2025 (5) TMI 1382 - AT - Income Tax

Reopening of assessment - reasons to believe or suspect - addition by treating the Long Term Capital Gain (LTCG) earned by the assessee on sale of shares as bogus - HELD THAT - The reasons pointed out by the AO did not constitute valid reasons for reopening of the assessment. The only information available to the AO was that the assessee had traded in shares of Appu Marketing Manufacturing Ltd./Ejecta Marketing Ltd. This information was already on record. No new tangible information has come to the possession of the AO that the LTCG declared by the assessee was bogus. AO in this case formed the belief of escapement of income by way of reappreciation of the facts that too by merely examining the financials of the said Appu Marketing Manufacturing Ltd. This action of the AO was not valid for the purpose of reopening of the assessment. No doubt the AO could have examined the aforesaid issue including financials of the said Appu Marketing Manufacturing Ltd. during the original assessment proceedings. Once the limitation period to issue notice u/s. 143(2) of the Act after filing of the return of income on 25.01.2015 had expired the AO was not supposed to revisit the facts of the case and change his opinion. No tangible material had come to the possession of the AO to form the belief that income of the assessee has escaped assessment. As observed above the only information that the assessee had traded in certain scrip would not constitute a reliable and sufficient information to form the belief that the income of the assessee has escaped assessment. A perusal of the reasons recorded would show that there was no information to the AO that the LTCG shown by the assessee in the return of income was bogus. Even in the reasons recorded the observations of the AO are based on preponderance of probabilities. Thus the reasons pointed out by the Assessing Officer cannot be said to be the reasons to believe that income of the assessee had escaped assessment. Therefore the reopening of assessment was bad in law and consequential assessment order is not sustainable - Decided in favour of assessee.

1. ISSUES PRESENTED and CONSIDERED

- Whether the reopening of the assessment under sections 147/148 of the Income-tax Act, 1961 was valid and legally sustainable in the absence of tangible material indicating escapement of income?

- Whether the Long Term Capital Gain (LTCG) earned by the assessee on sale of shares in Appu Marketing & Manufacturing Ltd./Ejecta Marketing Ltd. was bogus and liable to be added back to income?

- Whether the Assessing Officer (AO) had valid reasons to form a belief that the LTCG declared by the assessee was an accommodation entry to launder undisclosed income?

- Whether the satisfaction recorded by the AO for reopening the assessment was a bona fide satisfaction or a borrowed satisfaction based on mere suspicion or assumption?

- Whether the principles established by judicial precedents regarding the validity of reopening of assessments were correctly applied in this case?

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Reopening of Assessment under Sections 147/148

The legal framework governing reopening of assessments under sections 147/148 mandates that the AO must have "reason to believe" that income chargeable to tax has escaped assessment. This belief must be based on tangible material and not on mere suspicion, conjecture, or change of opinion. The AO's satisfaction should be bona fide and not a borrowed satisfaction. The reopening should not be a device for fishing or roving inquiry.

The Court examined the reasons recorded by the AO for reopening the assessment, which primarily relied on information from the Investigation Unit that the assessee had traded in penny stocks of Appu Marketing & Manufacturing Ltd./Ejecta Marketing Ltd. to the tune of Rs. 20,19,000/-. The AO analyzed the financials of the company and observed that the share price movements were unrelated to the company's fundamentals, concluding that the shares were rigged and the LTCG was bogus.

However, the Court noted that this information was already on record and no new tangible material had come to the AO's possession post the original assessment. The AO's belief was formed merely by reappreciating existing facts and assumptions about the nature of the shares and the transaction. The Court emphasized that the AO's conclusion was based on preponderance of probabilities and assumptions rather than concrete evidence of escapement of income.

The Court referred to authoritative precedents that hold that "reason to believe" must be supported by material evidence and cannot be a mere suspicion or subjective satisfaction. It cited the Supreme Court's ruling that reopening cannot be based on a mere change of opinion and that the AO's power to reopen is not plenary but circumscribed by the requirement of tangible material indicating escapement.

Applying these principles, the Court held that the reasons recorded by the AO did not constitute valid reasons to believe that income had escaped assessment. The reopening was therefore held to be bad in law and the consequential assessment order unsustainable.

Genuineness of LTCG and Allegation of Bogus Accommodation Entry

The AO alleged that the LTCG declared by the assessee was a sham transaction, an accommodation entry to channel undisclosed income, based on the nature of the penny stocks and their price movements. The AO's reasoning was that the shares lacked sound fundamentals and the price rise was manipulated, thus the LTCG was bogus.

The Court scrutinized this contention and found that the AO's conclusion was speculative and premised on assumptions without any direct evidence that the assessee's LTCG was fabricated. The Court observed that the AO's analysis of the company's financials and share price movements was insufficient to establish the bogus nature of the transaction. The mere fact that the shares were penny stocks and exhibited price fluctuations not linked to fundamentals did not ipso facto render the LTCG invalid or the transaction a sham.

The Court also noted that such issues could have been examined during the original assessment proceedings and did not justify reopening absent new material. The Court rejected the AO's view that the transaction was an accommodation entry, holding that such a conclusion required more than conjecture or suspicion.

Application of Judicial Precedents

The Court relied extensively on judicial precedents, including the Supreme Court's decision in "Income Tax Officer v Lakhmani Mewaldas" which clarified the nature of "reason to believe" necessary for reopening. It also cited decisions from various High Courts emphasizing that reopening cannot be based on borrowed satisfaction or mere suspicion and that tangible material must precede issuance of notice under section 148.

Further, the Court referred to rulings that the AO's power to reopen is not plenary and must be exercised within the statutory framework and principles of natural justice. The Court underscored that reopening cannot be a tool for fishing expeditions or roving inquiries.

Treatment of Competing Arguments

The assessee's counsel argued that the reopening was invalid as the AO did not have any new tangible material and that the satisfaction was a borrowed one based on vague and unsubstantiated information. The counsel contended that the AO's reasons were vague, and the reopening was a mere change of opinion.

The Department relied on the lower authorities' orders and contended that the AO had valid reasons based on the nature of the penny stocks and the investigation inputs.

The Court found the assessee's arguments persuasive, holding that the AO's reasons were insufficient and did not meet the threshold of "reason to believe." The Department's reliance on the lower authorities was rejected as those orders failed to appreciate the legal standards for reopening.

3. SIGNIFICANT HOLDINGS

- "The reasons to believe regarding the escapement of the income should be based on certain tangible material and it should not be mere pretence of the Assessing Officer. The reasons to believe does not mean reason to suspect. Reopening of the assessment is not permitted for making fishing and roving enquiries."

- "The powers of Assessing Officer to reopen an assessment, though wide, are not plenary. The words of the statute are 'reason to believe' and not 'reason to suspect'. Such an action of the Assessing Officer regarding formation of belief of escapement of assessment and thereby in starting proceedings u/s. 147 is open to challenge in a court of law."

- "No tangible material had come to the possession of the AO to form the belief that income of the assessee has escaped assessment. The AO, in this case, formed the belief of escapement of income by way of reappreciation of the facts, that too by merely examining the financials of the said company. This action of the AO was not valid for the purpose of reopening of the assessment."

- The reopening of the assessment was held to be "bad in law" and the consequential assessment order was quashed.

- The Court affirmed that the mere fact of trading in penny stocks and price fluctuations unrelated to fundamentals does not ipso facto establish that LTCG earned was bogus or that the transaction was an accommodation entry for laundering undisclosed income.

- The principle that reopening cannot be based on a change of opinion or assumption without new tangible material was reiterated and applied.

- The findings and conclusions in the lead appeal were applied mutatis mutandis to the other appeals involving identical facts and issues.

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