2025 (6) TMI 1520 - AT - Income Tax

Reopening of assessment - period of limitation - notice beyond three years - as alleged assessee has bought scrips and sold the same scrips immediately within few seconds at a higher rate and huge profit has been booked on such transactions which according to the AO is non-genuine profit - HELD THAT - A perusal of the assessment order shows that the Assessing Officer has no evidence in his possession of any asset which could or did represent income having escaped assessment since the profit so earned and credited to the Profit and Loss Account has already been utilized for repayment of loan. Similarly there is no evidence on record before the Assessing Officer that any expenditure in respect of a transaction or in relation to an event or occasion has escaped assessment. Thus the first 2 conditions are not satisfied. So far as the third clause i.e. an entry or entries revealing income chargeable to tax has escaped assessment is concerned it is an admitted fact that the entry relating to trading in derivatives is already reflected in the books of account and the same has also been credited to the Profit and Loss Account and disclosed as income whereby the said entry does not reflect any income having allegedly escaped assessment. Thus the 3rd condition is also not satisfied. Since the notice has admittedly been issued beyond a period of three years and since the Assessing Officer does not have any evidence in his possession of any asset which represents income having escaped assessment and since the entry relating to trading in derivatives has already been disclosed in the books of account by crediting the profit to the Profit and Loss Account therefore the mandatory requirements of time limit for issue of notice u/s 148 of the Act has not been satisfied. Therefore we agree with the contention of assessee that the notice in question is barred by limitation keeping in view of the specific and express provisions of section 149(1)(b) of the Act. Therefore the notice u/s 148 being not in accordance with law is liable to be quashed. We therefore quash the notice issued u/s 148 of the Act being barred by limitation. Assessee appeal allowed.

Summary

The core legal questions considered by the Tribunal in these appeals include:

1. Whether the reassessment notices issued under section 148 of the Income Tax Act, 1961, for assessment years 2015-16 and 2016-17 were valid and within the prescribed limitation period, particularly in light of the provisions of section 149 of the Act.

2. Whether the Assessing Officer had sufficient information or material to form a "reason to believe" that income chargeable to tax had escaped assessment, justifying the issuance of notices under section 148/148A.

3. Whether the income earned from trading in derivatives, which was disclosed in the Profit and Loss Account and returned by the assessee, could be treated as undisclosed income or unexplained credit under section 68 read with section 115BBE of the Act.

4. Whether the reassessment proceedings were initiated and conducted in accordance with the procedural requirements, including the jurisdictional authority under section 151A of the Act and the scheme for faceless assessment and issuance of notices.

5. Whether the Assessing Officer complied with the requirement to provide the assessee with complete reasons and material relied upon for reopening the assessment, as mandated by judicial precedents.

6. The validity and applicability of the various judicial precedents cited by both parties concerning reassessment notices, limitation, and treatment of derivative trading profits.

Issue-wise Detailed Analysis

1. Validity and Limitation of Reassessment Notices under Section 148/149

Legal Framework and Precedents: Section 148 empowers the Assessing Officer to reopen an assessment if there is reason to believe that income chargeable to tax has escaped assessment. Section 149 prescribes the time limits for issuance of such notices-generally within three years from the end of the assessment year, extendable up to ten years if the escaped income is represented in the form of an asset, expenditure, or entries in the books of account exceeding Rs. 50 lakhs. The proviso to section 149 further restricts issuance of notices for assessment years beginning on or before 1 April 2021 if the time limit has already expired under previous provisions.

Court's Interpretation and Reasoning: The Tribunal examined whether the Assessing Officer possessed any books of account, documents, or evidence revealing income represented as an asset, expenditure, or entry in the books that escaped assessment exceeding Rs. 50 lakhs. It was found that the profit from derivative trading was duly recorded in the Profit and Loss Account and credited to the company's bank account, and no asset or expenditure representing escaped income was identified. Thus, none of the three conditions under section 149(1)(b) for extending the limitation beyond three years were satisfied. Consequently, the issuance of notice under section 148 beyond three years was held to be barred by limitation.

Key Evidence and Findings: The assessee's books of account and bank statements showed the derivative trading profits credited and disclosed. The Assessing Officer failed to demonstrate possession of any evidence amounting to an asset or expenditure representing escaped income. The notice was issued after the three-year period without satisfying the conditions for extension.

Application of Law to Facts: The Tribunal applied the statutory limitation provisions strictly, emphasizing that mere suspicion or information about derivative transactions does not satisfy the requirement of tangible evidence of escaped income in the form of assets or entries. The fact that the income was disclosed and accounted for negated the basis for reopening beyond three years.

Treatment of Competing Arguments: The Revenue argued that the reassessment was justified based on information from the Insight Portal and alleged non-genuine profits from trade reversal. The assessee contended that the income was disclosed and the notice was barred by limitation. The Tribunal sided with the assessee, holding that the Revenue failed to meet the statutory preconditions for reopening.

Conclusion: The reassessment notices issued under section 148 were barred by limitation and hence invalid.

2. Existence of "Reason to Believe" and Sufficiency of Material for Reassessment

Legal Framework and Precedents: The Assessing Officer must have tangible material or information to form a "reason to believe" that income has escaped assessment. The Supreme Court in GKN Driveshafts (India) Ltd. v. ITO mandates that complete reasons and material relied upon must be furnished to the assessee.

Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer relied on information from the Insight Portal and alleged trade reversal transactions with suspicious timings and pricing. However, the assessee had submitted contract notes, bank statements, and annual reports evidencing genuine derivative trading. The Assessing Officer did not provide all relied-upon material, such as SEBI findings or broker statements, at the time of issuance of the notice or during proceedings, violating procedural fairness.

Key Evidence and Findings: The Assessing Officer's reliance on incomplete information and the absence of full disclosure of reasons and material to the assessee were critical. The assessee's evidence showed compliance with stock exchange regulations and legitimate banking transactions.

Application of Law to Facts: The Tribunal emphasized the requirement of furnishing complete reasons and material to the assessee before reopening proceedings. The absence of such disclosure rendered the reassessment proceedings flawed.

Treatment of Competing Arguments: The Revenue argued that the information from the Insight Portal and alleged suspicious transactions justified reassessment. The assessee countered with documentary evidence and procedural lapses. The Tribunal found the assessee's submissions more persuasive.

Conclusion: The Assessing Officer failed to provide sufficient and complete material to justify reassessment, violating principles of natural justice.

3. Treatment of Derivative Trading Profits under Sections 68 and 115BBE

Legal Framework and Precedents: Section 68 pertains to unexplained cash credits, and section 115BBE imposes special tax rates on unexplained income or investments. The assessee argued that the profits were business income disclosed in the Profit and Loss Account and not unexplained credits.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee had disclosed the derivative trading profits as "Profit on trading in derivatives" under other income, supported by contract notes and banking transactions. The Assessing Officer treated the profit as unexplained credit due to alleged sham transactions. The Tribunal observed that the amendment to section 115BBE applies from assessment year 2017-18 onwards and thus was not applicable for the years in question.

Key Evidence and Findings: The assessee's books and bank statements showed legitimate receipt and accounting of profits. No evidence was found to treat the amounts as unexplained credits.

Application of Law to Facts: The Tribunal held that since the income was disclosed and accounted for as business income, provisions of section 68 and 115BBE were not attracted.

Treatment of Competing Arguments: The Revenue contended the profits were fictitious and hence unexplained credits. The assessee demonstrated bona fide transactions. The Tribunal favored the latter.

Conclusion: The derivative trading profits were rightly disclosed business income and not unexplained credits under sections 68 or 115BBE.

4. Jurisdiction and Procedural Validity under Section 151A and Faceless Assessment Scheme

Legal Framework and Precedents: Section 151A mandates that notices under section 148 be issued through faceless assessment scheme by the National Faceless Assessment Centre (NFAC) via automated allocation. The Bombay High Court in Hexaware Technologies Ltd. v. ACIT held that issuance of notices by jurisdictional Assessing Officers instead of NFAC violates the scheme and renders proceedings invalid.

Court's Interpretation and Reasoning: The Tribunal observed that in the present case, the notice under section 148 was issued by the jurisdictional Assessing Officer, but the assessment was framed by NFAC. This procedural mismatch contravened the mandatory scheme under section 151A and related CBDT notifications.

Key Evidence and Findings: The notice records and assessment orders indicated split jurisdiction. The assessee's reliance on the Hexaware decision and other judicial pronouncements highlighted the procedural irregularity.

Application of Law to Facts: The Tribunal acknowledged that the scheme requires issuance of notices and assessments to be faceless and through automated allocation by NFAC, not by jurisdictional Assessing Officers.

Treatment of Competing Arguments: The Revenue argued administrative discretion and technological feasibility justified the procedure followed. The Tribunal rejected this, emphasizing strict compliance with the scheme.

Conclusion: The reassessment proceedings initiated by jurisdictional Assessing Officer with assessment by NFAC were procedurally invalid.

5. Non-Provision of Complete Reasons and Material to the Assessee

Legal Framework and Precedents: The Supreme Court in GKN Driveshafts (India) Ltd. v. ITO mandates that the Assessing Officer must provide the assessee with complete reasons and documents relied upon before reopening assessment.

Court's Interpretation and Reasoning: The Tribunal found that the Assessing Officer did not furnish the statement of the broker or SEBI orders relied upon during reassessment to the assessee. The notice under section 148A(b) contained generalized information without specific material demonstrating escapement of income.

Key Evidence and Findings: The absence of disclosure of critical material to the assessee was established from the record and submissions.

Application of Law to Facts: The Tribunal held that failure to provide complete reasons and material violated principles of natural justice and rendered the reassessment proceedings unsustainable.

Treatment of Competing Arguments: The Revenue contended that sufficient information was provided. The Tribunal disagreed based on the record.

Conclusion: Non-provision of complete reasons and material vitiated the reassessment proceedings.

6. Treatment of Competing Judicial Decisions

Legal Framework and Precedents: The parties cited numerous decisions concerning reassessment notices, limitation, and treatment of derivative transactions. The Tribunal carefully distinguished cases where reassessment was upheld due to non-disclosure or bogus transactions from the present case where income was disclosed.

Court's Interpretation and Reasoning: The Tribunal noted that many precedents relied upon by the Revenue involved undisclosed income or failed to comply with procedural requirements, unlike the present facts. The assessee's cited decisions emphasized strict adherence to limitation and procedural fairness.

Key Evidence and Findings: The Tribunal found the present case factually distinguishable from cases involving bogus transactions or non-disclosure.

Application of Law to Facts: The Tribunal applied the principles from relevant precedents to uphold limitation and procedural safeguards in reassessment.

Treatment of Competing Arguments: The Tribunal rejected the Revenue's reliance on distinguishable precedents and accepted the assessee's arguments supported by binding decisions.

Conclusion: The precedents support the assessee's case on limitation and procedural grounds.

Significant Holdings

"The basic condition for the limitation for issue of notice u/s 148 of the Act to be extended beyond three years till ten years is that the Assessing Officer must have in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of an asset, expenditure or an entry or entries in the books of account, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more."

"Since the profit so earned and credited to the Profit and Loss Account has already been utilized for repayment of loan, and the entry relating to trading in derivatives is already reflected in the books of account, the mandatory requirements of time limit for issue of notice u/s 148 have not been satisfied. Therefore, the notice u/s 148 being not in accordance with law is liable to be quashed."

"The notice under section 148 of the Act shall be issued through automated allocation and in a faceless manner by the National Faceless Assessment Centre and not by the jurisdictional Assessing Officer. Issuance of notice by the jurisdictional Assessing Officer and assessment by NFAC is contrary to the statutory scheme and renders the proceedings invalid."

"Non-provision of complete reasons recorded and material relied upon, including statements and orders, to the assessee before reopening assessment is fatal to the validity of reassessment proceedings."

"The profits earned from trading in derivatives, disclosed in the Profit and Loss Account and supported by contract notes and banking transactions, cannot be treated as unexplained credits under section 68 read with section 115BBE."

The Tribunal finally held that the reassessment notices issued beyond the limitation period without requisite material were invalid, the reassessment proceedings were procedurally flawed due to jurisdictional irregularities and non-disclosure of reasons, and the additions made on merits were consequently set aside as academic.