2024 (3) TMI 953 - HC - Income Tax

Quash reopening under Sections 147 and 148A(b): notice lacked material showing fictitious short-term capital loss or sham

HC quashed reopening under sections 147/148A(b), holding the notice lacked any material showing the claimed short-term capital loss was fictitious or that ... Reopening of assessment u/s 147 - notice issued u/s 148A(b) as alleged that petitioner was one of the persons who claimed fictitious short-term capital loss - HELD THAT:- There is nothing in the notice to indicate on what basis it is alleged that the short-term capital loss claimed was fictitious. Petitioner had, based on public announcement, invested in the mutual fund. The fact that petitioner received tax free dividend fund cannot be held against petitioner. The fact that petitioner had suffered a loss also cannot be held against petitioner. Even assuming that the transaction was pre-planned, there is nothing to impeach the genuineness of the transaction. Petitioner was free to carry on his business which he did within the four corners of law. Mere tax planning without any motive to evade taxes through colourable devices is not frowned upon even by the judgment 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 Section 148A(b) of the Act, the Assessing Officer alleges that JM Financial had manipulated accounting methodology so as to artificially inflate the distributable surplus and the investors, in order to reduce their tax liability, entered into these sham transactions and received dividend and short-term capital loss. These are allegations against JM Financial and do not implicate petitioner in any manner. There is nothing to indicate that petitioner had participated knowingly in a sham transaction to reduce his tax liability or to earn dividend or book short-term capital loss. Therefore, the Assessing Officer is also not clear whether the assessee had booked loss or claimed dividend in the JM Balanced Fund Annual Dividend Option Regular scheme or JM Equity Hybrid Fund Quarterly Dividend. This also indicates non application of mind by the Assessing Officer. Assessee appeal allowed. Issues Involved:1. Legality of the show cause notice and subsequent orders issued under Sections 148A(b), 148A(d), and 148 of the Income Tax Act, 1961.2. Alleged sham transactions and fictitious short-term capital loss claimed by the petitioner.3. Adequacy of information provided to the petitioner.4. Jurisdictional pre-conditions for reopening assessment.5. Compliance with procedural requirements and principles of natural justice.Summary:1. Legality of the Show Cause Notice and Subsequent Orders:The petitioner challenged the show cause notice dated 20th August 2022, the order dated 30th September 2022 under Section 148A(d), and the notices dated 30th September 2022 and 7th October 2022 under Section 148 of the Income Tax Act, 1961. The court noted that the Assessing Officer did not provide the petitioner with the requested documents and relied on information not made available to the petitioner. The court found that the Assessing Officer's actions lacked transparency and fairness, leading to the quashing of the impugned notices and orders.2. Alleged Sham Transactions and Fictitious Short-Term Capital Loss:The respondent alleged that the petitioner was involved in sham transactions with JM Financial Mutual Fund, resulting in fictitious short-term capital loss and ineligible dividend income. The court observed that the petitioner, as an investor, had no control or knowledge of JM Financial's activities and that there was no evidence to suggest the petitioner's involvement in any sham transactions. The court emphasized that mere tax planning within the law is permissible and cannot be deemed illegal.3. Adequacy of Information Provided to the Petitioner:The petitioner contended that he was not provided with complete information, documents, and material linking him to the alleged scam by JM Financial. The court highlighted that the petitioner was not given an opportunity to defend himself on merits as the information was withheld. The court found that the Assessing Officer's reliance on undisclosed information violated principles of natural justice.4. Jurisdictional Pre-Conditions for Reopening Assessment:The petitioner argued that the notice for reopening assessment was barred by limitation and that the jurisdictional pre-conditions were not satisfied. The court noted that the reasons for the formation of belief regarding escapement of income must have a rational connection with the information. The court found that the Assessing Officer's belief was based on vague and indefinite material, lacking a direct nexus or live link, rendering the reassessment proceedings illegal and bad in law.5. Compliance with Procedural Requirements and Principles of Natural Justice:The court emphasized that the Assessing Officer must provide the petitioner with all relevant information and documents to ensure a fair opportunity to present his case. The court found that the Assessing Officer's failure to do so resulted in a violation of procedural requirements and principles of natural justice. Consequently, the court quashed the impugned notices and orders.Conclusion:The court quashed and set aside the notice dated 20th August 2022 under Section 148A(b), the order dated 30th September 2022 under Section 148A(d), and the notices dated 30th September 2022 and 7th October 2022 under Section 148 of the Income Tax Act, 1961. The rule was made absolute in favor of the petitioner.