2023 (5) TMI 1214 - AT - Income Tax

Assessee's appeal allowed, AO's order under section 147 declared void. Reasons for income escape assessment found illogical.

The court allowed the assessee's appeal, declaring the Assessing Officer's order under section 147 as non est in the eyes of the law. The court found the ... Reopening of assessment - validity of notice u/s 148 - Information received by the AO under Project Falcon from DGIT(Investigation), Mumbai about trading on the United Stock Exchange of India by engaging in reversal trades in illiquid stock options resulting in non-genuine business loss/gains to the beneficiary assessee and that the present assessee is a party to such manipulation - HELD THAT:- Reasons derived by the AO on the alleged ground of income escaping assessment which consists of claim of artificial loss from trade reversal on Stock Exchange and the belief that the assessee has incurred an amount as commission paid for obtaining a loss of is beyond logic and not borne out of any record. Hence, the order passed by the Assessing Officer u/s 147 dated “Nil” is to be treated non est in the eyes of law. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the notice issued under section 148 read with section 147 was validly issued - specifically whether reasons for belief were properly recorded and whether reopening was within limitation or barred by the four-year rule and/or first proviso to section 147. 2. Whether the reopening was a mere change of opinion or re-appreciation of facts on record and therefore impermissible. 3. Whether the reassessment action was based on borrowed satisfaction or without application of mind, in view of reliance on information from Project Falcon and statements recorded under sections 131/133A. 4. Whether the proviso to section 43(5) (recognised stock exchange transactions/derivative losses) permits the loss claimed on trading in derivatives and, if so, whether the loss was non-genuine/speculative thereby attracting disallowance under section 147. 5. Whether an addition of commission (2% of turnover) or a lesser commission amount is sustainable where the AO alleges payment of cash commission for accommodation entries but records do not support the assertion. 6. Whether the notice under section 148 was valid for want of statutory approval under section 151. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of notice under section 148/147 and limitation Legal framework: Reopening survey/assessment requires formation of reason to believe that income has escaped assessment; notices under section 148 must be supported by recorded reasons under section 147; limitation and first proviso to section 147 restrict reopening after four years unless failure to disclose material facts is established. Precedent treatment: The Court/Tribunal applied orthodox principles that reasons must be cogent and based on material on record; mere reliance on information without tangible material or application of mind renders notice invalid (precedential approach followed; no specific cases cited in text). Interpretation and reasoning: The AO relied on information from Project Falcon and statements recorded during survey operations of third parties to form belief of non-genuine reversal trades and cash commissions. However, the Tribunal found the AO's belief - that there was an escapement of income aggregating Rs.4,26,88,014 (artificial loss + commission) - was not borne out by the record, beyond mere conjecture. The assessee had been assessed under section 153A and had not claimed the loss in return; broker Giriraj Stock Broking stated the assessee was never its client; contract notes were examined; United Stock Exchange was a notified recognised exchange (relevant to proviso to s.43(5)). The Tribunal held the reasons were 'beyond logic and not borne out of any record.' Ratio vs. Obiter: Ratio - a notice under section 148 must rest on cogent material on record; where the AO's reasons rely on uncorroborated information and do not support escapement of income the reopening is invalid. Obiter - reliance on Project Falcon data and statements of third-party brokers may be permissible if corroborated (implied). Conclusion: Reopening under section 147/148 was invalid; the AO's notice is to be treated non est and the reassessment set aside for lack of adequate reasons and absence of material establishing escapement of income within the statutory framework. Issue 2 - Reopening as change of opinion / reappreciation of facts Legal framework: Reopening is impermissible if it amounts to mere change of opinion on matters fully examinable during original assessment; reassessment not sustainable where it is re-appreciation of facts already on record. Precedent treatment: The Tribunal followed the settled principle that change of opinion is not a valid ground for reopening; reliance on the first proviso to s.147 and requirement of failure to disclose material facts where applicable was applied in assessing legitimacy of reopening. Interpretation and reasoning: The AO's action sought to treat trading losses as non-genuine based on data from Project Falcon despite the case having undergone scrutiny under section 153A and contract notes being available. The Tribunal construed the AO's approach as tantamount to reappreciation of facts and not demonstrating a failure to disclose material facts in the original return or assessment process. The fact that the assessee did not claim the loss in its return was noted but did not substitute for independent corroborative material to justify reopening. Ratio vs. Obiter: Ratio - reassessment that rests on reappreciation of facts already on record and amounts to change of opinion is impermissible absent specific tangible material showing failure to disclose material facts. Obiter - mere non-claim of loss in return is insufficient alone to justify reopening. Conclusion: Reopening constituted an impermissible change of opinion and was not sustainable on the facts. Issue 3 - Borrowed satisfaction and reliance on information from investigation (Project Falcon, statements under s.131/133A) Legal framework: AO must apply own mind; action cannot be based on mere borrowed or imported satisfaction from investigation reports without independent scrutiny or corroboration. Precedent treatment: The Tribunal adhered to the doctrine against borrowed satisfaction - that orders must be founded on material in the record and independent application of mind by the AO. Interpretation and reasoning: Although AO relied on Project Falcon data and statements of directors of brokers admitting provision of accommodation entries, the Tribunal found no direct material linking those admissions to the assessee's specific transactions. Broker Giriraj denied that the assessee was a client. The AO's computation of a 2% commission liability was based on an analogy and inference, not on direct evidence in the assessee's file. Thus the reopening was effectively based on borrowed satisfaction without requisite enquiry. Ratio vs. Obiter: Ratio - reliance on investigative inputs without independent corroboration constitutes borrowed satisfaction and invalidates reassessment. Obiter - statements of third parties may be relevant if directly linked and supported by documents. Conclusion: Reopening was founded on borrowed satisfaction and absence of application of mind; such reliance rendered the notice invalid. Issue 4 - Characterisation of derivative trading loss under proviso to section 43(5) and genuineness/speculativeness Legal framework: Proviso to section 43(5) (as amended and with notification recognising USE) treats losses/gains on transactions in derivatives on recognised stock exchanges in a specified manner; losses on recognised exchanges are not automatically speculative if they meet statutory recognition. Precedent treatment: The Tribunal applied the statutory scheme which recognises United Stock Exchange as a recognised exchange for the relevant purpose and invoked the proviso to s.43(5) in assessing whether loss on derivative transactions could be treated as allowable rather than speculative. Interpretation and reasoning: The Tribunal noted USE had been notified as a recognised stock exchange and the contract notes were examined. There was no direct material to show that the derivative trades were non-genuine or speculative as against the assessee. The AO's conclusion that the loss of Rs.99,42,838 was bogus arose from Project Falcon data and inferences rather than direct evidence. Given lack of record support and recognition of the exchange, the Tribunal treated the AO's characterisation as unsustainable. Ratio vs. Obiter: Ratio - where trades occur on a recognised stock exchange and there is no cogent record evidence of non-genuineness, losses cannot be treated as speculative merely on investigative inputs. Obiter - investigation data can trigger enquiry but must be corroborated. Conclusion: The loss on derivative trading could not be held non-genuine/speculative on the available record; the addition disallowing the loss was not sustainable. Issue 5 - Addition of commission (2% of turnover) and reduced commission upheld by appellate authority Legal framework: Additions for alleged cash commissions require evidence linking assessee to payment; AO may compute imputed commission but must ground the computation in record evidence. Precedent treatment: The Tribunal accepted the principle that mechanical percentage additions unsupported by specific evidence are not sustainable; the CIT(A) had reduced AO's addition to a nominal sum which revenue did not challenge. Interpretation and reasoning: AO imputed commission @2% on total turnover to arrive at Rs.3,27,45,176, based on analogy with statements of other entities. The Tribunal found this to be an arbitrary figure not supported by direct evidence against the assessee. The CIT(A) had fixed commission at Rs.1,99,380/- which the revenue did not appeal. The Tribunal thus treated the large imputation as beyond record and not justifiable. Ratio vs. Obiter: Ratio - arbitrary computation of commission on conjectural basis without evidentiary foundations is unsustainable. Obiter - nominal adjustments may be acceptable where supported or unchallenged on appeal. Conclusion: The AO's addition of commission @2% was unsustainable; the CIT(A)'s limited determination (unappealed by revenue) stands and the higher addition is set aside. Issue 6 - Approval under section 151 Legal framework: Notices under section 148 in certain circumstances require sanction/approval under section 151 (delegation/issuance formalities) as applicable. Precedent treatment: The Tribunal noted the ground but decided the matter on substantive insufficiency of reasons; no independent finding recorded in the text that absence of section 151 approval decisively invalidated the notice. Interpretation and reasoning: Although the assessee raised lack of proper approval under section 151, the Tribunal disposed the appeal on the basis that the reasons for reopening were not borne out by record and thus the notice was non est. The Tribunal did not need to adjudicate conclusively on section 151 approval given substantive infirmity. Ratio vs. Obiter: Obiter - lack of statutory approval under section 151 may render notice invalid; Ratio - in this instance, substantive failure of reasons sufficed to quash reopening. Conclusion: The notice was quashed on substantive grounds; the section 151 point was not determinative in the outcome. Overall Disposition The Tribunal held the reassessment proceedings under section 147/148 to be invalid for want of cogent material and application of mind, treated the AO's order as non est, allowed the appeal, and set aside the additions imputing non-genuine loss and large commission; the limited commission figure determined by the appellate authority remained unchallenged by revenue.