2025 (5) TMI 1545 - AT - Income Tax

Tax Reopening Nullified: Invalid Section 147/148 Notice Quashed Due to Procedural Flaws in Share Transaction Assessment

Neena Bihani Versus ITO Ward 49 (2) Income Tax Office. West Bengal

Appellate Tribunal (AT) quashed the Income Tax reopening and assessment order due to procedural irregularities. The AO's notice under section 147/148 was ... Reopening of assessment u/s 147 - reasons to believe - allegation was with regard to escapement of income pertaining to purchase of shares which led to issuance of notice u/s 148 - HELD THAT:- As in the assessment framed the ld. AO has made a very incoherent finding sometimes referring to the escapement of income and sometime stating that the assessee has not explained the purchase and sale of shares with cogent evidences with contract notes and Demat accounts, bank statement, etc. and AO himself noted that these shares were sold in the next assessment year and these shares of M/s Jackson Investment Ltd. numbered 41,000/- equity shares were sold through SMC Global Securities Limited and finally, added the same on account of Long Term Capital Gain. In our opinion there is total non-application of mind while passing the order u/s 148A(d) of the Act, issuing show cause notice and while framing the assessment at every stage as the AO was fully of casual and there was complete non-application of mind. Appeal of the assessee is allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Appellate Tribunal (AT) in this appeal include:Whether the reopening of the assessment under section 147 of the Income Tax Act was valid and justified in the facts and circumstances of the case;Whether the issuance of notice under section 148 and the subsequent assessment framed on the basis of alleged escaped income pertaining to purchase and sale of shares was legally sustainable;Whether the assessment order, which treated the transaction as long-term capital gains, was consistent with the allegations and principles of equity and fairness, given that the shares were sold in a subsequent assessment year;Whether the Assessing Officer (AO) applied mind properly and followed due process in reopening the assessment and framing the assessment order;Whether the assessee was able to substantiate the genuineness of the share transactions with adequate documentary evidence such as contract notes, demat account statements, and bank statements;Whether the addition of Rs.1,30,17,199/- as bogus long-term capital gain was justified in the absence of cogent evidence.2. ISSUE-WISE DETAILED ANALYSISValidity of Reopening under Section 147 and Issuance of Notice under Section 148The legal framework governing reopening of assessments is contained in section 147 read with section 148 of the Income Tax Act. The reopening must be based on tangible material indicating escapement of income and must comply with procedural safeguards including recording of valid reasons. The Court has consistently held that reopening must not be arbitrary or casual and requires application of mind.In the present case, the AO issued notice under section 148 on 28.07.2022, alleging escapement of income related to purchase of shares. However, the Tribunal noted that the reasons recorded by the AO were incoherent and inconsistent. The AO's own findings indicated that the shares were sold in the subsequent assessment year, yet the AO treated the entire transaction as long-term capital gains in the year under consideration. The Tribunal found the AO's approach to be a 'total non-application of mind' and 'casual,' pointing to procedural irregularities and lack of proper reasoning in reopening the assessment.The Tribunal emphasized that the AO's reasons and show cause notice pertained only to the purchase of shares, whereas the assessment order focused on long-term capital gains from the sale of shares, which were realized in a different financial year. This fundamental discrepancy undermined the validity of the reopening.Accordingly, the Tribunal held that the reopening was not sustainable and quashed the reopening and the assessment framed thereon.Assessment on the Basis of Long-Term Capital GainsThe AO's assessment was premised on the addition of Rs.1,30,17,199/- as bogus long-term capital gains, alleging that the assessee failed to substantiate the purchase and sale of shares with documentary evidence such as bank statements, contract notes, and demat account statements.The Tribunal observed that the AO's own findings acknowledged that the shares were sold in the subsequent assessment year, which contradicted the treatment of the entire amount as long-term capital gains in the impugned year. This demonstrated a lack of coherent application of legal principles governing capital gains taxation, which is contingent on the year of sale.Furthermore, the Tribunal noted that the AO did not adequately consider the evidence submitted by the assessee, nor did the AO properly evaluate the genuineness of the transactions before making the addition. The AO's failure to apply mind and reconcile the facts with the law led to an unjustified addition.Hence, the Tribunal concluded that the assessment order was legally untenable and that the addition on account of bogus long-term capital gains was not sustainable.Application of Principles of Equity and FairnessThe assessee contended that the assessment order contradicted the principles of equity and fairness, as the reopening and addition were based on allegations related to purchase of shares but assessed on long-term capital gains realized in a different year.The Tribunal agreed with this contention, highlighting that the AO's approach was inconsistent and failed to respect the principles of natural justice and fairness inherent in tax proceedings. The lack of clarity and coherence in the AO's reasoning led to a miscarriage of justice.Evidence and Burden of ProofThe AO alleged that the assessee obtained bogus accommodation entries in the form of capital gains/losses and failed to produce adequate documentary evidence. The assessee, however, had filed returns and responded to notices, asserting the genuineness of transactions.The Tribunal found that the AO did not properly evaluate the evidence or provide reasons for rejecting the documents submitted. The AO's failure to consider the evidence in a reasoned manner contributed to the flawed assessment.Treatment of Competing ArgumentsThe Tribunal carefully weighed the submissions of both parties. While the Revenue relied on the AO's findings of unexplained investments and lack of supporting documents, the assessee emphasized procedural irregularities, lack of coherent reasoning, and inconsistencies in the AO's approach.The Tribunal sided with the assessee, primarily on the ground of procedural impropriety and non-application of mind by the AO, rather than on the substantive merits of the transactions.3. SIGNIFICANT HOLDINGSThe Tribunal held:'In our opinion there is total non-application of mind while passing the order u/s 148A(d) of the Act, issuing show cause notice and while framing the assessment at every stage as the AO was fully casual and there was complete non-application of mind.''We note that AO recorded a finding that the shares were sold in the next financial year whereas the addition was made on account of long term capital gain. Consequently, we quash the reopening of assessment and also the assessment framed thereafter.'The core principles established include:Reopening of assessment under section 147 requires coherent, consistent reasons and proper application of mind;Assessment must be framed in accordance with the facts and allegations specified in the reopening notice and show cause notice;Long-term capital gains can only be assessed in the year of sale, and assessment on such grounds in an earlier year is impermissible;Failure to consider evidence and non-application of mind vitiates the assessment;Principles of equity and fairness must guide the assessment process, ensuring consistency and natural justice.Final determination was that the reopening of assessment and the assessment order based on alleged bogus long-term capital gains were quashed, and the appeal of the assessee was allowed.