2025 (4) TMI 280 - AT - Income Tax

AO failed to establish 'reason to believe' for reopening assessment under section 147 for alleged bogus LTCG transactions

Kavya Satija Versus DCIT Circle-2 (1) Gurugram, Haryana

ITAT Delhi quashed reopening of assessment under section 147 for alleged bogus LTCG transactions. The tribunal held that AO failed to establish 'reason to ... Reopening of assessment u/s 147 - additions made u/s 68 on account of alleged bogus Long Term Capital Gains (LTCG) - reason to believe or suspect - HELD THAT:- AO has merely acted on so-called information from Investigation Wing on dotted line without showing as to how he convinced himself that contents of the so-called information are worthy of being acted upon, more so when the assessment was already completed u/s 143(3). The reasons flippantly refers to statement of brokers/intermediaries and except such vague references, no substantive facts are discernible to provide rational ‘nexus’ of so-called information to the formation of belief qua the assessee. The approach of the AO, on the face of reasons recorded, appears to be most casual and robotic. It is well-settled that re-opening of a completed or a time-barred assessment is not permissible unless essential pre-requisites of sec 147 of the Act are strictly adhered. Noticeably, sec 147 of the Act uses the expression ‘reason to believe’ which is the bedrock for assumption of jurisdiction. The significant word in the main provision of sec 147 of the Act is ‘belief’ and not ‘suspicion’. It is well settled that ‘reason to believe’ is not the same as ‘reason to doubt’ or of ‘reason to suspect’. Pertinently, in the reasons recorded, an allegation has been made towards existence of ‘nexus’ of broker, entry operator and the beneficiaries (including assessee herein) to use penny stock namely, CCL scrip to provide accommodation entries to enable the beneficiaries to claim exempt income. Such substantial allegation of existence of ‘nexus’ which is the foundation for formation of adverse inference is without reference to any material whatsoever. The assessee can possibly be implicated for escapement of income only where the circumstances suggest some involvement of assessee in any manner giving rise to exempt income. Such involvement of assessee or an action in concert cannot however be figment of imagination for exercise of drastic powers vested u/s 147. In the absence of any material referred in the reasons to lend support to existence of any nexus between the entry operators and the assessee, it will unrealistic and illogical to tar all transactions of investors in CCL scrip as sham and stereotyping every transaction in CCL with same brush. The nexus is conspicuously absent in the reasons recorded. Also the capital gains arising on sale of shares cannot be labeled as sham profit and consequently the additions under s. 68 of the Act is without authority of law. The action of the Revenue without providing the copy of the statement of so-called intermediaries and without showing any material to support the allegation of nexus between the assessee and the entry providers is apparently far-fetched and unsustainable. The modus operandi spelt by AO by itself, is not an adequate ground to impeach all transactions in the scrip carried on the platform of exchange and reflected in the DMAT statement unless a concerted action involving assessee is established. The additions made by the AO are thus liable to be struck down even on merits. Decided in favour of assessee. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the assumption of jurisdiction under section 147 of the Income Tax Act, 1961 by the Assessing Officer (AO) was valid.Whether the additions made under section 68 of the Act on account of alleged bogus Long Term Capital Gains (LTCG) were justified on merits.ISSUE-WISE DETAILED ANALYSIS1. Assumption of Jurisdiction under Section 147Relevant Legal Framework and Precedents:Section 147 of the Income Tax Act empowers the AO to reopen an assessment if there is 'reason to believe' that income has escaped assessment. The formation of this belief must be based on tangible material and cannot be a mere suspicion or doubt. The Supreme Court in ITO vs Lakhmani Mewal Das and the Delhi High Court in Signature Hotels P. Ltd. vs ITO have emphasized that the 'reason to believe' must be bona fide and based on specific information.Court's Interpretation and Reasoning:The Tribunal observed that the AO's reasons for reopening the assessment were vague and lacked specific details. The AO acted merely on information from the Investigation Wing without independently verifying the facts or forming a belief based on tangible evidence. The reasons recorded did not disclose any concrete material linking the assessee to the alleged bogus transactions.Key Evidence and Findings:The AO relied on an Investigation Report alleging that the assessee's LTCG from the sale of shares of CCL International Ltd. was bogus. However, the Tribunal noted that the AO failed to provide the Investigation Report or any material evidence to the assessee, and the reasons recorded were based on borrowed satisfaction from the Investigation Wing.Application of Law to Facts:The Tribunal applied the principles established in judicial precedents, emphasizing that the AO must independently form a belief based on specific and tangible material. The absence of such material in the reasons recorded rendered the assumption of jurisdiction under section 147 invalid.Treatment of Competing Arguments:The assessee argued that the reasons recorded were vague and lacked any specific material linking them to the alleged bogus transactions. The Tribunal found merit in the assessee's arguments, concluding that the AO's reasons were insufficient to justify reopening the assessment.Conclusions:The Tribunal concluded that the assumption of jurisdiction under section 147 was invalid due to the lack of specific and tangible material in the reasons recorded. The notice issued under section 148 was quashed.2. Additions under Section 68 on MeritsRelevant Legal Framework and Precedents:Section 68 of the Income Tax Act allows the AO to make additions to income if unexplained credits are found in the books of the assessee. However, the burden of proof lies on the AO to establish that the credits are unexplained or bogus.Court's Interpretation and Reasoning:The Tribunal noted that the AO's conclusions were based on assumptions and conjectures rather than concrete evidence. The AO failed to provide any material evidence linking the assessee to the alleged accommodation entries or bogus transactions.Key Evidence and Findings:The assessee provided documentary evidence, including DMAT statements and bank records, to support the genuineness of the LTCG. The AO, however, relied on statements from third parties without providing them to the assessee or allowing cross-examination.Application of Law to Facts:The Tribunal applied the principles of natural justice, noting that the AO's failure to provide evidence or allow cross-examination violated the assessee's rights. The lack of concrete evidence meant that the additions under section 68 were unjustified.Treatment of Competing Arguments:The assessee argued that the transactions were genuine and supported by documentary evidence. The Tribunal agreed, finding that the AO's conclusions were based on suspicion rather than evidence.Conclusions:The Tribunal concluded that the additions under section 68 were unjustified on merits, as the AO failed to provide any concrete evidence of bogus transactions.SIGNIFICANT HOLDINGSCore Principles Established:The assumption of jurisdiction under section 147 must be based on specific and tangible material, not vague or borrowed satisfaction from other authorities.Additions under section 68 require concrete evidence linking the assessee to unexplained credits, and the principles of natural justice must be upheld.Final Determinations on Each Issue:The notice issued under section 148 was quashed, and the assumption of jurisdiction under section 147 was held to be invalid.The additions made under section 68 were struck down as unjustified on merits.The appeal of the assessee was allowed in its entirety.