2025 (2) TMI 1237 - AT - Income Tax

Reopening under s.147 and addition under s.68 based only on portal report without AO's independent satisfaction void ab initio

ITAT PUNE - AT held that reopening under s.147 and addition under s.68 based solely on an Investigation Wing report accessed via the Insight portal, ... Reopening of assessment u/s 147 - Addition u/s 68 - bogus LTCG - Borrowed satisfaction - information received in insight portal from DDIT (Inv) Wing, Unit-3, Delhi that the assessee has traded in the scrips of shell company which is proved to be a penny stock company listed on BSE and which has been used to facilitate introduction of unaccounted income of members of beneficiaries in the form of exempt capital gain - HELD THAT:- Reopening on the basis of report of the Investigation wing and non application of independent mind by the Assessing Officer which amounts to borrowed satisfaction supports his case to the proposition that the reopening of the assessment merely on the basis of report of Investigation Wing and without independent application of mind by the Assessing Officer is void ab initio. Since admittedly in the instant case the assessment has been reopened on the basis of the information received through insight portal from DDIT (Inv), Delhi and without independent application of mind by the Assessing Officer, therefore, such reassessment proceedings being not in accordance with law, have to be quashed - Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether reopening assessment under section 147 can be sustained where reasons recorded are based on information from the Investigation Wing/insight portal without independent application of mind by the Assessing Officer (i.e., borrowed satisfaction). 2. Whether long-term capital gains claimed as exempt under section 10(38) can be treated as non-genuine and added as unexplained cash credit under section 68 where transactions relate to an alleged penny-stock whose price was allegedly manipulated. 3. Whether documentation (bank statements, demat records, contract notes, STT payment, allotment letters) produced by the taxpayer suffices to sustain exemption under section 10(38) in face of departmental allegations of accommodation entries and syndicate-run manipulation. 4. Interaction and precedence of authorities on (a) requirement of 'reason to believe' with live link to tangible material at the stage of reopening and (b) evidentiary standards for treating share sale proceeds as accommodation entries. ISSUE-WISE DETAILED ANALYSIS - I. Validity of Reopening under Section 147 (Borrowed Satisfaction / Independent Application of Mind) Legal framework: Section 147 permits reopening when the Assessing Officer has 'reason to believe' that income has escaped assessment; reasons must be recorded and indicate material forming basis of belief. Authorities require a live link between material available to AO and formation of belief; AO must apply own mind rather than act on mere information from Investigation Wing. Precedent treatment: The Tribunal relied on High Court and Supreme Court pronouncements that reopening is an extraordinary power, requiring reasons showing nexus between material and belief (e.g., decisions holding that post-reopening post-facto analysis cannot cure lack of pre-reopening application of mind; AO cannot adopt a borrowed satisfaction from investigation reports). Interpretation and reasoning: The Assessing Officer's reasons were reproduced and show reliance on information received via the insight portal from DDIT (Inv.) with descriptive narration of the modus operandi of the alleged scheme. The Tribunal examined whether the AO independently applied mind to tangible materials before issuing notice u/s 148. Finding: the reasons recite conclusions from investigation reports without indicating specific material, analysis or linkage by the AO to the assessee's return or records prior to reopening. The Tribunal applied the principle that a mere reproduction of investigation conclusions, without AO's own recorded rationale demonstrating a live link to escapement of income, amounts to borrowed satisfaction and vitiates jurisdiction to reopen. Ratio vs. Obiter: Ratio - reopening is invalid where reasons merely restate investigation-wing conclusions without AO's independent application of mind and without showing nexus between material and formation of belief. Obiter - supportive references to authorities on extraordinary nature of reassessment and requirement for recorded reasons. Conclusion: Reassessment proceedings were quashed as the reopening notice was based on borrowed satisfaction from the investigation wing/insight portal without independent application of mind by the Assessing Officer; therefore the jurisdictional requirement under section 147/148 was not satisfied. ISSUE-WISE DETAILED ANALYSIS - II. Treatment of Claimed LTCG as Unexplained Cash Credit under Section 68 (Merit addressed but left academic) Legal framework: Exemption under section 10(38) for long-term capital gains arising from transfer of securities listed on recognized stock exchange subject to satisfaction of purchase/sale genuineness; section 68 permits addition as unexplained cash credit where explanation for credited sum is unsatisfactory. Precedent treatment: Tribunal and appellate authorities have divergent approaches: where documentary evidence (bank payments, demat statements, contract notes, STT receipts) is complete and not disproved by AO, exemption under section 10(38) has been allowed; conversely, where investigation establishes syndicate manipulation and beneficiaries/operatives, courts have upheld treating gains as accommodation entries. Cases cited by both sides illustrate both outcomes depending on fact-based assessments. Interpretation and reasoning: On merits, the Assessing Officer concluded - based on investigation material and pattern analysis - that the scrip was a penny stock used to provide bogus LTCG via circular trades and operators, and therefore rejected the exemption and treated the gain as unexplained receipt under section 68. The appellate authority upheld that finding by applying substance over form and human probabilities, relying on investigation reports and related evidence. However, the Tribunal did not decide the merit because it quashed reopening on jurisdictional grounds; the merits were therefore treated as academic and left undecided. Ratio vs. Obiter: Obiter in this judgment - the Tribunal records the departmental reasoning and competing precedents on merit but expressly declines to adjudicate the factual merits once reopening was quashed. No binding ratio on section 68/10(38) interplay is laid down by the Tribunal in this order. Conclusion: Addition under section 68 and denial of exemption under section 10(38) were sustained by lower authority on merits, but the Tribunal set aside the reassessment on jurisdictional ground without ruling on those merits. ISSUE-WISE DETAILED ANALYSIS - III. Evidentiary Value of Documentary Proof (Bank records, Demat, Contract Notes, STT) vis-à-vis Investigation Findings Legal framework: Where transactions are routed through recognized stock exchange, effected through registered brokers, payment via banking channels, STT paid and demat holdings established, the taxpayer's documents prima facie support claim of genuine transaction and exemption under section 10(38); the department must show why documents are insufficient and demonstrate circumstances pointing to sham/accommodation entries. Precedent treatment: Authorities differ; some decisions direct accepting documented evidence absent incriminating material, while others permit looking through form to substance where surrounding circumstances, syndicate evidence and admission/records from investigations indicate contrivance. Courts require application of tests of human probability and surrounding circumstances when documentary evidence is contradicted by independent incriminating material. Interpretation and reasoning: The assessee produced standard transactional documents. The department relied on broader investigation material (emails, scheme descriptions, impounded documents from operators, trading pattern analysis) to impugn genuineness. The Tribunal noted the existence of such competing material but again did not resolve the conflict on merits due to invalid reopening; it emphasised that the validity of reassessment has to be decided first because merits are academic if reopening is invalid. Ratio vs. Obiter: Obiter - reiteration of legal position that documentary proof can establish genuineness unless convincingly displaced by independent material; not decided conclusively here. Conclusion: Documentary evidence was available and contested by departmental investigation material; resolution of evidentiary sufficiency was not undertaken due to quashing of reassessment. ISSUE-WISE DETAILED ANALYSIS - IV. Precedential Interaction and Binding Force of Jurisdictional Decisions Legal framework: Tribunals must apply binding decisions of higher courts of jurisdiction and consider conflicting authorities elsewhere; the principle of stare decisis applies with weight to jurisdictional High Court and Supreme Court precedents. Precedent treatment: Parties relied on several High Court and Supreme Court decisions both for the proposition that reopening based on investigation reports without AO's independent application of mind is impermissible and for the proposition that transactions evidenced by exchange records and banking channels deserve protection. These precedents were analyzed to determine whether the AO met jurisdictional requirements. Interpretation and reasoning: The Tribunal extensively surveyed authorities (both favourable to taxpayer on merit and favourable to revenue on reinvestigation/merit) but concluded that settled precedents require AO to record reasons showing independent application of mind and linkage to material - absent which reopening is void - and therefore followed those lines of authority to quash reassessment. The Tribunal noted conflicting outcomes on merits in other cases but treated them as secondary to the jurisdictional defect. Ratio vs. Obiter: Ratio - where precedents establish need for live link and independent application of mind before reopening, the Tribunal follows that principle; the decision to quash is grounded on that binding legal principle. Observations on conflicting merits authorities are obiter in the sense they were referenced but not decisive. Conclusion: The Tribunal applied binding precedent on reopening requirements to invalidate the reassessment despite competing precedent on merits; adherence to jurisdictional precedents on borrowed satisfaction was decisive. FINAL CONCLUSION (as deduced from judgment) The Tribunal quashed the reassessment proceedings because the Assessing Officer relied on information from the Investigation Wing/insight portal without independent application of mind, amounting to borrowed satisfaction; since reopening was invalid, the Tribunal allowed the appeal without adjudicating the substantive additions on long-term capital gains/unexplained credits, which were therefore left academic.