Reassessment proceedings quashed after finding disclosed LTCG transactions were properly reported under section 10(38) exemption

ITAT Raipur quashed reassessment proceedings u/s 147/148 after finding AO's "reasons to believe" void ab initio. AO incorrectly concluded assessee failed to disclose capital gain transactions, but evidence showed LTCG was properly disclosed in exempt income column with STT paid and supporting annexure u/s 10(38). Court held reasons to believe were arbitrary, irrational and incorrect as required disclosure was already made. Reassessment order and subsequent CIT(Appeals) order deemed non-est. Appeal decided in favor of assessee against revenue.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

(a) Whether the Assessing Officer (A.O.) had valid "reasons to believe" under section 147 of the Income Tax Act, 1961 (the Act) to reopen the assessment for the assessment year 2014-15, given that the reassessment notice was issued based solely on a report from the investigation wing without any independent inquiry;

(b) Whether the "reasons to believe" recorded by the A.O. were based on correct facts, specifically regarding the alleged non-disclosure of the sale transaction of shares in the return of income (ROI);

(c) Whether the procedure prescribed under sections 147, 148 read with section 144B of the Act was properly followed by the A.O. in reopening the assessment;

(d) Whether the addition of Rs. 9,27,878/- under section 68 of the Act on account of long-term capital gain (LTCG) claimed exempt under section 10(38) was justified, considering the shares sold were genuine and there was no allegation of price rigging or involvement of the assessee in any fraudulent transaction;

(e) Whether the reassessment order passed under sections 143(3), 147 read with 144B was valid and sustainable in law, especially in light of the alleged procedural irregularities and lack of valid reasons to believe.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Validity of "Reasons to Believe" for Reopening Assessment

Relevant Legal Framework and Precedents: The reopening of assessment under section 147 requires that the A.O. must have "reasons to believe" that income chargeable to tax has escaped assessment. This "reason to believe" must be based on tangible material and not mere suspicion or conjecture. The Supreme Court has clarified that "reasons to believe" must be rational, relevant, and not arbitrary, vague, or irrelevant (State of Uttar Pradesh v. Aryaverth Chawal Udyog, [2015] 17 SCC 324). The "reason to believe" is the foundation for the validity of reassessment proceedings.

Court's Interpretation and Reasoning: The Tribunal examined the reasons recorded by the A.O., which alleged that the assessee had not disclosed the sale of shares of M/s Tilak Ventures Ltd. amounting to Rs. 9,27,878/- in the return of income, and that the transaction was a facade to introduce unaccounted income. However, the assessee's counsel demonstrated from the return of income that the LTCG on sale of shares was indeed disclosed under the column "exempt income" with corresponding securities transaction tax (STT) paid, amounting to Rs. 8,84,938/-. This disclosure was also reflected in the computation of income under the relevant schedule.

The Tribunal found that the A.O.'s reasons to believe were based on incorrect and factually wrong assertions regarding non-disclosure. The A.O. relied solely on the investigation wing's report without conducting any independent inquiry or verifying the correctness of the facts presented by the assessee.

Key Evidence and Findings: The return of income and computation annexed by the assessee clearly disclosed the LTCG transaction, supported by STT payment. The A.O.'s failure to consider this evidence rendered the "reasons to believe" arbitrary and without proper foundation.

Application of Law to Facts: Since the "reasons to believe" must be based on material and not on wrong facts, the Tribunal held that the A.O.'s reasons were void ab initio. The reliance on a mere report without independent verification failed to meet the legal threshold for reopening assessment.

Treatment of Competing Arguments: The Revenue's argument that the transaction was not disclosed was negated by the assessee's documentary evidence. The Tribunal emphasized that the absence of a provision in the ROI to directly show the receipt amount does not amount to non-disclosure, as the net exempt income after adjusting cost of acquisition was correctly reflected.

Conclusion: The "reasons to believe" recorded by the A.O. for reopening the assessment were invalid, rendering the reassessment proceedings void ab initio.

Issue (c): Compliance with Procedural Requirements under Sections 147, 148, and 144B

Relevant Legal Framework and Precedents: The procedure for reopening assessments under sections 147 and 148 read with section 144B requires strict adherence to the conditions precedent, including issuance of valid notices and satisfaction of the A.O. about escapement of income based on proper reasons.

Court's Interpretation and Reasoning: The assessee contended that the notice under section 143(2) was issued prior to the disposal of objections, which is against the prescribed procedure. The Tribunal noted procedural irregularities but primarily focused on the invalidity of the "reasons to believe" as fatal to the reassessment.

Key Evidence and Findings: The notice under section 143(2) was issued on 22/12/2019, before the objection order dated 18/02/2021 was passed, indicating procedural lapses.

Application of Law to Facts: Since the foundation for reopening-the "reasons to believe"-was invalid, the procedural irregularities further reinforced the illegality of the reassessment order.

Conclusion: The reassessment proceedings were not in compliance with the mandatory procedural requirements and thus were invalid.

Issue (d): Justification of Addition under Section 68 on LTCG Claimed Exempt under Section 10(38)

Relevant Legal Framework and Precedents: Section 68 deals with unexplained cash credits. The addition under this section requires that the assessee fails to satisfactorily explain the nature and source of the credit. Exemption under section 10(38) applies to LTCG arising from sale of equity shares where STT is paid.

Court's Interpretation and Reasoning: The A.O. invoked section 68 to add Rs. 9,27,878/- on the ground that the LTCG was unexplained and the shares were allegedly used for accommodation entries. The Tribunal observed that the shares were listed equity shares, genuine and held by the assessee, with no allegations of price rigging or fraudulent involvement. The assessee had paid STT and disclosed the LTCG in the return.

Key Evidence and Findings: The shares of M/s Tilak Ventures Ltd. were recognized as genuine by various courts, and the assessee's transactions were transparent and disclosed.

Application of Law to Facts: Since the LTCG was disclosed and exempt under section 10(38), and no adverse material was brought to show the credit was unexplained, the addition under section 68 was unwarranted.

Treatment of Competing Arguments: The Revenue's reliance on the nature of the stock as "penny stock" and suspicion of accommodation entries was not supported by concrete evidence.

Conclusion: The addition under section 68 was arbitrary and baseless and was rightly disallowed.

Issue (e): Validity and Sustainability of the Reassessment Order

Court's Interpretation and Reasoning: The Tribunal held that the reassessment order passed under sections 143(3), 147 read with 144B was void ab initio due to invalid "reasons to believe" and procedural lapses. Since the foundation for reassessment was absent, all subsequent proceedings lacked legal sanctity.

Conclusion: The reassessment order was quashed and the appeal allowed in favor of the assessee.

3. SIGNIFICANT HOLDINGS

"The mandate of law is that while invoking reassessment proceedings, the A.O should be absolutely clear in his mind that there are 'reasons to believe' that the income or part of income has escaped assessment. In this case, the A.O has formed his reasons based on wrong facts. Resultantly, the order passed u/s. 147/148 becomes null and void."

"The 'reasons to believe' recorded by the A.O for reassessment proceedings are void-ab-initio. Resultantly, all the subsequent proceedings becomes non-est in the eyes of law."

"The 'reasons to believe' on which the assessing authority bases its opinion must not be arbitrary, irrational, vague, distant or irrelevant."

"Since the 'reasons to believe' has been held void ab initio, therefore, the reassessment order passed by the A.O u/s.147/148 of the Act does not have any legal sanctity to survive, hence, it is quashed."

"The addition made by the A.O and sustained by CIT(A), NFAC is arbitrary, baseless and not justified."

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