2025 (6) TMI 1465 - AT - Income Tax

Validity of reopening of assessment - information received from SFIO which in-turn was based on investigation made in the transactions of NSEL with regard to CCM carried out by few unscrupulous brokers - reassessment proceedings were initiated against the assessee after four years - HELD THAT - In the instant case the observation of the AO with regard to absence of assessee not disclosing truly and fully all material facts is conspicuously missing. The assessment order is too shallow that even the Assessing Officer has not mentioned the name of the brokers through whom transactions were carried out by the assessee at NSEL. Further the AO has not even carried out the exercise of identifying the scripts in which the assessee carried out CCM. In light of the above observations we find no infirmity in findings of the CIT(A) in holding reopening of assessment as bad in law. On merits of the addition assessee has shown that the the gain on sale of such scrips (on which CCM is alleged) has already been offered to tax in the return of income. Assessee has referred to the transactions carried out by the assessee and their disclosure in the return of income. Also disputed trades have been mentioned in the return of income. CIT(A) correctly deleted addition. Decided in favour of assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Appellate Tribunal (AT) in this matter are:

(i) Whether the reopening of the assessment under section 147 of the Income Tax Act, 1961 (the Act) based on information received from the investigation wing (SFIO) was valid in law and fact.

(ii) Whether the information received from the investigation wing constituted a valid and sufficient piece of evidence to justify reopening of the assessment.

(iii) Whether the Assessing Officer (AO) formed a valid opinion and conducted an independent inquiry before initiating reassessment proceedings, especially regarding the alleged Client Code Modifications (CCM).

(iv) Whether the AO properly analyzed the complete details of the transactions involving CCM and made additions in a justified and non-arbitrary manner.

(v) Whether the additions made by the AO-specifically Rs. 2,96,33,125 as unexplained income from CCM and Rs. 8,91,363 as commission paid to entry operators-were justified and sustainable on merits.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i) & (ii): Validity of Reopening of Assessment and Sufficiency of Evidence from Investigation Wing

Legal Framework and Precedents: Section 147 of the Act empowers the AO to reopen an assessment if there is reason to believe that income chargeable to tax has escaped assessment. However, when reopening occurs beyond four years from the end of the relevant assessment year, the first proviso to section 147 applies, requiring that the AO must specify that the income escaped assessment due to failure on the part of the assessee to "disclose fully and truly all material facts" necessary for assessment.

Court's Interpretation and Reasoning: The Tribunal examined the reasons recorded by the AO for reopening the assessment. It was noted that the AO relied solely on information received from the Serious Fraud Investigation Office (SFIO), which itself was based on investigations into transactions on the National Spot Exchange Limited (NSEL) involving Client Code Modifications by certain brokers. The AO did not conduct any independent inquiry or verification after receipt of the SFIO report. The reasons recorded were found to be superficial and did not mention any failure on the part of the assessee to disclose material facts as required under the proviso to section 147. Furthermore, the AO failed to specify the brokers involved or identify the specific scripts in which CCM was alleged.

Key Evidence and Findings: The AO's order was described as "too shallow," lacking detailed reasons or evidence to justify reopening. The absence of any mention of non-disclosure by the assessee was critical, especially given the procedural safeguard under the proviso to section 147.

Application of Law to Facts: Since the reopening was after four years and the AO did not comply with the mandatory requirement to specify failure of disclosure of material facts, the reopening was held to be invalid in law.

Treatment of Competing Arguments: The Revenue argued that the SFIO report was a valid piece of evidence justifying reopening. The Tribunal disagreed, emphasizing that mere receipt of information from an investigation wing without independent inquiry or specific findings against the assessee is insufficient.

Conclusion: The reopening of the assessment was held to be bad in law due to non-compliance with the statutory requirements under section 147.

Issue (iii) & (iv): Formation of Opinion and Conduct of Inquiry by AO and Analysis of CCM Transactions

Legal Framework and Precedents: The AO must form a bona fide opinion based on material and conduct an independent inquiry before reopening assessment or making additions. The principle of natural justice requires that the assessee be given an opportunity to be heard and that the AO's order be a speaking order with reasons recorded.

Court's Interpretation and Reasoning: The Tribunal found that the AO had not conducted any independent inquiry after receiving information from SFIO. The AO's order merely extracted parts of the SFIO report and did not analyze or identify specific transactions or brokers related to the assessee. The AO accepted the profit figures declared by the assessee, which already included profits from trades involving CCM, yet made additions on account of those trades without proper justification.

Key Evidence and Findings: The AO did not identify the scripts or brokers involved in the CCM transactions of the assessee. The CIT(A) noted that the broker of the assessee was different from the broker mentioned in the SFIO report. The AO's order was described as arbitrary and lacking in detailed analysis.

Application of Law to Facts: The AO's failure to conduct an independent inquiry and to properly analyze the transactions led to the conclusion that the additions were made arbitrarily.

Treatment of Competing Arguments: The Revenue contended that the AO had analyzed the information and passed a speaking order after giving the assessee an opportunity of being heard. The Tribunal rejected this, finding the AO's order non-speaking and arbitrary.

Conclusion: The AO failed to form a valid opinion or conduct an adequate inquiry; the additions on CCM transactions were not justified.

Issue (v): Justification of Additions on Merits

Legal Framework and Precedents: Additions under section 69C of the Act require the AO to establish that the income or expenditure is unexplained and that the assessee is unable to satisfactorily account for it. The burden lies on the AO to prove that the income is undisclosed or that accommodation entries have been obtained.

Court's Interpretation and Reasoning: The assessee demonstrated that gains from trades involving CCM were disclosed in the return of income and profit figures submitted. The CIT(A) observed that the AO did not produce any evidence to show that the assessee or his broker was engaged in bogus CCM or wrongdoing. The AO failed to identify the entry operators or provide any money trail or tangible evidence to substantiate the allegation of accommodation entries. The CIT(A) noted that the AO's addition of Rs. 2,96,33,125 as unexplained income and Rs. 8,91,363 as commission paid to entry operators was arbitrary and unsupported.

Key Evidence and Findings: The assessee furnished complete details of transactions involving CCM, which were not challenged by the AO. No evidence was brought on record to prove the existence of accommodation entries or undisclosed income. The broker involved with the assessee was different from the broker implicated in the SFIO report.

Application of Law to Facts: Without evidence of wrongdoing or unexplained income, the additions were not sustainable. The CIT(A) rightly deleted the additions on merits.

Treatment of Competing Arguments: The Revenue failed to place any material to controvert the CIT(A)'s findings or to establish that the assessee was a beneficiary of undisclosed income from CCM.

Conclusion: The additions were rightly deleted on merits due to lack of evidence and the fact that gains were disclosed and taxed.

3. SIGNIFICANT HOLDINGS

The Tribunal upheld the findings of the CIT(A) and dismissed the Revenue's appeal, holding as follows:

"After expiry of four years from the end of relevant assessment year, the first proviso to section 147 of the Act comes into play. According to first proviso to section 147 of the Act, assessment cannot be reopened unless the AO specifies that income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to 'disclose fully and truly all material facts' necessary for his assessment. In the instant case the observation of the Assessing Officer with regard to absence of assessee not disclosing truly and fully all material facts is conspicuously missing."

"The assessment order is too shallow that even the Assessing Officer has not mentioned the name of the brokers through whom transactions were carried out by the assessee at NSEL. Further, the AO has not even carried out the exercise of identifying the scripts in which the assessee carried out CCM."

"The allegation of obtaining accommodation entry is a serious allegation and onus is on the AO to first substantiate his allegation by gathering some tangible material/evidence either in the form of statement recorded during investigation or any material seized/impounded in this regard. On perusal of the assessment order, reasons recorded and notices issued during the reassessment proceedings, there is no such evidence been referred by the AO to support his allegation."

"I am of the considered opinion that the AO has failed to establish that the appellant was a beneficiary of Rs. 2,96,33,125/- on account of Client Code Modification. Therefore, the addition made by the AO of Rs. 2,96,33,125/- as income from undisclosed sources and of Rs. 8,91,363/- u/s 69C of the Act are hereby deleted."

Core principles established include the strict compliance with procedural safeguards under section 147, the necessity of independent inquiry by the AO before reopening assessments, the requirement of tangible evidence to support serious allegations such as accommodation entries, and the principle that mere receipt of information from an investigation wing without corroboration is insufficient to justify reassessment.

The Tribunal's final determination was to dismiss the Revenue's appeal and uphold the CIT(A)'s order invalidating the reopening and deleting the additions on merits. The assessee's cross objections were dismissed as not pressed.

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