2025 (4) TMI 336 - HC - Income Tax

Gujarat HC quashes reassessment notices under Sections 148A(b), 148A(d), 148 due to factual discrepancy in fund identification

Gujarat HC quashed reassessment notices under Sections 148A(b), 148A(d), and 148 of the Income Tax Act. The assessee had disclosed short-term capital ... Validity of reopening of assessment - allegations in the notice is against the JM Balanced Fund-Annual Dividend Option Regular Plan of JM Financial which is alleged to have manipulated accounting methodology so as to artificially inflate the distributable surplus - HELD THAT:- The petitioner has disclosed the short term capital loss suffered during the year under consideration in the computation of the income as well as return of income. On perusal of the statement placed on record pertaining to the short term capital loss from the mutual fund there is no reference to JM Balanced Fund-Dividend as stated in the reasons forming part of the notice under Section 148A (b) of the Act being the information which led to reopening of the assessment. Perusal of the impugned order u/s 148A (d) also refers to the transaction made by the assessee during the Financial Year 2017-2018 pertaining to Assessment Year 2018-2019 refers to JM Equity Hybrid Fund only and not the JM Balanced Fund whereas the allegations in the notice is against the JM Balanced Fund-Annual Dividend Option Regular Plan of JM Financial which is alleged to have manipulated accounting methodology so as to artificially inflate the distributable surplus. As relying on Karan Maheshwari [2024 (3) TMI 953 - BOMBAY HIGH COURT] rendered in the similar facts of transactions for violation of law by JM Financial AO could not have assumed the jurisdiction for reopening the assessment and adopting the same reasoning as per the aforesaid decisions, we are also of the opinion that the impugned notice as well as order are required to be quashed and set aside. Accordingly, impugned notice issued under Section 148A (b) and the order passed under Section 148A (d) and the notice issued under Section 148 of the Act of the even date are quashed and set aside. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the notice issued under Section 148A(b) and the order under Section 148A(d) and consequential notice under Section 148 of the Income Tax Act, 1961 could be sustained where the reasons for reopening rest on information originating from a survey of a mutual fund but there is no direct or live link between that information and the assessee's transactions. 2. Whether the Assessing Officer satisfied the jurisdictional pre-condition of having 'reason to believe' escapement of income where the show-cause material (a) misidentifies the mutual fund scheme(s) implicated by the survey, (b) relies on information not furnished to the assessee despite requests, and (c) contains ambiguous or inconsistent allegations. 3. Whether reliance on findings or allegations against a third-party entity (the mutual fund/its management) without material establishing the assessee's knowing participation in sham transactions can justify reopening of assessment under Sections 148A/148. 4. Whether the Court should interfere in exercise of writ jurisdiction under Articles 226 and 227 at the pre-reassessment stage where the assessee alleges denial of documents/opportunity and lack of rational nexus between information and belief of escapement. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Jurisdictional standard for reopening under Sections 148A/148: legal framework Legal framework: Sections 147, 148, 148A of the Income Tax Act, 1961 require that the Assessing Officer have 'reason to believe' that income chargeable to tax has escaped assessment; Section 148A prescribes pre-reopening procedural safeguards including issuance of notice under Section 148A(b) with information forming basis and passing of order under Section 148A(d) after considering the assessee's response. Precedent Treatment: The Court applies settled principles from Lakhmani Mewal Das v. ITO and subsequent decisions that the reasons for belief must have a rational connection or 'live link' with the information relevant to the assessee; the Court follows the approach that the power to reopen is not plenary and cannot rest on vague, remote or conjectural material. Interpretation and reasoning: The Court examines whether the reasons recorded in the Section 148A(b) notice and the Section 148A(d) order demonstrate a direct nexus between the survey-derived information and the particular transactions declared by the assessee. The Court finds that the material relied upon either fails to identify the source-date of information, conflates different schemes (JM Balanced Fund vs. JM Equity Hybrid Fund), and does not establish that the assessee participated knowingly in any sham arrangement. Ratio vs. Obiter: Ratio - reopening under Sections 148A/148 must rest on reasons that have an intelligible nexus to the assessee's transactions; vague or indirect information which does not implicate the assessee cannot sustain reopening. This is a core legal proposition applied to the facts. Conclusion: The Court concludes that the requisite jurisdictional pre-condition (reason to believe based on material with a live link to the assessee) is lacking; thus the reopening could not be legally sustained. Issue 2 - Reliance on third-party survey findings and sufficiency of nexus to the assessee Legal framework: While information may be received from third-party investigations or survey actions (Section 133A), such information must, when used to form belief for reopening, have a rational connection to the assessee and not be used merely as ipsi dixit to implicate unrelated investors. Precedent Treatment: The Court relies on the Bombay High Court decision (Karan Maheshwari) and Lakhmani principle that third-party information cannot be the sole basis for reopening unless it establishes a live link to the assessee; the Court treats those authorities as followed rather than distinguished. Interpretation and reasoning: The impugned notice alleged manipulation by the mutual fund and that 'investors' entered into sham transactions, but did not supply any material showing the assessee's knowing involvement. The Court notes the absence of specific evidence tying the assessee to the alleged scheme and that the notice itself is inconsistent in referring to different schemes, indicating non-application of mind and tenuous reliance on third-party allegations. Ratio vs. Obiter: Ratio - allegations against a third party do not automatically translate into reason to believe escapement in relation to a particular assessee; a direct nexus is necessary. Obiter - observations on the nature and scale of fund inflows and the assessee's relative position are explanatory to the application of the ratio but not essential to the legal rule. Conclusion: Reliance on the mutual fund's survey findings, without specific material connecting the assessee to the alleged sham transactions, is insufficient to justify reopening; the Court invalidates the exercise of jurisdiction on this basis. Issue 3 - Duty to provide information and opportunity before passing order under Section 148A(d) Legal framework: Section 148A(b) requires furnishing of information forming basis of the belief. The procedural regimen under Section 148A contemplates that the assessee be given sufficient information and reasonable opportunity to reply before an order under Section 148A(d) is passed. Precedent Treatment: The Court follows authorities (including the Bombay High Court decision relied upon) establishing that reliance upon information withheld from the assessee, followed by passing of an order without providing the requested documents, is a breach of the procedural safeguards and will vitiate the reopening. Interpretation and reasoning: The record shows the assessee sought documents after receipt of the Section 148A(b) notice; the respondent supplied some details only shortly before passing the Section 148A(d) order, and the Assessing Officer proceeded ignoring outstanding requests and without adequate material showing escapement. The Court treats the department's conduct as depriving the assessee of an effective opportunity to meet the case. Ratio vs. Obiter: Ratio - failure to furnish the information forming the basis of the belief and to afford a reasonable opportunity to respond undermines the validity of the Section 148A(d) order. This is a core procedural rule applied to the facts. Conclusion: The order under Section 148A(d) was passed without furnishing material relied upon and without affording a fair opportunity, rendering the order and consequent notice under Section 148 liable to be quashed. Issue 4 - Whether the Court should exercise writ jurisdiction at pre-assessment stage Legal framework: Writ jurisdiction under Articles 226/227 may be exercised to test the legality of administrative action, including the validity of reopening proceedings, particularly where jurisdictional conditions or procedural mandates are not satisfied. Precedent Treatment: The Court reiterates settled law that while courts should not ordinarily probe the sufficiency of material upon which income-tax authorities form a belief, they may examine whether reasons are relevant and bear upon the issue; where there is absence of rational nexus or manifest non-application of mind, interference is appropriate. Interpretation and reasoning: Given the identified defects - absence of live link, inconsistent identification of schemes, reliance on third-party allegations without connecting evidence, and withholding of information requested by the assessee - the Court finds writ intervention warranted at the pre-assessment stage to prevent illegality and arbitrariness in reopening. Ratio vs. Obiter: Ratio - the Court may, by writ, quash notices/orders under Sections 148A/148 where the statutory pre-conditions and procedural safeguards are not met; this is outcome-determinative. Obiter - comments on the availability of a full assessment-stage opportunity to contest merits are ancillary and permissive. Conclusion: Writ jurisdiction is properly exercised to quash the Section 148A(b) notice, the Section 148A(d) order and the Section 148 notice where the statutory and procedural prerequisites are demonstrably absent. Overall Conclusion and Disposition The Court holds that the reasons for reopening did not have the requisite rational connection or live link to the assessee's declared transactions; the impugned documentation and allegations against the mutual fund did not implicate the assessee, the Assessing Officer failed to provide material requested and misapplied mind by conflating schemes and relying on ambiguous information. Applying the principles in Lakhmani and the reasoning in the comparable High Court decision, the Court declares the notice dated 10/03/2022 under Section 148A(b), the order dated 06/04/2022 under Section 148A(d), and the consequent Section 148 notice of the same date to be unsustainable and quashes and sets them aside. No order as to costs.