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2025 (5) TMI 603 - AT - Income TaxInitiation of reassessment proceedings - reasons to believe - recording the reasons is based on some uploaded information that assessee has done some high volume / value transactions and fictitious profits in equity / derivative trading and bogus long term capital gain/ short term capital loss in the shares - HELD THAT - Reasons recorded clearly shows that firstly ld. AO is not certain about what is the nature of escapement and whether gain is short term or long term dehors the facts of the assessee s case; and secondly he states that assessee has been benefitted by inflation of share price through doctored transaction but yet he is not sure if there is a gain or loss shown by the assessee. In his reason to believe he is not sure what is the nature of accommodation entry which assessee might have taken and what is the basis to entertain his belief that assessee has resorted to some suspicious mode of obtaining the gains and not offering the income to tax by not showing the details of income or claiming non allowable deduction. How he has arrived at conclusion that the income related to some kind of transactions remains undisclosed which is required to be considered in computing total income of the assessee. All this are his bald allegation and complete non-application of mind on the information coming on record and the facts and material of the assessee already on record. Since there was no co-relation between the reasons to believe as recorded by the ld. AO and the live link nexus with the facts of the assessee s case therefore such reason to believe falls in the realm of conjectures and borrowed. It is a well settled law that reasons which has been recorded and duly approved by the higher authorities ld. AO cannot change the reasons later on as it is on his reasons recorded approval has been granted to acquire jurisdiction to reopen the case and issue notice u/s 148. Thus we do not find any infirmity either on facts or in law in the finding given by the ld. CIT (A). Accordingly we uphold the order of the ld. CIT (A) holding that entire re-assessment order is bad in law as the reasons recorded do not clothe the AO with jurisdiction to reopen the case u/s.148. Accordingly the grounds raised by the Revenue are dismissed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in these appeals filed by the Revenue against the orders of the CIT(A) are:
2. ISSUE-WISE DETAILED ANALYSIS Validity of Reopening Proceedings under Section 147 Relevant legal framework and precedents: Section 147 of the Income-tax Act empowers the Assessing Officer (AO) to reopen an assessment if he has "reasons to believe" that income chargeable to tax has escaped assessment. The validity of reopening depends on the existence of valid reasons recorded in writing, which must be specific, clear, and based on material facts. The reasons must not be vague, irrelevant, or based on mere suspicion or conjecture. The AO cannot alter or add to the reasons after obtaining approval for reopening. Judicial precedents emphasize that the reasons must disclose a live link between the information relied upon and the facts of the assessee's case, and the AO must apply his mind at the time of recording reasons. Court's interpretation and reasoning: The Tribunal observed that the reasons recorded by the AO were vague and generic, referring broadly to "fictitious profits," "bogus long term capital gains," and "accommodation entries" involving Ashlar Securities Pvt. Ltd., without specifying how these allegations related concretely to the assessee's transactions or computations. The AO's reasons were inconsistent, as he was uncertain whether the escapement related to long-term or short-term gains or losses, and failed to identify any specific transaction or income that escaped assessment. The AO's reasons were largely based on uploaded information and general investigation findings from SEBI and the Investigation Wing, without verifying or correlating these findings with the assessee's actual profit and loss accounts or tax returns. The AO did not examine the assessee's disclosed losses from currency derivatives, which were subject to scrutiny in the original assessment. The Tribunal found that the AO's reasons were "bald allegations" and "non-application of mind," amounting to conjecture and borrowed information rather than concrete material. Key evidence and findings: The assessee had filed returns declaring business income, short-term capital gains, and other income, including detailed profit and loss accounts showing losses from currency derivatives and F&O trading. The original assessment under section 143(3) was completed after scrutiny, and no undisclosed income was found. The AO's reopening was based on general information about the broker and syndicate members involved in doctored transactions, but no direct evidence linked the assessee's transactions to such malpractices. Application of law to facts: The Tribunal applied the principle that reopening must be based on specific and relevant reasons to believe and found that the AO failed to demonstrate a nexus between the information and the assessee's case. The reasons recorded did not disclose any escapement of income but were rather vague allegations. The AO's failure to consider the assessee's disclosed losses and the original scrutiny assessment further undermined the validity of reopening. Treatment of competing arguments: The Revenue argued that reopening was justified based on concrete information from SEBI and the Investigation Wing, and that the assessee's transactions were part of a larger tax evasion scheme uncovered under PROJECT FALCON. The Tribunal rejected this, holding that general information about the broker or syndicate cannot substitute for specific reasons relating to the assessee's case. The Tribunal also noted that the AO changed the reasons post hoc while disposing of objections, which is impermissible. Conclusions: The reasons recorded for reopening were vague, incorrect, and did not disclose a valid reason to believe that income had escaped assessment. The reopening was therefore void ab initio, and the reassessment orders passed thereunder were quashed. Allegation of Bogus Losses and Fictitious Transactions through Broker Relevant legal framework and precedents: The Revenue alleged that the assessee booked bogus losses in currency derivatives trading through Ashlar Securities Pvt. Ltd., which was allegedly engaged in providing accommodation entries and inflating share prices through doctored transactions. SEBI's investigation and penalty orders against the broker and syndicate members were cited as evidence of such malpractices. Judicial precedents have held that transactions done solely to avoid taxes by creating fictitious gains or losses can be disregarded for tax purposes. Court's interpretation and reasoning: The Tribunal found that the AO did not establish any direct link between the assessee's transactions and the alleged bogus transactions or accommodation entries. The assessee had disclosed losses from currency derivatives in the profit and loss account, which were scrutinized and accepted in the original assessment. The AO failed to demonstrate that these losses were fictitious or part of any syndicate's manipulations. The Tribunal noted that the AO did not verify the nature of each transaction or the genuineness of losses before recording reasons. Key evidence and findings: The assessee's detailed profit and loss accounts and computations showed genuine losses from currency derivatives. The AO's reliance on SEBI's general findings against the broker and syndicate, without specific evidence implicating the assessee, was insufficient. The Tribunal emphasized that mere association with a broker under investigation does not establish that the assessee's transactions were bogus. Application of law to facts: The Tribunal applied the principle that tax authorities must establish a direct and specific link between the alleged tax evasion scheme and the assessee's transactions. General allegations and third-party investigations cannot substitute for such proof. The assessee's disclosure and scrutiny of losses negated the claim of bogus losses. Treatment of competing arguments: The Revenue's reliance on PROJECT FALCON and SEBI orders was rejected as being too general and unconnected to the assessee's facts. The Tribunal held that the AO's failure to verify and distinguish genuine losses from fictitious ones amounted to non-application of mind. Conclusions: The allegation of bogus losses and fictitious transactions was unsubstantiated in the assessee's case, and the reassessment based on such allegations was invalid. Applicability of PROJECT FALCON and SEBI Investigation Findings Relevant legal framework and precedents: PROJECT FALCON was an investigation by SEBI, BSE, and the Investigation Wing into tax evasion and market manipulation in the F&O derivatives segment. SEBI's findings and penalties in related cases were cited by the Revenue to justify reassessment. The law requires that such information must be linked specifically to the assessee's case for reopening. Court's interpretation and reasoning: The Tribunal observed that while PROJECT FALCON uncovered malpractices in the market, the AO failed to demonstrate that the assessee's transactions were part of the scheme or that the assessee benefited from any doctored transactions. The reasons recorded did not establish a nexus between the investigation's findings and the assessee's income or losses. Key evidence and findings: The AO's reasons referred to the general findings of SEBI and the Investigation Wing but did not identify any transaction or income of the assessee that was tainted. The assessee's records showed genuine trading losses, and no evidence was produced to show that these were accommodation entries or manipulated gains/losses. Application of law to facts: The Tribunal applied the principle that reopening must be supported by reasons specific to the assessee's case, not merely by general investigation findings. The absence of a direct link rendered the reopening invalid. Treatment of competing arguments: The Revenue argued that the assessee was one of the beneficiaries of the syndicate's doctored transactions. The Tribunal rejected this on the ground that mere suspicion or general information is insufficient for reopening. Conclusions: The findings under PROJECT FALCON and SEBI investigations could not justify reopening in the absence of specific evidence linking the assessee's transactions to the alleged malpractices. Reliance on Judicial Precedents including Apex Court Decision in Related Matter Relevant legal framework and precedents: The Revenue cited a Supreme Court decision in a case involving Rakhi Trading Pvt. Ltd., where the Court upheld SEBI's findings that certain transactions were carried out mainly to avoid taxes and were therefore liable to be disregarded. Court's interpretation and reasoning: The Tribunal noted that while judicial precedents establish the principle that transactions done solely for tax evasion can be disregarded, such precedents apply only when the facts of the case are similar and the transactions are shown to be fictitious or accommodation entries. In the present case, the AO failed to establish such facts with respect to the assessee. Key evidence and findings: The Tribunal found no evidence that the assessee's transactions were similar to those in the cited precedent. The assessee had disclosed genuine losses, and the AO did not demonstrate any tax evasion scheme involving the assessee. Application of law to facts: The Tribunal applied the principle that precedents are fact-sensitive and cannot be mechanically applied without establishing factual similarity. The absence of such similarity meant the precedent was not applicable. Treatment of competing arguments: The Revenue's reliance on the precedent was rejected as misplaced in the absence of proof that the assessee's transactions were fictitious or part of a tax evasion scheme. Conclusions: The cited judicial precedents did not support the reopening or reassessment in the assessee's case. 3. SIGNIFICANT HOLDINGS "The reasons recorded do not only vague but also incorrect. Though the AO proceeded on vague facts, as is noticed from the reasons, he disposed of the objections, raised by the appellant against the reasons by mentioning specific facts related to income escapement due to fictitious loss by trading in currency derivatives. He did not submit different proposal to his higher authorities by mentioning specific reasons and obtained their sanction before issue of notice u/s 148 of the Act. He just revised the reasons while disposing objections of the appellant. This vitiates the reassessment proceedings. When initiation/start is wrong what follows is also wrong. Since initiation of reassessment proceedings was based on vague and incorrect facts, the Order is void ab-initio. The Order is, therefore, cancelled." Core principles established include:
Final determinations on each issue were that the reassessment proceedings were invalid and void ab initio due to non-application of mind and vague reasons; the allegations of bogus losses and fictitious transactions were unsubstantiated; and the reopening based on PROJECT FALCON and SEBI findings was unjustified. Consequently, the appeals filed by the Revenue were dismissed and the orders of the CIT(A) quashing the reassessment were upheld.
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