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TMI Blog2022 (1) TMI 1416X X X X Extracts X X X X X X X X Extracts X X X X ..... d it also does not relate to the broker of assessee, since the sale is not through M/s.Anand Rathi Shares and Stock Brokers Ltd., but through Arcadia Share and Brokers Pvt.Ltd. Thus, on obtaining this information, there shall need to be a reason for formation of belief that there is a rational connection having live link between the material coming to the income tax officer and his formation of belief that the income chargeable to tax has escaped the assessment of the particular year. Even when the Court is not required to go into the sufficiency or adequacy of the material, it is a must for the AO to establish the rational connection of direct nexus or live link between the material coming to the notice of the officer and formation of his belief. There does not appear to be any material connecting the present assessee, where information in relation to the third party has been used by the AO. There is nothing to indicate as to how in absence of any explicit connection of the assessee with the information received from the another agency, the reassessment proceedings have been initiated. The statement recorded of Shri Sanjay Vora also does not name the assessee nor has there been an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... None ORAL JUDGMENT PER : HONOURABLE MS. JUSTICE SONIA GOKANI 1. The appellant - Principal Commissioner of Income Tax is aggrieved by the order dated 07.01.2021 passed by the Income Tax Appellate Tribunal ('the ITAT' hereinafter) passed in Appeal ITA No.5/SRT/2019 for Assessment Year 2013-2014 and therefore, it has raised the following substantial questions of law for the consideration of this Court. "(a) Whether in the facts and circumstances of the case, learned ITAT has erred in law and on facts in quashing the reassessment proceedings under Section 147, even though the Assessing Officer had sufficient tangible material to form a bonafide belief that the income of the assessee has escaped assessment for AY 2013-14? (b) Whether in the facts and circumstances of the case, learned ITAT has erred in law and on facts in not deciding the case on merits i.e. without appreciating the facts of the case and the cogent material and circumstantial evidences gathered by the Assessing Officer during the case of assessment proceedings?" 2. The case of the assessee was reopened as the information was received from the Investigation Wing of Kolkata, which carried out survey/search opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was named in Kolkata Investigation Report titled as "Project Bogus LTCG/STCL through BSE Listed Penny Stocks" prepared by the DDIT (Investigation) Unit 2(3), (ii) The statements by promoters, brokers and associated persons, (iii) The assessee is not an ardent trader in shares and invested in only handful of shares in his life, (iv) It invested in shares of the company Global Securities Ltd. which had no worthwhile credentials on record, (v) The purchase of the shares of Global Securities Ltd. were off market transactions where no STT has been paid, and (vi) The sale of shares happened through a broker which has been categorically involved in LTCG scam as named in Kolkata Investigation Report through online mode and STT. 2.6 The Assessing Officer had not only rejected the reply of the assessee and concluded that huge Capital Gain earned by the assessee within a very short period of time and investment in penny stock was neither the result of coincidence nor of the genuine investment activity, but was on account of a well planned and executed scheme in which the company, brokers, buyers and sellers of the scripts worked in tandem to achieve predetermined objectives. Hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket transactions are not chargeable to STT. Hence, no exemption under Section 10(38) of the Act is available for shares which would have been sold off the market. 3. This was challenged further by the assessee before the ITAT. In assessee's appeal being ITA Nos.05/SRT/2019 for the Assessment Year 2013-2014, the question which was raised before the Tribunal was whether the Assessing Officer erred in reopening assessment under Section 147 of the Act by issuing notice under Section 148 of the Act. 3.1 The Tribunal noted that the challenge by the assessee is to the reassessment proceedings under Section 147/148 of the Act and he also raised the issues on merits. However, the main grievance of the assessee had been confined to the reassessment proceedings which is termed as a technical issue by the Tribunal. 3.2 According to the Tribunal, the assessee is an individual, who derived income from other sources and LTCG during the year under consideration. The case was reopened since the information received from Investigation Wing of Kolkata, which carried out survey/searched operations that in large number of penny stock companies the share prices were artificially raised on the stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estigation Wing and examined the information apply his mind and on being satisfied that the income chargeable to tax had escaped the assessment and hence, the reasons recorded are valid. The reasons recorded are thus: "The assessee filed return of income for the year under consideration on 29.03.2014 declaring total income at Rs.7,77,230/-. In this case, information is received from the Investigation Wing, Kolkata who had carried out survey/search operations wherein it was established that in large number of penny stock companies share prices were artificially raised/manipulated on the Stock Exchanges in order to book bogus claims of Long Term Capital Gain/Loss. The Information as per EFS/ITS data/penny stock reflects that the asseessee has shown Long Term Capital Gain of Rs.20,76,924/- on which is claimed as exempt. This is one such case wherein the assessee has claimed that the Long Term Capital Gain amounting to Rs.20,76,924/- arising out Of sale of shares is exempt and the scrip name being Global Securities Ltd. which is one of the companies utilized by Anand Rathi Share and Stock Brokers ltd. for providing bogus accommodation entries. This fact was duly accepted before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in assesses's case the income chargeable to tax has escaped assessment. 3.9 Shri Sanjay Vora's statement since did not contain the name of the assessee and did not relate to the broker of the assessee and when the assessee did not sell shares through M/s.Anand Rathi Share & Brokers, the reasons recorded of the findings of survey or search operation in relation to other assessee would not apply on the assessee. 3.10 The Tribunal held that the reasons which had been given for the belief which was formed by the Assessing Officer hopelessly failed to satisfy the requirements of the statute and the whole process of taxation needs to follow the procedures which are valid under the law and must adhere to substantive as well as procedural law. The levy and collection of the taxes always should be strictly in accordance with law. The words reason to believe is extensively discussed, which means that the belief needs to be of an honest and reasonable person based upon reasonable grounds and the Assessing Officer may act on direct or circumstantial evidence, but not on mere suspicion, gossip or rumor. He would be acting without jurisdiction if the reason for his belief that the condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or reassess such income or recompute the loss or the depreciation allowance or any other allowance or deduction for such assessment year (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year). Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment yeart. unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year: Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) locate outside India, chargeable to tax, has escaped assessment for any assessment year : Provided also that the Assessing Officer may assess or reassess such income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under subsection (2) of section 148. Explanation. For the purpose of assessment or reassessment or recomputation under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, irrespective of the fact that the provisions of section 148A have not been complied with.]" 148: Before making the assessment, reassessment or recomputation under Officer shall serve on the assessee a notice, along with a copy of the order passed, if required, under clause (d) of section 148A, requiring him to furnish within such period, as may be specified in such notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer shall be deemed to have information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated or books of account, other documents or any assets are requisitioned or survey is conducted in the case of the assessee or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person. Explanation 3.-For the purposes of this section, specified authority means the specified authority referred to in section 151.]" 6. This Court in case of HariKishan Sunderlal Virmani, reported in 394 ITR 146 (Guj.-HC) on the issue of reopening was considering as to whether any reassessment proceedings can be permitted on the basis of the information received from the another agency, when the Assessing Officer was required to form an independent opinion on the basis of the material on record that the income has escaped the assessment for the relevant year. The Court held that without forming any such opinion solely and mechanically relying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and mechanically relying upon the information received from other source, there cannot be any reassessment for the verification. 5.4 At this stage it is required to be noted that even in the reasons recorded, there is no allegation that there was any failure on the part of the assessee in not disclosing truly and fully material facts necessary for assessment. Under the circumstances, the assumption of the jurisdiction to reopen the assessment beyond the period of four years in exercise of powers under section 147 of the Act is bad in law and contrary to the provisions of section 147 of the Act. Under the circumstances, on the aforesaid ground alone, the impugned reassessment proceedings deserve to be quashed and set aside. 5.5 In view of the above and for the reasons succeeds. stated above, present petition The impugned notice issued under section 148 of the Income Tax Act, 1961 and reopening of the proceedings for A.Y. 2009-10 cannot sustain and the same deserves to be quashed and set aside and are hereby quashed and set aside. Rule is made absolute accordingly. In the facts and circumstances of the case, there shall be no order as to costs." 7. The Apex Court in cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Investigating Wing. The Court held that neither the application of mind, nor the formation of belief that income chargeable to tax had escaped the assessment on the basis of information available at the disposal of Assessing Officer. After he expressed in any rigid format in the reasons recorded, the two essential requirement can be gathered from reasons recorded. 8.3 Apt would be to reproduce the relevant findings and observations of this Court. "7. The reasons thus recorded do not proceed only on the information supplied by the Investigating Wing. The Assessing Officer having applied his mind and processed such information, formed his belief that the income chargeable to tax has escaped assessment. Neither the application of mind, nor the formation of belief that income chargeable to tax has escaped assessment on the basis of information available at the disposal of Assessing Officer, have to be expressed in any rigid format in the reasons recorded. Hence, as these two essential requirements can be gathered from the reasons recorded, the notice for reopening cannot fail on such basis. Division Bench of this Court in case of Dishman Pharmaceuticals & Chemicals Ltd. v. Dy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterials prima facie suggested suppression of sale consideration of the tiles manufactured by the assessee to evade excise duty. On the basis of such material, the Assessing Officer also formed a belief that income chargeable to tax had also escaped assessment. When thus the Assessing officer had such material available with him which he perused, considered, applied his mind and recorded the finding of belief that income chargeable to tax had escaped assessment, the re-opening could not and should not have been declared as invalid, on the ground that he proceeded on the show-cause notice issued by the Excise Department which had yet not culminated into final order. At this stage the Assessing Officer was not required to hold conclusively that additions invariably be made. He truly had to form a bona fide belief that income had escaped assessment. In this context, we may refer to various decisions cited by the counsel for the Revenue. 10. In case of Central Provinces Manganese Ore Co. Ltd. v. Income Tax Officer, Nagpur (Supra) the Supreme Court noted that in case of the assessee which had an office in London, this Customs authority had come to know that the assessee had declared v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appearing for the respondents, has urged that the letter of Shri Bagai was received by the Income tax Officer on March 26, 1974 and on the very next day, that is, on March 27, 1974, he issued the impugned notice under Section 147(b) of the Act and that he did not have conducted any inquiry or investigation into the information sent by Shri Bagai. Merely because the impugned notice was sent on the next day after receipt of the letter of Shri Bagai does not mean that the Income Tax Officer did not apply his mind to the information contained in the said letter of Shri Bagai. On the basis of the said facts and information contained in the said letter, the Income Tax officer, without any further investigation, could have formed the opinion that there was reason to believe that the income of the assessee chargeable to tax had escaped assessment. The High Court, in our opinion, was in error in proceeding on the basis that it could not be said that the Income Tax Officer had in his possession information on the basis of which he could have reasons to believe that income of the assessee chargeable to tax had escaped assessment for the relevant assessment years. For the reasons aforemention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income Tax & Anr. (supra), Division Bench of Delhi High Court considered the validity of reopening of assessment where the notice was based on information received from Directorate of investigation that the assessee was beneficiary of bogus accommodation entries. The Court while upholding the validity of reopening observed that sufficiency of reason cannot be considered in a writ petition. It was observed as under : "23. The present factual canvas has to be scrutinized on the touchstone of the aforesaid enunciation of law. It is worth noting that the learned counsel for the petitioner has submitted with immense vehemence that the petitioner had entered into correspondence to have the documents but the assessing officer treated them as objections and made a communication. However, on a scrutiny of the order, it is perceivable that the authority has passed the order dealing with the objections in a very careful and studied manner. He has taken note of the fact that transactions involving Rs.27 lakhs mentioned in the table in Annexure P-2 constitute fresh information in respect of the assessee as a beneficiary of bogus accommodation entries provided to it and represents the undi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T [2008] 302 ITR 275 (Mad) upheld the notice for reopening which was based on information from enforcement directorate showing possible inflation of purchases made by the assessee. 8. The question of change of opinion and failure on the part of the assessee to disclose truly and fully all material facts, in the present case are closely connected. Undoubtedly, as noted earlier, the Assessing Officer during the original assessment had examined the transactions. However, such examination would necessarily. be on the basis of disclosures made by the assessee in the return filed and during the scrutiny assessment. If the Assessing Officer has information to form a reasonable opinion that prima facie the entire transaction itself was sham and bogus, as reference to such transaction during the original assessment and raising certain queries in this respect would not prevent him from reopening the assessment on the principle of change of opinion. As noted, the opinion would be formed on the basis of disclosures. When disclosures are found to be prima facie untrue, the opinion formed earlier would not prevent Assessing Officer from examining the issue. In the present case, as noted, Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quiry/ verification. Yet another contention emphasized by the learned Senior Counsel is that the post notice correspondence made after the reasons recorded could not have added anything which was lacking in the reasons themselves. He urged that in absence of any statement given by any Director of Basant Marketing Pvt. Ltd. stating that the assessee received and obtained accommodation entry in the form of loans and advances, the reasons lack basis. The Director Mr. Dalmia of Basant Marketing Pvt. Ltd. as contended also does not reveal anywhere and, therefore, it is premature on the part of the Assessing Officer to so record the reasons. It is further urged that the affidavit of Rishabh Dalmia stating on oath that the loan transactions with the petitioner are genuine for having been carried out only through cheques, prima facie vindicates that the entire exercise is based on suspicion. The entire thrust, therefore, is that issuance of notice is nothing but a fishing inquiry. 19. As discussed at length while adverting to the law, that sufficiency of reasons recorded by the Assessing Officer need not be gone into by this Court. Of course, the Assessing Officer when forms his belief o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat at the time of scrutiny assessment, a specific query was raised with regard to unsecured loans and advances received from the said company namely, Basant Marketing Pvt. Ltd. based at Kolkata. These being the transactions through the cheques and drafts, there would arise no question of the Assessing Officer not accepting such version of the assessee and not treating them as genuine loans and advances. Furnishing the details of names, addresses, PANs, etc. also would lose its relevance if subsequently furnished information, which has been made basis for issuance of notice impugned, concludes that Basant Marketing Pvt. Ltd. is merely a dummy company of one Shri Arun Dalmia, which provided the accommodation entries to various beneficiaries. 21. This Court has examined the belief of the Assessing Officer to a limited extent to inquiry as to whether there was sufficient material available on record for the Assessing Officer to form a requisite belief whether there was a live link existing of the material and the income chargeable to tax that escaped assessment. This does not appear to be the case where the Assessing Officer on vague or unspecific information initiated the proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion needs to be categorical, specific and dependable. The Apex Court also has time and again emphasised that the sufficiency of the reasons for forming the belief is not the domain of the Court. However, it is open to establish that there exist no belief or the belief is not a bona fide and is vague, irrelevant, nonspecific and based on the unsustainable information. 8.3 The material whether has a rational connection or live link with the formation of the requisite belief can be gone into by the Court. Upon the basis of any subsequent valid information, if the officer forms reason to believe that the twin conditions provided under Section 147 of the Act are satisfied. That no full and true disclosure of the fact have been made by the assessee at the time of original assessment and hence, the income chargeable to tax has escaped the assessment by forming his own belief based on his own reasons to belief. The Court need not interfere. 9. This being a well laid down position of law that the Court needs to inquire to a limited extent is as to whether there exist a sufficient material on record for the Assessing Officer to form a requisite belief and whether there was a live link exi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the statute are satisfied before he initiates the proceedings of reassessment. 12. This Court cannot be oblivious of the requirement of satisfying these conditions before the reassessment proceedings are initiated, there appears to be a borrowed satisfaction. It has chosen to merely considered the information/material received from other source without forming any independent opinion on the basis of the material on record that income has escaped the assessment. His suspicion of the assessee dealing with the shares and claiming of LTCG would not provide the sufficient grounds for reopening. 13. The exercise which is based on suspicion is not permissible for reopening and any notice for reassessment in such circumstances would need to be termed as a fishing inquiry only. 14. In case of Vilas Vrajlal Parekh HUF (supra) it was a case where the Principal Director of Income Tax (Inv) Kolkata, had undertaken the exercise of accommodation entry of LTCG, and identified large number of beneficiaries who had availed huge amount of bogus entries of LTCG and identified about 64811 beneficiaries involving bogus LTCG amounting Rs.38,000 crore. The revenue has highlighted the modus operandi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Brokers Ltd. for providing bogus accommodation entries. This had been accepted in the statement recorded under Section 131 of the Act of Shri Sanjay Vora, the assessee had claimed the LTCG amounting to Rs.20,76,924/- arising out of sale of shares of Global Securities Ltd. The Assessing Officer on getting this information has issued the notice by recording the reasons that this claim of LTCG on sale of shares of Global Securities Ltd. was the prearranged mechanism of claiming bogus LTCG. On getting this information, it was deduced that the Global Securities Ltd. has been involved in circular trading and sale and purchase of the scrip to convert unaccounted money of several beneficiaries into accounted one by following the said modus operandi. 16. The Assessing Officer to form the opinion there shall need to be some link with the material and as discussed above, the same is missing, the challenge needs to fail. Though no rigid format is a must to express application of mind or for formation of belief that income chargeable to tax has escaped assessment and yet, when reliance on the information is mechanical without reassessment for the verification, independent opinion needs to be h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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