TMI Blog2024 (3) TMI 953X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the Apex Court in McDowell Co. Ltd [ 1985 (4) TMI 64 - SUPREME COURT] It is settled law that the reasons for the formation of the belief that there has been escapement of income must have a rational connection with or relevant bearing on the information. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income Tax Officer and his view that there has been escapement of income of the assessee from assessment in the particular year. It is settled law that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched which would suggest escapement of the income of the assessee from assessment. The powers of the Income Tax Officer to reopen assessment, though wide, are not plenary. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The live link or close nexus should be there between the information before the Income Tax Officer and the belief which he has to prima facie form an opinion regarding the escapement of the income of the assessee. In the notice issued under Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Rs. 1,28,53,426/- on 26th December 2015 and Rs. 1,92,80,140/- on 30th March 2016 aggregating to Rs. 3,41,12,650/-. On 31st March 2016 petitioner transferred the units for a consideration of Rs. 3,61,19,053/- and thereby incurred a short-term capital loss on the sale of the units. After considering the aforesaid dividend earned and the short-terms capital loss incurred, petitioner determined his total income for Assessment Year 20162017 at Rs. 66,44,040/- and filed return of income accordingly on 4th August 2016. 7. Petitioner s case was selected for scrutiny assessment on 16th December 2018 and an assessment order dated 16th December 2018 was passed under Section 143(3) of the Act making an addition of Rs. 3,50,000/-. Petitioner has preferred an appeal before the Commissioner of Income Tax (Appeals) which is still pending. 8. Thereafter petitioner received a notice dated 2nd June 2021 under Section 148 of the Act alleging that there was information that petitioner had received dividend amounting to USD 57548. Petitioner replied to the notice which was converted into a notice under Section 148A(b) of the Act pursuant to the order of the Apex Court in Union of India V/s. Ashish Aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end should be reduced from the cost of investment with resulting reduction in short-term capital loss. The assessee is one the persons who claimed fictitious short-term capital loss. As per the information, the assessee is one of the beneficiaries, who have received dividend and claimed fictitious losses in equity / derivative trading in JM Equity Hybrid Fund-Quarterly Dividend of JM Financial Asset Management Limited, to the tune of Rs. 3,41,12,651/- during the F.Y. 2015-16 relevant to the A.Y. 2016-17 as under : Sr.No. Source PAN Source PAN Name Information FY Information Type Information Value Information Date Remarks 1 AAACJ2578F JM FINANCIAL ASSET MANAGEMENT LIMITED 2015-16 Fictitious Losses in Equity/Derivative Trading 12853427 26-12-2015 JM Equity Hybrid Fund-Quarterly Dividend 2 AAACJ2578F JM FINANCIAL ASSET MANAGEMENT LIMITED 2015-16 Fictitious Losses in Equity/Derivative Trading 19280140 30-03-2016 JM Equity Hybrid Fund-Quarterly Dividend 3 AAACJ2578F JM FINANCIAL ASSET MANAGEMENT LIMITED 2015-16 Fictitious Losses in Equity/ Derivative Trading 1979084 18-06-2015 JM Equity Hybrid Fund-Quarterly Dividend On-going through the computation of income of Karan Manoj Maheshwari f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otice. Secondly, petitioner had made investments through banking channels that are reflected in its books of account and there is no reason to believe the same to be anything less than genuine. Thirdly, the notice and the order, impugned herein, are based merely on information allegedly received from the DDIT (Inv)-3(1), Mumbai, and petitioner's implication in the matter is purely based on conjectures and surmises. Fourthly, the information provided in the notice is ambiguous and does not establish any live link with evidence that income of assessee has escaped assessment. Lastly, the jurisdictional pre-conditions have not been satisfied, rendering the reassessment proceedings, illegal and bad in law. Mr. Thacker thus, seeks quashing of the notice and order impugned herein. 12. Mr. Singh defended the reopening of assessment by placing the onus of demonstrating that the dividend income and capital loss shown in his income tax return from the investment made in JM Financial Mutual Fund is not a result of a sham transaction undertaken by the said JM Financial Mutual Fund completely on petitioner. Mr. Singh contended that the information available with the Assessing Officer is in l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2015 and 18th June 2015 there was an inflow of Rs. 2719.33 Crores in the mutual fund. Between 20th June 2015 to 27th December 2015 a further inflow of Rs. 2259.28 Crores was made in the mutual fund and between 28th December 2015 to 30th June 2016 there was a further inflow of Rs. 4698.28 Crores into the mutual fund. In this, petitioner s investment was only Rs. 1,10,00,000/- on 17th June 2015 and Rs. 6,00,00,000/- on 25th August 2015. 16. It is thus clear that petitioner is only a small fry in the larger scheme of things and in fact himself a victim of the alleged fraud of JM Financial and again being victimised by the Assessing Officer. Even in the order where it is mentioned that statement of the key management personnel of the mutual fund was recorded, there is nothing to indicate that petitioner was part of the alleged sham mutual fund. Infact in paragraph 7.4 of the impugned order referred to by Mr. Singh, in the statement of Mr. Suvendu Rakshith, it is recorded that the sales team had been passing on the hints to the distributors about the prospective dividend distribution, much in advance, to lure the prospective clients. Admittedly petitioner was not a distributor and was o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it in the above argument of the Department. At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment years before insertion of Section 94(7) vide Finance Act, 2001 w.e.f. 1.4.2002. With regard to such cases we may state that on facts it is established that there was a sale . The sale-price was received by the assessee. That, the assessee did receive dividend. The fact that the dividend received was tax-free is the position recognized under Section 10(33) of the Act. The assessee had made use of the said provision of the Act. That such use cannot be called abuse of law . Even assuming that the transaction was pre-planned there is nothing to impeach the genuineness of the transaction. With regard to the ruling in McDowell Co. Ltd. v. Commercial Tax Officer [154 ITR 148(SC)], it may be stated that in the later decision of this Court in Union of India v. Azadi Bachao Andolan [263 ITR 706 (SC)] it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of this Court in McDow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serted by the same Finance Act as brought into force w.e.f. 1.4.2002. (emphasis supplied) 18. It is settled law that the reasons for the formation of the belief that there has been escapement of income must have a rational connection with or relevant bearing on the information. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income Tax Officer and his view that there has been escapement of income of the assessee from assessment in the particular year. It is settled law that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched which would suggest escapement of the income of the assessee from assessment. The powers of the Income Tax Officer to reopen assessment, though wide, are not plenary. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The live link or close nexus should be there between the information before the Income Tax Officer and the belief which he has to prima facie form an opinion regarding the escapement of the income of the assessee. The relevant p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that before such action is taken the requirements of the law should be satisfied. The live link or close nexus which should be there between the material before the Income-tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter's failure or omission to disclose fully and truly all material facts was missing in the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment . The majority of the learned Judges in the High Court, in our opinion, were not in error in holding that the said material could not have led to the formation of the belief that the income of the assessee respondent had escaped assessment because of his failure or omission to disclose fully and truly all material facts. We would, therefore, uphold the view of the majority and dismiss the appeal with costs. (emphasis supplied) It is also trite law that while the Court cannot investigate into the adequacy or sufficiency of the reasons, which have weighed with the Income Tax Officer in coming to the belief, the Court can certainly examine whether the reasons are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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