2025 (4) TMI 997 - HC - Income Tax

Reopening of assessment u/s 147 - limitation period prescribed u/s 149(1)(a) - HELD THAT - The purpose for sharing the information which is construed as suggestive of the assessee s income escaping assessment is to enable the assessee to respond to the same and for the AO to take an informed decision on the basis of the record including the assessee s response. Thus the question as to the value of income that may have escaped assessment is required to be determined by the AO at the stage of passing of an order u/s 148A (d) and not at the stage of sharing the information with the Assessee in terms of Section 148A (b) of the Act. In the present case there can be no dispute that even if the transaction of sale and purchase of equity shares of PMC Fincorp Ltd. is held to be bogus the only amount that could be brought under the net of tax is the sum. This is the only amount received by the Assessee from his broker on account of the said transaction and the AO has no information which suggests otherwise. Undisputedly the Assessee has surrendered the said amount to tax as he had claimed the same as short term capital gains. In view of the above the impugned order is unsustainable on both the grounds (i) the impugned notice is beyond the period of three years as stipulated under Section 149 (1) and (ii) that there is no material to indicate that the Assessee s income has escaped assessment as the petitioner has declared the amount as received chargeable to tax and has also paid the tax on the said amount. The petition is accordingly allowed and the impugned notice is set aside.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the notice dated 22.07.2022 issued under Section 148 of the Income Tax Act, 1961 (the Act) for reopening the assessment for AY 2014-15 is valid and within the limitation period prescribed under Section 149(1)(a) of the Act;

(b) Whether the Assessing Officer (AO) had sufficient and valid information indicating that the petitioner's income had escaped assessment, thereby justifying the issuance of the notice under Section 148;

(c) Whether the procedure prescribed under Section 148A of the Act, introduced with effect from 01.04.2021, was complied with in initiating reassessment proceedings;

(d) Whether the transactions of sale and purchase of shares of PMC Fincorp Ltd. declared by the petitioner were genuine or bogus, and if bogus, whether the income escaping assessment exceeded Rs. 50,00,000/- as alleged by the AO;

(e) The applicability and interpretation of the Supreme Court's directions in Union of India & Ors. v. Ashish Agarwal regarding the treatment of notices issued under Section 148 before and after 01.04.2021;

(f) The extent to which the information shared by the AO under Section 148A(b) can be relied upon to determine the limitation period and the quantum of income escaping assessment.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Validity and Limitation of Notice under Section 148

Legal Framework and Precedents: Section 149(1)(a) of the Income Tax Act prescribes a three-year limitation period for issuance of notice under Section 148 for reassessment where the escaped income is less than Rs. 50,00,000/-. The procedure for reassessment notices issued after 01.04.2021 was amended by the Finance Act, 2021, introducing Section 148A, which mandates a preliminary inquiry and furnishing of information before issuance of notice under Section 148.

The Supreme Court in Union of India & Ors. v. Ashish Agarwal clarified that notices issued under Section 148 post 01.04.2021 without following Section 148A procedure would be construed as notices under Section 148A(b), and the AO must furnish information to the assessee to justify reopening.

Court's Interpretation and Reasoning: The Court noted that the impugned notice dated 22.07.2022 was issued after 01.04.2021 and thus must comply with Section 148A. The initial notice dated 08.04.2021 was issued under the pre-amendment provisions and was challenged. Following the Supreme Court's directions, the AO furnished information on 20.05.2022 under Section 148A(b).

The Court held that the limitation period under Section 149(1)(a) applies to the quantum of income escaping assessment determined after considering the assessee's response and all material on record at the stage of passing the order under Section 148A(d), not merely on the information shared under Section 148A(b).

Key Evidence and Findings: The AO alleged income escaping assessment exceeded Rs. 50,00,000/- based on information indicating long term capital gains of Rs. 61,95,000/-. However, the petitioner declared only short term capital gains of Rs. 9,43,944/- and paid tax accordingly. The petitioner's bank statements, contract notes, and income tax return corroborated the declared STCG and receipt of net gain.

Application of Law to Facts: Since the only income received and declared was Rs. 9,43,944/-, the limitation period for issuance of notice under Section 148 is three years. The impugned notice was issued beyond this period, rendering it time-barred.

Treatment of Competing Arguments: The Revenue contended that the information furnished under Section 148A(b) indicating income over Rs. 50,00,000/- must be accepted for limitation purposes. The Court rejected this, emphasizing that the information is preliminary and must be tested against the assessee's response and other material before determining limitation.

Conclusion: The impugned notice is barred by limitation under Section 149(1)(a) as the escaped income is less than Rs. 50,00,000/-.

(b) Sufficiency of Information Indicating Income Escaping Assessment

Legal Framework and Precedents: Section 148A(b) requires the AO to communicate to the assessee the information or material on which the reassessment proceedings are proposed. The AO must then consider the assessee's response before passing an order under Section 148A(d).

Court's Interpretation and Reasoning: The Court observed that the information shared by the AO alleged fictitious long term capital gains of Rs. 61,95,000/-, which was not substantiated by any material. The petitioner's response demonstrated that the gain was short term capital gain of Rs. 9,43,944/- and that tax was paid on the same.

The AO's assertion that the transaction was bogus due to absence of margin money was not supported by any material in the information shared or otherwise on record. The Court held that suspicion or allegation alone cannot justify reopening without credible material.

Key Evidence and Findings: The petitioner submitted contract notes, bank statements, and ITRs confirming the genuineness of the STCG transaction and tax payment. There was no evidence contradicting the petitioner's claim of actual receipt of only Rs. 9,43,944/-.

Application of Law to Facts: The AO's order under Section 148A(d) must be based on a careful examination of all material including the assessee's response. Here, the AO failed to demonstrate any credible information indicating escaped income exceeding Rs. 50,00,000/-.

Treatment of Competing Arguments: The Revenue's reliance on the information from the Insight Portal and the AO's subjective conclusion that the transaction was bogus was rejected due to lack of supporting evidence.

Conclusion: The AO's order under Section 148A(d) holding that reassessment proceedings are justified is erroneous and unsustainable.

(c) Compliance with Procedure under Section 148A

Legal Framework and Precedents: Section 148A mandates a two-stage process: furnishing of information to the assessee under Section 148A(b) and consideration of the assessee's response before passing order under Section 148A(d) to initiate reassessment.

Court's Interpretation and Reasoning: The Court noted that the AO complied with the Supreme Court's directions by furnishing information on 20.05.2022 and subsequently passing the order under Section 148A(d) on 22.07.2022.

However, the AO's decision under Section 148A(d) was flawed as it was based on incorrect information and did not properly consider the assessee's response and material on record.

Conclusion: While procedural compliance was observed, the substantive decision under Section 148A(d) was not justified.

(d) Genuineness of Share Transactions and Quantum of Escaped Income

Legal Framework and Precedents: Income escaping assessment must be established by credible material. Mere suspicion of bogus transactions is insufficient without evidence.

Court's Interpretation and Reasoning: The AO's contention that the transactions were bogus due to lack of margin money was unsubstantiated. The petitioner's evidence of broker contract notes, bank receipts, and tax returns established the genuineness of the STCG transaction.

The AO's claim that income escaping assessment was Rs. 61,95,000/- was based on an incorrect assumption of long term capital gains, which the petitioner never claimed.

Application of Law to Facts: The only income that could have escaped assessment was Rs. 9,43,944/- which was declared and taxed by the petitioner.

Conclusion: The transaction was genuine to the extent of declared STCG and tax paid, and no escaped income exceeding Rs. 50,00,000/- was established.

(e) Interpretation of Supreme Court Directions in Union of India & Ors. v. Ashish Agarwal

Legal Framework and Precedents: The Supreme Court held that notices issued under Section 148 after 01.04.2021 without following Section 148A procedure would be treated as notices under Section 148A(b) and that reassessment proceedings must comply with the new procedural safeguards.

Court's Interpretation and Reasoning: The Court applied these directions, noting that the initial notice dated 08.04.2021 was pre-amendment but was regularized by treating it as a Section 148A(b) notice. The AO complied by furnishing information and passing the order under Section 148A(d).

The Court emphasized that the AO's decision under Section 148A(d) must be based on credible material and the assessee's response, consistent with the Supreme Court's mandate.

Conclusion: The procedural safeguards introduced by the Finance Act, 2021 and clarified by the Supreme Court are mandatory and were to be strictly complied with.

(f) Reliance on Information Shared under Section 148A(b) for Determining Limitation and Quantum of Escaped Income

Legal Framework and Precedents: Section 148A(b) requires the AO to share information or material on which reassessment is proposed. However, the quantum of escaped income and limitation period are to be determined after considering the assessee's response and all material at the stage of order under Section 148A(d).

Court's Interpretation and Reasoning: The Court rejected the Revenue's argument that the information shared under Section 148A(b) must be accepted at face value for limitation purposes. The Court held that the information is preliminary and subject to verification and response.

Application of Law to Facts: Here, the information alleged long term capital gains of Rs. 61,95,000/-, but the petitioner's response disproved this. Therefore, limitation must be assessed based on the actual income escaping assessment established after considering the response.

Conclusion: The AO cannot rely solely on the preliminary information to determine limitation or escaped income.

3. SIGNIFICANT HOLDINGS

"The purpose for sharing the information, which is construed as suggestive of the assessee's income escaping assessment is to enable the assessee to respond to the same and, for the AO to take an informed decision on the basis of the record including the assessee's response. Thus, the question as to the value of income that may have escaped assessment is required to be determined by the AO at the stage of passing of an order under Section 148A (d) of the Act and not at the stage of sharing the information with the Assessee in terms of Section 148A (b) of the Act."

"Even if the transactions for sale and purchase of shares of PMC Fincorp Ltd. are suspected to be a bogus transaction, the value of income that has escaped assessment cannot exceed Rs. 9,43,944/- as that is the only amount received by the Assessee in respect of the said transaction."

"The impugned notice is beyond the period of three years as stipulated under Section 149 (1) of the Act; and, there is no material to indicate that the Assessee's income has escaped assessment as the petitioner has declared the amount as received, chargeable to tax and has also paid the tax on the said amount."

Core principles established include:

- The limitation period for issuance of notice under Section 148 depends on the quantum of income escaping assessment established after considering the assessee's response and material on record, not merely on preliminary information shared under Section 148A(b).

- The AO must have credible and substantiated material to conclude that income has escaped assessment before initiating reassessment proceedings.

- The procedural safeguards introduced by Section 148A and upheld by the Supreme Court must be strictly followed.

- Mere suspicion or unsubstantiated allegations of bogus transactions are insufficient to justify reassessment.

Final determinations:

(i) The impugned notice dated 22.07.2022 issued under Section 148 is set aside as barred by limitation.

(ii) The order under Section 148A(d) holding that reassessment proceedings are justified is quashed due to lack of credible material indicating escaped income exceeding Rs. 50,00,000/-.

(iii) The reassessment proceedings consequent to the impugned notice are invalid and liable to be set aside.