2025 (7) TMI 504 - AT - Income Tax

Validity of the reopening of the assessment proceedings - as alleged reasons recorded were not provided to the assessee - Bogus/fictitious loss - HELD THAT - Assessee did not comply to the notice u/s.148 on 30.04.2021 as the return was not filed within the prescribed time of 30 days from the date of service of notice. Assessee finally filed return of income on 24.02.2022 which was almost near the fag end of the limitation period and the assessee has also not furnished any documentary evidence to prove that assessee has applied for copy of reasons for reopening of the case before CIT(A). All the legal issues raised by the assessee hereby dismissed. Bogus/fictitious loss - Whether assessee made a genuine claim of loss on trading of securities? - Assessee was not aware of the other parties to whom transactions were made and he has not contacted with those parties. We however notice that transactions which were entered into by the assessee through broker Skung Tradelink Ltd. seems to be in the nature of accommodation entry because Nimish Kumar Somani Director of Skung Tradelink Ltd. in his statement on 04.12.2019 has clearly stated that for various entities his portal has been used for generating bogus loss or gain in order to make adjustment in their accounts. CIT(A) has specifically dealt with SEBI report that the trading and reverse trading were done within few seconds to book fictitious loss being arranged by certain parties and therefore the finding of CIT(A) confirming the action of the AO and the assessee having arranged bogus/fictitious loss needs no interference. Ground raised by the assessee is also dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the reopening of the assessment under section 147 of the Income-tax Act, 1961 (the Act) was valid and justified, especially in light of the contention that it was based on a change of opinion and whether the reasons recorded for reopening were properly communicated to the assessee.

(b) Whether the Assessing Officer (AO) complied with the procedural requirements under section 148 of the Act, including timely issuance of notice and furnishing of reasons for reopening the assessment.

(c) Whether the claim of loss amounting to Rs. 40,35,560/- from trading in securities, particularly through derivatives and futures & options (F&O) transactions, was genuine or constituted bogus/fictitious losses disallowed under the provisions of the Act, including section 68 relating to unexplained cash credits.

(d) Whether the findings of the lower authorities, including the Commissioner of Income Tax (Appeals) (CIT(A)) and the AO, in sustaining the reassessment order and disallowance of losses were legally sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Validity of Reopening under Section 147 and Compliance with Section 148

Relevant Legal Framework and Precedents: Section 147 of the Act permits reopening of completed assessments if the AO has reason to believe that income has escaped assessment. The reopening must be based on tangible material or information leading to a bona fide belief, and not mere change of opinion. Section 148 requires issuance of notice along with reasons recorded for reopening, which must be served on the assessee. The Supreme Court and various High Courts have held that reopening on mere change of opinion is impermissible and the reasons must be communicated to the assessee.

Court's Interpretation and Reasoning: The Tribunal examined the facts that the reopening was triggered following information received from the Securities and Exchange Board of India (SEBI) and the department's insight portal, which flagged abnormal trading patterns involving the assessee and others. The information indicated consistent and significant losses or profits reversed with the same counterparties within a short span, suggestive of manipulation or accommodation entries.

The Tribunal noted that the AO had recorded specific reasons indicating failure on the part of the assessee to disclose fully and truly all material facts, thus satisfying the requirement of reason to believe under section 147. The reopening was not on account of change of opinion but on the basis of credible information and material received from regulatory authorities and internal departmental intelligence.

Regarding procedural compliance, the Tribunal observed that the notice under section 148 was validly issued and served. Although the assessee contended that reasons for reopening were not furnished despite requests, no documentary evidence was produced by the assessee to substantiate this claim. The assessee also failed to file the return within the prescribed 30-day period from the date of service of the notice under section 148, instead filing it at the fag end of the limitation period. This conduct weakened the assessee's contention of procedural lapse.

Key Evidence and Findings: The Tribunal relied on the SEBI reports, departmental insight portal data, and the statement of the director of the broker Skung Tradelink Ltd., who admitted to facilitating bogus profit/loss entries for various entities, including the assessee. The AO's reasons recorded were specific and detailed, reflecting a bona fide belief of escapement of income.

Application of Law to Facts: The Tribunal applied the principles governing reopening of assessments and found that the AO had valid reasons and followed due procedure. The reopening was not a mere change of opinion but was grounded on credible material indicating tax evasion through fictitious losses.

Treatment of Competing Arguments: The assessee's arguments of procedural non-compliance and change of opinion were rejected due to lack of evidence and the factual matrix supporting the AO's reasons. The Tribunal upheld the CIT(A)'s dismissal of these grounds.

Conclusions: The reopening of the assessment was valid, and the procedural requirements under section 148 were complied with. Grounds challenging reopening were dismissed.

Issue (c): Legitimacy of Claimed Loss from Securities Trading

Relevant Legal Framework and Precedents: Losses claimed in trading of securities are subject to scrutiny under the Act. Section 68 empowers the AO to treat unexplained cash credits as income if the assessee fails to satisfactorily explain the nature and source of such credits. Courts have consistently held that transactions lacking commercial substance or involving accommodation entries are liable to be disregarded and losses disallowed.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee claimed losses of Rs. 40,35,560/- from derivative trading through the broker Skung Tradelink Ltd. The AO and CIT(A) found these losses to be fictitious, supported by the statement of the broker's director admitting to generating bogus profits/losses for clients to manipulate accounts.

The SEBI report and departmental investigations revealed that the transactions were reversed within seconds or the next day, indicating no genuine market risk or economic substance, but rather arranged accommodation entries to create artificial losses.

Key Evidence and Findings: The director's statement, SEBI's internal alerts, and the pattern of trading transactions served as crucial evidence. The assessee's failure to establish the genuineness of transactions or identify counterparties further weakened his claim.

Application of Law to Facts: Applying section 68 and principles against tax evasion through fictitious transactions, the Tribunal upheld the disallowance of losses. The transactions were treated as unexplained credits, and losses were rightly denied.

Treatment of Competing Arguments: The assessee contended that transactions were conducted through proper channels, supported by contract notes and banking transactions, and that he was unaware of the counterparty identities. The Tribunal found these arguments insufficient to rebut the strong evidence of arrangement and manipulation.

Conclusions: The claim of loss was disallowed as it was found to be bogus/fictitious, and the reassessment order confirming this disallowance was upheld.

Issue (d): Sustainability of the Reassessment Order and CIT(A) Findings

Relevant Legal Framework and Precedents: The appellate authorities must independently examine the validity of reopening and the merits of the claim. The CIT(A) and Tribunal must ensure that the AO's order is based on sound legal principles and supported by evidence.

Court's Interpretation and Reasoning: The Tribunal found that the CIT(A) had thoroughly examined the grounds raised by the assessee, including the reopening validity and the merits of the loss claim. The CIT(A) correctly applied the legal standards and relied on the material on record. The Tribunal agreed with the CIT(A)'s conclusions and reasoning.

Key Evidence and Findings: The Tribunal noted the absence of any rebuttal or representation from the assessee during the hearing, strengthening the findings of the lower authorities.

Application of Law to Facts: The Tribunal applied the principles of appellate scrutiny and found no error or illegality in the CIT(A)'s order.

Treatment of Competing Arguments: The assessee's grounds were dismissed due to lack of evidence and failure to appear or contest the appeal effectively.

Conclusions: The reassessment order and the CIT(A)'s confirmation thereof were upheld.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"The initiation of proceedings are not on account of change of opinion of the Assessing Officer but on the basis of information received on insight portal of the department wherein it was informed that SEBI came across several instances/internal alerts wherein a set of entities were consistently making loss or profit by their trading in options on individual stock which were listed on the BSE. Trading of these entities found abnormal because they were consistently seen making significant loss or profit by their traders which were reversed with the same counter-parties either on the same day or the next day."

"The reasons recorded the Assessing Officer has mentioned that the income escaped assessment because of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment under consideration."

"The appellant did not comply to the notice u/s 148 of the Act dated 30.03.2021 as the return u/s 148 of the Act was not filed within the prescribed time of 30 days from the date of service of the notice. Further, the appellant filed a return on 24.02.2022 i.e. at the fag end of the limitation period of assessment."

"Transactions which were entered into by the assessee through broker Skung Tradelink Ltd. seems to be in the nature of accommodation entry because Nimish Kumar Somani, Director of Skung Tradelink Ltd. in his statement on 04.12.2019 has clearly stated that for various entities his portal has been used for generating bogus loss or gain in order to make adjustment in their accounts. Assessee is one of the beneficiaries."

Core principles established include that reopening of assessment under section 147 must be based on tangible material and bona fide reasons beyond mere change of opinion; procedural compliance under section 148 is mandatory and failure to file return within prescribed time weakens the assessee's case; and losses arising from accommodation entries or bogus transactions are liable to be disallowed under the Act.

Final determinations:

(i) The reopening of the assessment was valid and legally sustainable.

(ii) The procedural requirements under section 148 were complied with, and the assessee's contention of non-furnishing of reasons was unsubstantiated.

(iii) The claimed loss of Rs. 40,35,560/- was fictitious and rightly disallowed.

(iv) The reassessment order and the appellate order confirming it were upheld, and the appeal was dismissed.