section 147 of the Income Tax Act, 1961, after the expiry of four years from the end of the relevant assessment year.
Whether there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment during the original proceedings.
Whether the reopening of the assessment was based on a mere change of opinion, which is not permissible under the law.
Whether the information received from the Chief Commissioner of Income Tax (CCIT) constituted "tangible material" for the purpose of reopening the assessment.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification for Reopening the Assessment

Relevant legal framework and precedents: Section 147 of the Income Tax Act allows the AO to reassess income if there is "reason to believe" that income has escaped assessment. However, if four years have passed since the end of the relevant assessment year, the AO must also demonstrate that the escapement was due to the assessee's failure to disclose material facts fully and truly.
Court's interpretation and reasoning: The court emphasized that the AO must have an independent and reasonable belief, not merely a suspicion or borrowed satisfaction from another authority, to justify reopening an assessment.
Key evidence and findings: The AO relied on information from the CCIT about the assessee's involvement in penny stock transactions but did not conduct an independent inquiry to substantiate this information.
Application of law to facts: The court found that the AO's belief was not independently formed and was based on inadequate investigation, thus failing the legal standard for reopening assessments.
Treatment of competing arguments: The assessee argued that the AO acted on borrowed satisfaction and failed to demonstrate any new tangible material. The court agreed, noting the absence of independent verification by the AO.
Conclusions: The court concluded that the reopening was unjustified as the AO did not satisfy the statutory conditions under Section 147, particularly the requirement of an independent reason to believe that income had escaped assessment.

Issue 2: Failure to Disclose Material Facts

Relevant legal framework and precedents: The first proviso to Section 147 requires that if an assessment is reopened after four years, the AO must demonstrate that the income escaped assessment due to the assessee's failure to disclose material facts fully and truly.
Court's interpretation and reasoning: The court noted that the AO did not provide any evidence or reasoning in the recorded reasons to suggest that the assessee failed to disclose material facts during the original assessment.
Key evidence and findings: The court found that the AO's reasons were based on a factual inaccuracy, as the original assessment had indeed been completed under Section 143(3), contrary to the AO's claim.
Application of law to facts: The court held that the AO's failure to mention any specific nondisclosure by the assessee rendered the reopening invalid.
Treatment of competing arguments: The Department argued that the assessee had not disclosed the nature of the transactions fully. However, the court found no evidence to support this claim.
Conclusions: The court concluded that there was no failure on the part of the assessee to disclose material facts, and thus the reopening of the assessment was invalid.

Issue 3: Change of Opinion

Relevant legal framework and precedents: The Supreme Court has held that reopening an assessment based on a mere change of opinion is not permissible.
Court's interpretation and reasoning: The court found that the AO's action was based on a change of opinion rather than any new tangible material.
Key evidence and findings: The AO's reasons did not indicate any new material that was not considered during the original assessment.
Application of law to facts: The court held that the AO's action constituted a review of the original assessment, which is not allowed under the guise of reassessment.
Treatment of competing arguments: The Department's argument that new information justified the reopening was rejected due to lack of evidence.
Conclusions: The court concluded that the reopening was based on a change of opinion, rendering it invalid.

Issue 4: Tangible Material for Reopening

Relevant legal framework and precedents: The courts have consistently held that "tangible material" is required to justify the reopening of an assessment.
Court's interpretation and reasoning: The court found that the information from the CCIT did not constitute tangible material, as it was vague and lacked specific details.
Key evidence and findings: The AO did not conduct any independent verification of the information received from the CCIT.
Application of law to facts: The court held that the information was insufficient to form a "reason to believe" that income had escaped assessment.
Treatment of competing arguments: The Department failed to demonstrate how the information constituted tangible material.
Conclusions: The court concluded that the absence of tangible material invalidated the reopening of the assessment.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The expression 'reason to believe' occurring in sec. 147 'is stronger' than the expression 'if satisfied' and such requirement has to be met by the AO in the reasons recorded before usurping the jurisdiction u/s. 147 of the Act."
Core principles established: The AO must have an independent reason to believe that income has escaped assessment, based on tangible material, and not merely act on borrowed satisfaction or suspicion.
Final determinations on each issue: The court determined that the AO's reopening of the assessment was invalid due to lack of independent and reasonable belief, absence of tangible material, and the reopening being based on a change of opinion.

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