2020 (1) TMI 1742 - AT - Income Tax

Reopening assessment under section 147 invalid where AO's reasons were mere suspicion; broker's post-trade client-code changes seen as regular practice

ITAT Kolkata (AT) held that reopening assessment under s.147 was unjustified because the AO's reasons reflected only suspicion, not a reasonable belief ... Reopening of assessment u/s 147 - Reason to believe or suspect - Eligibility of reasons to believe - HELD THAT:- Reasons in support of the impugned notice accept the fact that as a matter of regular business practice, a broker in the stock exchange makes modifications in the client code on sale and / or purchase of any securities, after the trading is over so as to rectify any error which may have occurred while punching the orders. The reasons do not indicate the basis for the Assessing Officer to come to reasonable belief that there has been any escapement of income on the ground that the modifications done in the client code was not on account of a genuine error, originally occurred while punching the trade. The material available is that there is a client code modification done by the Assessee's broker but there is no link from there to conclude that it was done to escape assessment of a part of its income. Prima facie, this appears to be a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment. Appeal of the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the reopening of assessment under section 147/148 is valid where reasons recorded rely primarily on information received from an investigative authority/broker data without independent application of mind by the Assessing Officer. 2. Whether reasons recorded that are general, vague or refer to 'some brokers' and that do not specify nature, amount, time and mode of transactions or explain how client code modifications relate specifically to the assessee amount to a 'reason to believe' as required for valid reassessment. 3. Whether reliance on material supplied by another income-tax authority or agency constitutes permissible basis for reopening absent independent verification and formation of belief by the AO (i.e., whether 'borrowed satisfaction' invalidates reopening). 4. Consequential question: if reopening is held invalid on the above grounds, whether the reassessment must be quashed without adjudication on merits. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening when reasons rely primarily on information from investigative authority/broker data Legal framework: Section 147 requires the Assessing Officer to have 'reason to believe' that income chargeable to tax has escaped assessment; the reasons recorded must disclose the AO's mind and the basis for forming that belief. Precedent treatment: The Court follows established authoritative rulings holding that mere receipt of information from investigative wings or other authorities does not, by itself, constitute reason to believe unless the AO independently examines and forms his own belief based on material on record. Interpretation and reasoning: The reasons recorded in the present matter reproduce information from an investigative source (DGIT/Pr. DIT(Inv.)) describing misuse of trading platforms and listing multiple entities. The AO's reasons do not demonstrate any independent analysis linking the supplied information to the assessee's specific transactions or disclosing the AO's own evaluative process. The reasons therefore amount to a repetition of the investigative report rather than a reasoned formation of belief by the AO. Ratio vs. Obiter: Ratio - reopening based solely on reproduced/incoming investigatory information without independent application of mind is invalid. Obiter - ancillary observations on how AO might have validated such material (not necessary for decision). Conclusion: Reopening is invalid where the reasons merely restate investigative data without the AO forming an independent, documented belief that income has escaped assessment in respect of the assessee. Issue 2 - Sufficiency and specificity of reasons: vagueness, generality and lack of link to assessee Legal framework: Reasons recorded must be clear, specific and disclose the nature, amount and manner of the transactions or omissions relied upon so that a reasonable person could conclude that income has escaped assessment; reasons that are vague or general will not satisfy section 147. Precedent treatment: The Court applies prior holdings that reasons which are vague, scanty or ambiguous (not indicating when, how, with whom or in what amount the transactions occurred) cannot sustain a reassessment notice; mere suspicion without particulars is insufficient. Interpretation and reasoning: The recorded reasons refer to client code modification activities done by 'some brokers' and state that the assessee 'booked profit' via bogus entities, but do not identify specific transactions, dates, amounts tied to the assessee (beyond a summary table) in a manner showing AO's independent appreciation. There is no explanation why client code changes were not genuine rectifying entries or why they must be treated as tax-evasive, nor is there an assertion of failure by the assessee to disclose material facts. Ratio vs. Obiter: Ratio - reasons lacking requisite specificity and linking facts to the assessee constitute a 'reason to suspect' not a 'reason to believe,' and are legally insufficient. Obiter - classification of client code modification as routine error versus tax-evasion requires case-specific inquiry (commentary only). Conclusion: The reasons are legally inadequate because they are general and do not disclose the AO's basis for concluding that the client code modifications were not genuine or that the assessee failed to disclose material facts; thus they do not amount to a valid reason to believe. Issue 3 - Borrowed satisfaction: reliance on material from another authority without independent verification Legal framework: While information from other departments or investigative units may trigger scrutiny, the AO must independently consider the material on the assessee's record and form his own reasoned belief; a mere adoption of another authority's satisfaction (borrowed satisfaction) is impermissible. Precedent treatment: The Court follows earlier tribunal and high court decisions holding that reassessment proceedings initiated on the basis of another agency's information, without the AO forming an independent opinion on the assessee's material, are invalid. Interpretation and reasoning: The reasons explicitly show the AO acted on information/analysis received from investigative units and did not demonstrate any independent verification or application of mind to the assessee's own records to arrive at a distinct belief. The materials on record were not shown to be examined to establish nexus with the assessee's tax liability; thus the reopening proceeds from borrowed satisfaction. Ratio vs. Obiter: Ratio - reopening founded on borrowed satisfaction, absent AO's independent formation of belief after examining the assessee's material, is invalid. Obiter - administrative coordination between agencies is permissible provided AO's independent satisfaction is recorded (observational). Conclusion: The reassessment is invalid because it is based on borrowed satisfaction without the AO independently forming and recording a reasoned belief that income of the assessee had escaped assessment. Issue 4 - Consequence: quashing reassessment and not adjudicating merits Legal framework: Where the foundation for reopening (i.e., reasons recorded) is legally defective, the proper remedy is to quash the reassessment proceedings; no adjudication on merits is warranted when jurisdictional defect exists. Precedent treatment: Consistent application of law requires annulment of reassessment where section 147 jurisdiction is not validly invoked; merits are not to be examined once reopening is quashed for lack of jurisdiction. Interpretation and reasoning: Having found the reasons to be vague, general and based on borrowed satisfaction, the Court concludes that jurisdictional requirement under section 147 is not satisfied. Consequently, substantive additions or assessments flowing from such reopening cannot be sustained. Ratio vs. Obiter: Ratio - invalid reopening mandates quashing of reassessment without entering into merits. Obiter - none. Conclusion: The reassessment is quashed for legal infirmity in the reasons recorded; the appeal on merits is not adjudicated as the reopening itself is bad in law.