2025 (5) TMI 1594 - HC - Income Tax

Reopening of assessment u/s 147 - reasons to believe - objective satisfaction recorded by AO as to how the income has escaped assessment or not? - bogus LTCG/STCG on sale of penny stocks - HELD THAT - The reasons have been clearly stated and the assessee having filed its return of income pursuant to the notice issued u/s 147 had sufficient opportunity to give their explanation to the reasons so recorded. The asseessee did not avail this opportunity when the assessment was taken up u/s 147 of the Act. Assessee was put to notice along with questionnaire and the assessee was represented by a chartered accountant but no explanation was offered. Therefore it is not a case where the AO did not apply his mind but has recorded his satisfaction upon considering the materials available with the department when the assessee carried out the matter on appeal before the CIT(A-2). Though certain grounds were raised the assessee did not pursue the appeal. The Appellate Authority while rejecting the appeal by order has noted various dates on which the appeal was adjourned from April 2018 to March 2019. The CIT(A) also took note of the reasons given by the Assessing Officer and affirmed the said order. Therefore in our view the Tribunal fell in error in coming to the conclusion that the Assessing Officer has reopened the case on very vague reasons without objective satisfaction as to how the income has escaped assessment. Thus we are satisfied that the Assessing Officer had reopened the assessment with due application of mind. The reasons which have been recorded for reopening cannot be considered to be vague. Also assessee miserably failed to establish the genuineness of the transaction the creditworthiness of the company namely M/s. Rupak Developers Pvt. Ltd. which are found to be a shell company with no business activities and therefore the creditworthiness of the said company has also not been established. Thus all these factors would go to show that the reopening was done for valid reasons and therefore the learned Tribunal ought not to have interfered with the said assessment order. Decided in favour of revenue.

The core legal questions considered by the Court in this appeal filed by the revenue under Section 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal (Tribunal), are as follows:

i) Whether the assessing officer recorded objective satisfaction regarding how income had escaped assessment, in compliance with the principles laid down by the Supreme Court, particularly in the case of Raymond Woollen Mills Vs ITO.

ii) Whether the assessing officer's reasons for reopening the assessment were vague or whether there was specific information justifying reopening, and whether the Tribunal erred in holding the reasons vague.

iii) Whether the Tribunal was justified in quashing the assessment order despite the principle that sufficiency of belief is not open to question, though existence of belief can be challenged, as held in Phool Chand Bajranglal Vs ITO.

iv) The appellant's reservation to add, modify, or alter grounds of appeal or adduce additional evidence during hearing.

Issue-wise Detailed Analysis

1. Objective Satisfaction and Formation of Belief by the Assessing Officer

The legal framework governing reopening of assessments under Section 147 of the Income Tax Act mandates that the assessing officer must have "reason to believe" that income chargeable to tax has escaped assessment. The Supreme Court in Raymond Woollen Mills Vs ITO and Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. clarified that "reason to believe" means a cause or justification to suppose income has escaped assessment, and does not require final legal proof at the stage of reopening. The assessing officer's subjective satisfaction based on relevant material suffices.

The Court examined the assessment order dated 15th December 2017, noting that the reopening was predicated on the detection of a Rs. 1 Crore credit in the assessee's bank account from M/s. Rupak Developers Pvt. Ltd. during the relevant financial year. The Assessing Officer issued notices under Sections 148, 143(2), and 142(1), and gave the assessee opportunity to explain the transaction. The assessee failed to provide any satisfactory explanation or supporting documents to establish the genuineness of the transaction or the business of Rupak Developers Pvt. Ltd.

The Court found that the Assessing Officer had material indicating that Rupak Developers Pvt. Ltd. was a shell company used to provide accommodation entries in the form of bogus long-term and short-term capital gains (LTCG/STCG) through penny stock sales. This material formed the basis of the Assessing Officer's belief that income had escaped assessment.

The Court referred to a similar precedent in Principal Commissioner of Income Tax - 9, Kolkata -vs- P L Goenka HUF, where the Supreme Court's principles were reiterated, emphasizing that the assessing officer's subjective satisfaction need only be based on relevant material and not conclusive proof. The Court underscored that the assessing officer's role is to administer the statute with solicitude for the public exchequer and fairness to taxpayers.

Applying these principles, the Court held that the Assessing Officer had recorded objective satisfaction based on material facts and applied his mind to the reasons for reopening. The Tribunal erred in holding otherwise.

2. Validity and Specificity of Reasons for Reopening

The Tribunal had held that the reopening was based on vague reasons and that the Assessing Officer had mechanically followed investigation reports without independent application of mind. The Court rejected this view, observing that the reasons for reopening were clearly recorded and supported by specific information, including the credit entry in the assessee's bank account and the investigation findings regarding the shell company's activities.

The Court noted that the assessee was given ample opportunity to explain the transactions and failed to do so. The Assessing Officer's reasons were therefore neither vague nor arbitrary but founded on concrete material. The Court also noted that the appellate authority (CIT(A)) had examined the facts in detail and upheld the reopening, further reinforcing the validity of the reasons.

The Court emphasized that the Tribunal's elevation of the CBDT's guidelines to the status of binding regulation was erroneous, as the Assessing Officer is entitled to rely on relevant material and form a subjective belief.

3. Challenge to the Sufficiency of the Assessing Officer's Belief

The Tribunal had quashed the assessment order on the basis that the Assessing Officer's belief was not sufficiently supported. The Court referred to the Supreme Court's ruling in Phool Chand Bajranglal Vs ITO, which clarified that while the existence of belief can be challenged, the sufficiency of the belief is not open to judicial scrutiny. The Court found that the Assessing Officer had sufficient reasons to form the belief that income had escaped assessment.

The Court held that the Tribunal erred in substituting its own view for that of the Assessing Officer and in quashing the assessment order on grounds of insufficiency of belief.

4. Failure of the Assessee to Establish Genuineness of Transactions

The Court highlighted that the assessee failed to establish the genuineness of the Rs. 1 Crore credit transaction or the creditworthiness of Rupak Developers Pvt. Ltd., which was found to be a shell company with no real business activity. This failure reinforced the validity of the reopening and the assessment order.

5. Treatment of Competing Arguments

The Court considered the assessee's non-appearance and lack of explanation as significant. It also took into account the detailed findings of the Assessing Officer and the appellate authority, which were supported by investigation reports and documentary evidence. The Tribunal's contrary conclusion was found to be based on an incorrect appreciation of facts and law.

Conclusions

The Court concluded that the Assessing Officer had applied his mind and recorded sufficient reasons for reopening the assessment under Section 147. The reopening was justified on specific and relevant information, and the assessee failed to rebut the presumption of escaped income. The Tribunal erred in holding that the reasons were vague and in quashing the assessment order.

Significant Holdings

"Section 147 authorises and permits the assessing officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word 'reason' in the phrase 'reason to believe' would mean cause or justification; if the assessing officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment."

"At the initiation stage, what is required is 'reason to believe', but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief; whether the materials would conclusively prove the escapement is not the concern at that stage since the formation of belief by the assessing officer is within the realm of subjective satisfaction."

"Sufficiency of the belief recorded by the assessing officer is not open to question, but the existence of belief can be challenged."

"The assessing officer is entitled to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers."

"The reasons recorded for reopening the assessment cannot be considered to be vague when supported by specific information and investigation reports."

The final determinations are that the reopening of the assessment was valid and justified, the Assessing Officer had objectively recorded satisfaction based on relevant material, the Tribunal erred in quashing the assessment order, and the appeal filed by the revenue is allowed with the assessment order restored.

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