2025 (7) TMI 1034 - AT - Income Tax

Validity of reopening assessment u/s 147 - reasons to believe or reasons to suspect - independent application of mind OR borrowed satisfaction - Addition u/s 69A as unexplained investment made in purchase of shares - HELD THAT - Reasons to believe are merely copy paste of information contained in report from Investigation Wing. Thus the learned AO had only reasons to suspect and not reasons to believe in the instant case. On perusal of the case file we find that the AO has also not recorded anything with regard to the material on the basis of which the reasons and conclusion was formed except the information received from DDIT (Inv.) Unit 1(3) Ahmedabad and on the basis of vague reasons initiated proceedings under section 147 by issuing notice under section 148 of the Act. The case of the assessee was reopened on the reason that the assessee has claimed bogus Long Term Capital Gain and has not disclosed the capital gain earned and income escaped assessment. Whereas the assessment order was passed taking into account that the assessee has invested in purchase of shares of Safal Herbs Ltd. The AO observing that the assessee could not explain the source of investment made in purchase of the shares of Safal Herbs Ltd. made the addition to the total income of the assessee. Thus the grounds for reopening the assessment were fundamentally wrong. As such no long term capital gains were earned by the appellant. On perusal of the first appellate order we find that the assessee actually incurred short term capital loss which was not claimed by the assessee in return of income filed. Therefore the premises on which reasons to believe are grounded is based out of mere suspicion and conjectures as firstly the impugned amount did not pertain to amount of capital gains but purchase amount and second the appellant incurred short term capital loss; and did not earn long term capital gains. In the present case reopening under section 147 has been done without linking information received from Investigation Wing of the Department to actual facts in the appellant s case. Therefore it is observed that the reasons recorded are vague and suffer from infirmities mentioned. We also note that even after verifying that the information available with him based on which notice u/s 148 had been issued was wrong the AO lost his jurisdiction to assess the case but completed the assessment on wrong footing. Therefore we are of the opinion that once the reasons on the basis of which notice of reassessment had been given do not subsist the AO loses his jurisdiction to assessee the case and hence we quash the assessment order passed by ld. AO on this score. It is noteworthy that it is a settled position that reasons cannot be substituted and the reasons are required to be read as they were recorded by the AO.what has been recorded by the AO as reasons to believe is nothing more than a vague information further the said reasons cannot be substituted subsequently by way of assessment order. It is well settled in law that reasons as recorded for reopening the reassessment are to be examined on a standalone basis. Nothing can be added to the reasons so recorded nor anything can be deleted from the reasons so recorded. Thus we are inclined to quash the assessment order passed by ld. AO making addition on account of unexplained investment in purchase of shares and also the order of the ld. CIT (A) sustaining the addition. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

• Whether the Assessing Officer (AO) validly reopened the assessment under section 147 of the Income Tax Act, 1961, based on the reasons recorded, particularly whether the reasons constituted a valid "reason to believe" or were merely borrowed satisfaction or suspicion.
• Whether the addition of Rs. 15,95,000/- under section 69A as unexplained income was justified, given that the appellant incurred a short-term capital loss and the issue of unexplained investment was not part of the reasons for reopening.
• Whether the AO complied with principles of natural justice by granting sufficient time to the appellant to respond to the show cause notice issued under section 144.
• Whether the AO erred in not appreciating that the appellant incurred only short-term capital loss, which was not claimed in the return, and thus no loss accrued to revenue.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Reopening under Section 147

Relevant legal framework and precedents: Section 147 empowers the AO to reopen assessment if he has a "reason to believe" that income chargeable to tax has escaped assessment. The "reason to believe" must be based on tangible material with a rational nexus to the escaped income and the assessee. The AO cannot rely on mere suspicion or borrowed satisfaction. The reasons recorded must be clear, unambiguous, and disclose the AO's mind. Precedents relied upon include Well Trans Logistics India (Delhi HC), Principal Commissioner of Income-tax vs. Meenakshi Overseas (Delhi HC), and Rajhans Processors (Rajasthan HC), which emphasize that reopening cannot be based solely on information from the Investigation Wing without independent inquiry.

Court's interpretation and reasoning: The AO reopened the assessment on the basis of information from DDIT (Inv.) alleging bogus long-term capital gains (LTCG) of Rs. 15,95,000/-. However, the AO did not conduct any independent inquiry or gather additional material before issuing the notice under section 148. The reasons recorded were vague, lacked reference to any documents, and were essentially a mechanical reproduction of the information received. The AO failed to establish a live nexus between the information and the appellant's income.

Key evidence and findings: The appellant's transactions showed purchase and sale of shares resulting in a short-term capital loss of Rs. 7,01,240/-, not LTCG. Supporting documents such as contract notes, bank statements, and balance sheets were submitted. The reopening was based on incorrect premises, as no LTCG was earned. The AO's reasons did not disclose any failure on part of the appellant to disclose material facts.

Application of law to facts: The Tribunal found that the AO's reasons did not meet the legal standard for reopening under section 147. The reopening was based on mere suspicion and borrowed satisfaction without independent application of mind or tangible material. The reasons recorded were insufficient and did not justify reopening.

Treatment of competing arguments: The revenue argued on the basis of information from Investigation Wing, but the Tribunal held that such information alone is insufficient. The appellant's detailed submissions and documentary evidence disproved the AO's basis for reopening.

Conclusion: The reopening under section 147 was invalid and the assessment order passed on that basis was without jurisdiction.

Issue 2: Justification for Addition under Section 69A

Relevant legal framework and precedents: Section 69A deals with unexplained investments not recorded in the books of account. Explanation 3 to section 147 clarifies that the AO may assess other escaped income noticed during reassessment proceedings, but only if the income forming the basis of reopening is also assessed. Precedents include Ranbaxy Laboratories Ltd. (Delhi HC), Commissioner of Income-tax vs. Shri Ram Singh (Rajasthan HC), and Jet Airways (Bombay HC), which hold that if the income forming the basis of reopening is not found to have escaped assessment, the AO cannot make additions on other grounds without fresh notice.

Court's interpretation and reasoning: The AO reopened the case for bogus LTCG but ultimately found no LTCG was earned. Instead, the AO made an addition of Rs. 15,95,000/- as unexplained investment under section 69A on the purchase amount of shares, which was not part of the reasons recorded for reopening. The Tribunal noted that the appellant had disclosed the purchase and sale transactions in the books of account and paid Securities Transaction Tax (STT).

Key evidence and findings: The appellant submitted purchase and sale bills, bank statements, and audited financial statements showing the transactions were recorded. The AO's addition was based on an issue not forming part of the original reasons to believe. The CIT(A) admitted the appellant incurred a capital loss and no LTCG was earned.

Application of law to facts: Since the AO accepted that no LTCG was earned (the basis of reopening), he lost jurisdiction to assess other income not forming part of the reasons to believe. The addition under section 69A was thus not justified.

Treatment of competing arguments: Revenue contended Explanation 3 to section 147 allows assessment of other escaped income noticed during proceedings. The Tribunal distinguished this, emphasizing that the AO must first assess the income forming the basis of reopening. If that income is not found to have escaped assessment, the AO cannot assess other income without fresh notice.

Conclusion: The addition under section 69A was improper and unsustainable.

Issue 3: Compliance with Principles of Natural Justice

Relevant legal framework and precedents: Principles of natural justice require that the assessee be given reasonable opportunity to respond to show cause notices. Precedents such as Dipak Natwarlal Dholakiya (Gujarat HC) and Rahim Saib Hiriyur Hyder Ali (Karnataka HC) hold that passing assessment orders without adequate time to respond violates natural justice and warrants quashing of the order.

Court's interpretation and reasoning: The show cause notice under section 144 was issued on 28.09.2021 with a response deadline of 29.09.2021. The appellant sought adjournment and filed response on 30.09.2021, which was not considered. The AO passed the order on 30.09.2021 ignoring the appellant's response.

Key evidence and findings: Acknowledgements of response submission were on record. The AO's failure to consider the response amounted to violation of natural justice.

Application of law to facts: The Tribunal found the AO's conduct contrary to settled legal principles requiring reasonable opportunity. However, since the assessment order was quashed on other grounds, this issue became infructuous.

Conclusion: The AO erred in not granting sufficient time, but the issue was not adjudicated finally due to quashing of the assessment.

Issue 4: Appreciation of Capital Loss and Revenue Impact

Relevant legal framework and precedents: The appellant incurred short-term capital loss of Rs. 7,01,240/- on the transactions, which was not claimed in the return. The loss implies no income escaped assessment and no prejudice to revenue.

Court's interpretation and reasoning: The CIT(A) admitted the loss. The AO failed to appreciate this fact and proceeded to make addition on purchase amount. The Tribunal noted that no loss accrued to revenue and no prejudice was caused.

Key evidence and findings: Contract notes, ledger accounts, and financial statements supported the loss claim.

Application of law to facts: The reassessment was based on incorrect premise of LTCG, whereas actual transactions resulted in loss. Hence, no escaped income existed.

Treatment of competing arguments: Revenue did not dispute the loss but proceeded on incorrect grounds.

Conclusion: The issue became infructuous after quashing the assessment.

3. SIGNIFICANT HOLDINGS

"The expression 'believe' in section 147 requires an objective satisfaction based on definite material and information, howsoever insufficient it is. The sufficiency of the material cannot be gone into, but relevancy certainly can be gone into. The reasons for the belief should have a rational connection or a relevant bearing on the formation of the belief and should not be extraneous or irrelevant. That is, there must be live nexus between information, assessee and escaped income. Absence of material and nexus of the material with the assessee and escaped income will invalidate reopening of assessment."

"The reopening of assessment under Section 147 is a potent power not to be lightly exercised. It certainly cannot be invoked casually or mechanically. The heart of the provision is the formation of belief by the AO that income has escaped assessment. The reasons so recorded have to be based on some tangible material and that should be evident from reading the reasons. It cannot be supplied subsequently either during the proceedings when objections to the reopening are considered or even during the assessment proceedings that follow."

"Upon the formation of a reason to believe under section 147 and following the issuance of a notice under section 148, the Assessing Officer has the power to assess or reassess the income which he has reason to believe had escaped assessment, and also any other income chargeable to tax. The words 'and also' cannot be ignored. The correct interpretation would be to regard those words as being conjunctive and cumulative. The assessment or reassessment must be in respect of the income in respect of which he has formed a reason to believe that it has escaped assessment and also in respect of any other income which comes to his notice subsequently during the course of the proceedings. If the income which was the basis of the formation of the reason to believe is not assessed or reassessed, it would not be open to the AO to independently assess only that income which comes to his notice subsequently."

"The reasons recorded by the Assessing Officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. The reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to those reasons. Reasons provide link between conclusion and evidence. The reasons recorded must be based on evidence."

Final determinations:

• The reopening of assessment under section 147 was invalid as the reasons recorded were vague, based on borrowed satisfaction, and lacked nexus with escaped income.
• The addition under section 69A was unsustainable as it related to an issue not forming part of the reasons to believe and no LTCG was earned.
• The AO violated principles of natural justice by not granting sufficient time to respond to the show cause notice.
• The appellant incurred a short-term capital loss; no escaped income existed and no prejudice to revenue was caused.
• The assessment order and the appellate order sustaining the addition were quashed.