2025 (1) TMI 815 - HC - Income Tax

Assessing Officer cannot reopen assessment based on borrowed satisfaction without independent opinion on disclosed F&O losses

Gujarat HC ruled in favor of the assessee in a case involving reopening of assessment for AY 2013-14 regarding F&O trading losses. The court held that ... Reopening of assessment - loss on account of F&O transactions - genuineness of such transactions remained unproved - HELD THAT:- The specific issue of losses on account of F&O trade was raised by the department, it cannot be held that the department was justified in reopening the assessment for Assessment Year 2013-14, which, we may add, has been done mechanically without application of mind, in the absence of any tangible material. Reasons recorded that the no verification of the material on record is made by the respondent and there is no independent opinion that any income has escaped assessment due to any failure on the part of the assessee in not disclosing fully and truly all material facts necessary for assessment. The initiation of reopening proceedings are on the borrowed satisfaction as no independent opinion is formed and on bare perusal of the reasons recorded, it emerges that the Assessing Officer, considering the information received from the insight portal, has issued impugned notice forming reason to believe that the income has escaped the assessment on the presumption that the petitioner has been involved in creating the non-genuine profit which is already offered to tax in the return of income which is accepted in the regular course of assessment by passing the order under section 143 (3) of the Act. There is no basis to form reasonable belief for escapement of income except the information made available on the insight portal - As on the basis of the information received from another agency on insight portal or from the SEBI report, there cannot be any reassessment proceedings unless the respondent, after considering such information/material received from other sources, consider the same with the material on record in the case of the petitioner assessee and thereafter, is required to form independent opinion that income has escaped assessment. Without forming such opinion solely and mechanically relying upon the information received from the other sources, the respondent-Assessing Officer could not have assumed the jurisdiction to reopen the assessment based on such information. This view is fortified by the decision of this Court in case of Harikishan Sunderlal Virmani [2016 (12) TMI 1558 - GUJARAT HIGH COURT] Assessing Officer could not have assumed the jurisdiction merely and solely relying upon the information made available on the insight portal without forming any independent opinion on the basis of the material on record vis-a-vis the petitioner is concerned. Petitioner had disclosed in its return for the Assessment Year 2013-14 the particulars of the loss under the head of “future and options” which was subsequently scrutinized and accepted by the Department. Therefore, the notice for re-opening the assessment on the exact entry under the head of “future and options” is based on change of opinion. Decided in favour of assessee. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether reopening an assessment under section 147 read with section 148 of the Income-tax Act is valid where the relevant loss (Futures & Options loss) was disclosed in the return, investigated during scrutiny under section 143(3) and accepted by the Assessing Officer in the assessment order. 2. Whether information received from an external source (investigation/insight portal/other directorates) can alone furnish 'reason to believe' for reopening absent independent application of mind and tangible material in the assessee's record. 3. Whether the issuance of a notice under section 148, based on the department's risk-profiling/Project Falcon data indicating non-genuine trading, amounts to a permissible fresh opinion or an impermissible change of opinion when prior assessment had dealt with the same entry. 4. Whether the petitioner's objections to reopening raise issues of failure to disclose fully and truly all material facts necessary for assessment, and if not, whether reassessment is barred beyond four years. 5. Whether the writ under Article 226 is premature in view of alternate statutory remedies (appeal to CIT(A)/Tribunal) when only a notice under section 148 has been issued. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening where loss was disclosed and accepted in earlier assessment Legal framework: Reopening under section 147/148 requires that the Assessing Officer have 'reason to believe' that income has escaped assessment, typically predicated on failure to disclose material facts or discovery of new material; assessments finalized under section 143(3) are vulnerable to reopening only if such reason to believe exists and is not merely a change of opinion. Precedent Treatment: The Court relied on established principles that reopening after four years requires tangible new material and not mere change of opinion. Prior judicial pronouncements have held reopening invalid where no failure to disclose or new material exists. Interpretation and reasoning: The Court examined record showing the F&O loss was declared in the return, supporting evidences (broker contract notes, ledgers, contra entries) were furnished during scrutiny, and the assessment order under section 143(3) did not disallow the claim. The reasons recorded for reopening targeted the same entry without producing independent contradictory material specific to the assessee. The Court found no failure to disclose fully and truly all material facts by the assessee. Ratio vs. Obiter: Ratio - where the claimed loss was disclosed, supported in scrutiny and accepted in assessment, reopening based on the same entry without fresh tangible material is impermissible and amounts to change of opinion. Obiter - remarks on the nature of derivatives vs. stocks are explanatory and not essential to the legal holding. Conclusions: Reopening was invalid on this ground; the notice under section 148 was quashed insofar as it seeks to reassess the disclosed and accepted F&O loss. Issue 2 - Reliance on external investigation/insight portal without independent application of mind Legal framework: Information from other agencies or investigative wings can form the basis for reopening only if the Assessing Officer, upon considering such information together with material on file, forms an independent reasoned belief that income has escaped assessment. Precedent Treatment: The Court followed the consistent line that 'borrowed satisfaction' or mere reliance on information uploaded by other authorities is insufficient; independent verification and formation of opinion based on the assessee's own material is required. Interpretation and reasoning: The reasons recorded showed reliance on risk profiling and insight portal data, with findings about the broker group and alleged accommodation entries, but lacked demonstration that the Assessing Officer examined the petitioner's records afresh or formed an independent opinion. The reasons were general, non-specific, and did not identify dates, transaction specifics, or how materials contradicted the earlier accepted record. Ratio vs. Obiter: Ratio - reopening predicated solely on information from other agencies without independent verification and application of mind is impermissible. Obiter - procedural comments on how such verification should be conducted were advisory. Conclusions: Reopening could not be sustained on the basis of unexamined insight portal material; absence of independent satisfaction rendered the notice invalid. Issue 3 - Change of opinion vs. discovery of new tangible material Legal framework: Reassessment is impermissible if it only reflects a change of opinion by the department; valid reassessment requires either failure to disclose material facts or newly discovered tangible material bearing on escapement of income. Precedent Treatment: The Court applied established tests distinguishing permissible reassessment from impermissible change of opinion. Interpretation and reasoning: The Court found the reasons for reopening targeted the same P&L entry and lacked any new tangible material specific to the petitioner that would justify reopening after four years. The department's conclusion appeared to be a reassessment of the correctness of the earlier acceptance rather than discovery of new information previously not available. Ratio vs. Obiter: Ratio - reopening based on reassessment of an accepted entry without fresh tangible material constitutes a change of opinion and is invalid. Obiter - comparisons drawn between derivative transactions and share transactions were not essential to this conclusion. Conclusions: The notice embodied an impermissible change of opinion; reopening was unjustified. Issue 4 - Allegation of non-disclosure and its sufficiency to reopen beyond four years Legal framework: To reopen after four years, there must be reason to believe that the assessee failed to disclose fully and truly all material facts; mere suspicion or generalized allegation is insufficient. Precedent Treatment: Courts have required clear demonstration of non-disclosure or new material showing concealment. Interpretation and reasoning: The assessee had filed audited accounts, annexures, and a specific reply during scrutiny furnishing supporting broker documents; the Court found there was no failure to disclose. The reasons for reopening alleged non-genuine trades generically without showing how the provided documents were false or incomplete. Ratio vs. Obiter: Ratio - absent demonstrable failure to disclose or falsity of furnished material, reopening beyond four years is unsustainable. Obiter - comments on the need for particularity in reasons are explanatory. Conclusions: The reopening could not be justified on alleged failure to disclose; the statutory bar after four years was thereby engaged. Issue 5 - Prematurity of writ remedy when alternate statutory remedies exist Legal framework: Availability of efficacious alternative remedies may render writ premature; however, where requirement of independent satisfaction and jurisdictional error in issuance of notice is shown, constitutional remedy may be entertained. Precedent Treatment: The Court considered but did not rely upon the contention of prematurity, finding jurisdictional infirmity in the reasons for reopening. Interpretation and reasoning: Though objection was made that appeal remedies exist, the Court found that the Assessing Officer's lack of independent application of mind and the jurisdictional defect in forming reason to believe justified interference by writ jurisdiction at this stage. Ratio vs. Obiter: Ratio - where issuance of section 148 notice suffers from jurisdictional infirmity (no independent reason to believe), writ jurisdiction to quash may be exercised notwithstanding existence of alternate remedies. Obiter - the Court did not lay down exhaustive parameters for prematurity analysis. Conclusions: Writ relief was appropriate and the notice was quashed despite availability of appeal remedies. Final Conclusion The reassessment notice under section 148 read with section 147 was quashed because (a) the F&O loss was disclosed, supported and accepted in the original assessment; (b) the reopening rested on information from other agencies without independent application of mind or fresh tangible material specific to the assessee; and (c) the notice amounted to a change of opinion rather than valid discovery of escaped income. The Court made the rule absolute and declined to award costs.