2021 (5) TMI 969 - HC - Income Tax

Validity of assessment reopening notice upheld based on sufficient nexus between information and reasons for reopening.

Vilas Vrajlal Parekh Huf Versus The Income Tax Officer Ward 1 (3)

Vilas Vrajlal Parekh Huf Versus The Income Tax Officer Ward 1 (3) - TMI Issues Involved:1. Validity of sanction under Section 151 of the Income Tax Act.2. Accuracy of the reasons for reopening the assessment.3. Existence of a 'reason to believe' that income chargeable to tax has escaped assessment.4. Nexus between the information received and the material gathered.5. Permissibility of reopening for investigative purposes without specific findings.6. Allegation of reopening based on borrowed satisfaction.Detailed Analysis:1. Validity of Sanction under Section 151 of the Act:The petitioner argued that the reopening of the assessment lacked a valid sanction as required under Section 151 of the Income Tax Act. The court noted that the necessary approval had been obtained from the Principal Commissioner of Income Tax before issuing the notice under Section 148. The approval was provided to the petitioner at the stage of disposing of the objections, indicating that the authorities had applied their mind and were satisfied with the reasons for reopening the assessment. Therefore, the court found no merit in the argument regarding the invalid sanction.2. Accuracy of the Reasons for Reopening the Assessment:The petitioner contended that the reasons for reopening were factually incorrect. The court examined the reasons recorded by the Assessing Officer (AO), which included information about penny stock transactions involving Tuni Textiles Ltd. The AO had observed price manipulation in the shares, suggesting that the petitioner had availed accommodation entries for long-term capital gains (LTCG). The court found that the reasons recorded were based on specific information and inquiries made by the AO, thus dismissing the argument of inaccuracy.3. Existence of a 'Reason to Believe' that Income Chargeable to Tax has Escaped Assessment:The petitioner argued that there was no 'reason to believe' that income had escaped assessment. The court highlighted that under Section 147, the AO can reopen an assessment if there is a reason to believe that income has escaped assessment. In this case, the AO had gathered information from the AIMS module and conducted independent inquiries, forming a belief that the income had escaped assessment due to dubious penny stock transactions. The court concluded that the AO had a valid reason to believe that income had escaped assessment.4. Nexus Between the Information Received and the Material Gathered:The petitioner claimed that there was no live nexus between the information received and the material gathered. The court noted that the AO had received specific information about penny stock transactions and had conducted inquiries to gather relevant details. The AO's belief that the income had escaped assessment was based on this information and the observed price manipulation in the shares of Tuni Textiles Ltd. The court found that there was a sufficient link between the information and the material gathered, justifying the reopening of the assessment.5. Permissibility of Reopening for Investigative Purposes Without Specific Findings:The petitioner argued that reopening the assessment for investigative purposes without specific findings was impermissible. The court clarified that at the stage of issuing the notice, the AO is not required to have final evidence but only a reason to believe that income has escaped assessment. The AO's belief was based on the information and inquiries conducted, which indicated that the petitioner had engaged in dubious penny stock transactions. The court held that the AO's decision to reopen the assessment was justified and permissible under the law.6. Allegation of Reopening Based on Borrowed Satisfaction:The petitioner contended that the reopening was based on borrowed satisfaction without independent application of mind by the AO. The court examined the reasons recorded by the AO and found that the AO had conducted independent inquiries and applied his mind to the information received. The AO had formed his own belief that income had escaped assessment based on the gathered material. The court dismissed the argument of borrowed satisfaction, affirming that the AO had independently assessed the situation.Conclusion:The court concluded that the AO had valid reasons to believe that income had escaped assessment and had followed the due process in obtaining the necessary sanction under Section 151. The reasons for reopening were based on specific information and inquiries, establishing a sufficient nexus between the information and the material gathered. The court dismissed the petition, upholding the validity of the notice for reopening the assessment. The writ application was dismissed, and no order as to costs was made.