2023 (10) TMI 390 - AT - Income Tax

Tribunal Allows Appeal, Quashes Income Addition Due to Flawed Assessment; Delay in Filing Appeal Condoned.

The Tribunal condoned a 14-day delay in filing the appeal, allowing the assessee's challenge against the income addition based on client code ... Validity of Reopening of assessment u/s 147 - Assessee argued that reasons recorded did not reveal any material or information in the possession of the AO on the basis of which he formed belief of escapement of income and non-application of mind by the AO while recording satisfaction for escapement of income - HELD THAT:- It is an admitted fact that the reasons supplied to the assessee did not disclose either material or information in the possession of the AO, which revealed to him that the assessee had resorted to CCM to shift profits/loss in trading of shares so as to evade payment of tax. Also, the reasons as noted by me, show no application of mind by the AO, relying merely on the information available with him. This information, as noted, neither reveals the material nor the source from where it came, nor it specifies scrip on which CCM was resorted to by the assessee to earn loss. In the absence of the specific information available with the AO, there was no scope for the AO to apply his mind on it independently, and check the information available with him so as to arrive at his own satisfaction of the income of the assessee being escaped the assessment. Therefore we are in complete agreement with the ld. counsel for the assessee that the jurisdiction assumed by the AO to reopen the case of the assessee is de hors the satisfaction of the AO of any income of the assessee having escaped the assessment and was clearly in violation of the condition prescribed under section 147 of the Act for assuming valid jurisdiction to frame assessment. The assessment order passed, as a consequence is, liable to quashed. The contention of the ld. DR that there was a separate reasons recorded by the AO which revealed the source of information or the material with the AO leading to his belief of escapement of income, is of no assistance to the validity of the re-assessment proceedings, since admittedly, this reason was never confronted to the assessee. The Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd.[2002 (11) TMI 7 - SUPREME COURT] has categorically laid down the procedure to be adopted during reassessment proceedings, taking note of the principle of natural justice embedded in any proceedings, that the AO is required to supply copy of the reasons to the assessee, entertain his objection on the same, deal with the objections, and thereafter proceed with the reassessment proceedings - Therefore, the requirement of the assessee for being supplied with copy of the reasons before proceeding to frame assessment is a mandatory requirement and a brief or cryptic reason supplied to the assessee, with the original being held back by the AO, will not suffice to fulfill this mandatory requirement of law. For this reason, reject the arguments of the ld. DR. Throughout the re-assessment proceedings, and even in the appellate proceedings, the assessee was never confronted with the information with the AO regarding CCM indulged in by the assessee nor the details of the specific scrip in which the assessee had purportedly done CCM. There is no reference anywhere in the order both of the AO and the CIT(A) of the specific scrip in which the CCM was resorted to. In the absence of the assessee being confronted with the specific details of the adverse information in the possession of the Revenue department, on the basis of which the addition was made to his income, there is no case at all for upholding the order of the ld. CIT(A). Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the reopening of assessment under section 147 (read with section 148 procedures) is valid where the assessing officer's recorded reasons do not disclose material or source of information and only cryptic reasons were supplied to the assessee. 2. Whether the assessing officer's satisfaction for reopening is a valid exercise of jurisdiction or a 'borrowed satisfaction' where there is no independent application of mind and the assessee was not confronted with the material said to support escapement of income. 3. Whether an additional legal ground challenging validity of reassessment (questioning 'reason to believe' and jurisdiction under section 147/148) may be admitted at the appellate stage when it raises pure questions of law requiring no fresh facts. 4. Whether the addition to income on account of alleged client code modification (CCM) and shifting of profits/losses in trading transactions can be sustained in the absence of specific disclosure to the assessee of the scrips/trade particulars and of confrontation with the adverse information relied upon by the Revenue. ISSUE-WISE DETAILED ANALYSIS - 1. Validity of Reopening under Section 147/148 (sufficiency and supply of reasons) Legal framework: Reopening under section 147 requires the AO to have 'reason to believe' that income chargeable to tax has escaped assessment; procedural fairness requires supply of reasons to the assessee, opportunity to object, and consideration of objections before framing reassessment (principles reiterated in GKN Driveshafts and embodied in later statutory provisions relating to section 148/148A). Precedent Treatment: The Court followed the Supreme Court's exposition in GKN Driveshafts regarding the mandatory procedure of supplying reasons and allowing objections; legislative amendments (Finance Act, 2021) reinforce these procedural safeguards. Interpretation and reasoning: The Tribunal examined the reasons provided to the assessee and the fuller reasons available to the AO. The copy actually supplied to the assessee was cryptic and did not disclose the source, particulars of the scrip, or the specific material underpinning the AO's belief. In such circumstances the AO could not have applied independent mind or verified the information against records; the satisfaction appears to be based on information not communicated to, or tested by, the assessee. Ratio vs. Obiter: Ratio - where reasons for reopening do not disclose material/information or source and only a cryptic version is furnished to the assessee, the reopening is invalid for want of bona fide 'reason to believe' and for breach of principles of natural justice. Obiter - reference to statutory strengthening of procedure by Finance Act, 2021 confirms policy intent but is not required to decide the instant facts. Conclusions: The reassessment was quashed for invalid exercise of jurisdiction under section 147/148 because the requirements of disclosure of reasons and opportunity to object were not met and the AO's satisfaction was not shown to be the AO's own considered satisfaction. ISSUE-WISE DETAILED ANALYSIS - 2. 'Borrowed satisfaction' and failure to apply independent mind Legal framework: Jurisdiction to reopen must rest on the AO's own application of mind to material in his possession; a satisfaction borrowed from another officer or source, untested and not communicated to the assessee, cannot sustain reassessment. Precedent Treatment: The Tribunal relied on established law emphasizing that the AO must have and record the material/evidence forming the basis of his belief and must confront the assessee with such material (GKN Driveshafts paradigm). Interpretation and reasoning: The reasons supplied to the assessee lacked the details (name/status of third party allegedly involved, specific scrip/trade particulars) necessary for independent verification. The Tribunal found that, in absence of such particulars, the AO did not independently verify or apply mind and effectively proceeded on information gathered by another (investigating division/NSE data) without disclosing it to the assessee. Ratio vs. Obiter: Ratio - where the AO's recorded satisfaction is founded on undisclosed information and lacks independent application of mind, the satisfaction is a borrowed satisfaction and void; therefore, reassessment is invalid. Obiter - comments on how CCM may be misused are explanatory/background and not essential to the decision. Conclusions: The AO's satisfaction was a borrowed satisfaction; jurisdiction assumed under section 147/148 was invalidated on this ground. ISSUE-WISE DETAILED ANALYSIS - 3. Admission of additional legal ground challenging validity of reassessment Legal framework: Appellate forums may admit additional grounds that raise pure questions of law and do not require investigation of fresh facts; established principles permit admission where adjudication can be done on record without remand for further fact-finding. Precedent Treatment: The Tribunal admitted the additional legal ground relying on settled Supreme Court authority allowing consideration of such points at appellate stage when purely legal (citing Jute Corporation and National Thermal Power Co. principles as applied by the Tribunal). Interpretation and reasoning: The Tribunal treated the challenge to the validity of reopening as a pure legal question (reason to believe, procedural lapses), admissible for adjudication without additional fact-finding. The Court therefore admitted and adjudicated this ground before considering merits. Ratio vs. Obiter: Ratio - additional grounds raising pure legal issues about jurisdiction and validity of reopening may be admitted and decided on the existing record. Obiter - none material beyond application to facts. Conclusions: The additional legal ground was correctly admitted and decided against the Revenue on the merits of procedural and jurisdictional infirmities. ISSUE-WISE DETAILED ANALYSIS - 4. Merits: Addition for alleged Client Code Modification (CCM) and shifting of profits/losses Legal framework: Additions based on alleged market manipulations or contrived transactions must rest on tangible material linking the assessee to the inadmissible transaction; natural justice requires confrontation with particulars so the assessee may explain or rebut. Precedent Treatment: The Tribunal applied the procedural and evidentiary standards required for sustaining additions; no novel precedent was overruled or distinguished on merits. Interpretation and reasoning: On merits the Tribunal observed that neither the AO nor the first appellate authority confronted the assessee with the specific adverse information (such as the scrip, trade particulars, or the role of the named broker/entity) relied upon to make the addition. Because the assessee was never furnished or given an opportunity to meet the detailed material said to prove CCM, the addition could not be upheld. The Tribunal further noted that having quashed the assessment on jurisdictional grounds, adjudication on merits was not necessary, but nevertheless found the merits unsustainable for lack of confrontation and specific evidence. Ratio vs. Obiter: Ratio - an addition premised on alleged CCM cannot be sustained where specific adverse material (trade/scrip particulars and the linkage to the assessee) was not disclosed to the assessee and no opportunity was afforded to rebut; such non-confrontation undermines the addition. Obiter - general observations about CCM being used for tax evasion are descriptive and not decisive. Conclusions: The addition on account of alleged client code modification and shifting of profits/losses was not sustained; because of procedural infirmity and non-confrontation, the Tribunal allowed the grounds and set aside the reassessment.