Reopening assessment under s.147 invalid where reasons fail to show escaped income or nexus with alleged manipulative trades

HC held that reopening assessment under s.147 was invalid because the reasons recorded did not disclose any escaped income. The AO failed to establish any nexus between alleged manipulative reversal trades and the assessee's transactions or to show unassessed income; losses and corresponding profits neutralized each other and no other information indicated undisclosed income. Mere reliance on SEBI and Apex Court observations without specific co-relation with the assessee's trades was insufficient to form a belief of escapement of income. Relief granted to the assessee; reassessment order quashed.

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Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act for reopening the assessment.
2. Whether the reasons recorded for reopening the assessment were sufficient and justified.
3. The legitimacy of the transactions carried out by the petitioner on the Bombay Stock Exchange.
4. Whether the sanction under Section 151 of the Act was properly obtained.
5. The applicability of the observations made by SEBI and the Apex Court in similar cases to the petitioner's case.

Detailed Analysis:

1. Validity of the Notice Issued Under Section 148:
The petitioner challenged the notice dated 31st March 2021 issued by the Assessing Officer under Section 148 of the Income Tax Act for reopening the assessment for the Assessment Year 2015-16. The petitioner contended that the notice was bad, illegal, barred by limitation, and without jurisdiction.

2. Sufficiency and Justification of the Reasons Recorded:
The petitioner argued that there was no escapement of income chargeable to tax to justify reopening the assessment. The reasons recorded by the Assessing Officer were based on information from the Insight Portal regarding coordinated and premeditated trading on the Bombay Stock Exchange, resulting in non-genuine business losses and gains. The petitioner contended that the transactions involved identical "buy" and "sell" trades and thus had no revenue impact. The court found that the reasons recorded did not disclose any income that had escaped assessment since the effect of the loss and profit would be 'nil'.

3. Legitimacy of Transactions on the Bombay Stock Exchange:
The petitioner asserted that the transactions in Futures and Options (F&O) on a recognized stock exchange could not result in non-genuine losses. The court noted that the transactions were carried out on the Bombay Stock Exchange and there was no co-relation established between the petitioner's transactions and the manipulative reversal trades discussed by SEBI and the Apex Court. Therefore, the court concluded that the Assessing Officer could not have come to a prima facie conclusion that income had escaped assessment.

4. Proper Sanction Under Section 151:
The petitioner contended that the required sanction under Section 151 of the Act was not obtained. However, the court found this contention untenable upon perusal of the sanction/approval under Section 151, which was properly obtained.

5. Applicability of SEBI and Apex Court Observations:
The respondent relied on the observations made by SEBI and the Apex Court in similar cases of manipulative reversal trades to justify the reopening. The court found that merely referring to these observations without establishing a direct co-relation with the petitioner's transactions was insufficient. The characteristics of manipulative reversal trades, as discussed by SEBI and confirmed by the Apex Court, did not apply to the petitioner's case in the absence of specific evidence linking the petitioner to such trades.

Conclusion:
The court concluded that the reasons recorded by the Assessing Officer did not form any valid reason to believe that income had escaped assessment. Therefore, the notice issued under Section 148 for reopening the assessment was not sustainable. The petition was allowed, and the impugned notice dated 31st March 2021 was quashed and set aside. Rule was made absolute, with no order as to cost.

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