2025 (8) TMI 1245 - AT - Income Tax

Reopening assessment under Section 147 quashed where no new material facts, borrowed satisfaction relied upon

ITAT KOLKATA - AT held the reopening of assessment under section 147 as invalid and quashed the consequential order. The Tribunal found no failure by the ... Validity of reopening of assessment - notice after the expiry of four years from the end of the relevant assessment year - reasons to believe - transaction carried out by the assessee in the derivative segment - as argued reasons recorded u/s. 148(2) were not provided to the appellant inspite of specific request made - HELD THAT:- Firstly, original assessment in this case was carried u/s. 143(3) of the Act and reopening has been made after four years from the relevant assessment year and the AO has failed to demonstrate as to any failure on the part of the assessee to fully and truly disclose all the material facts relating to the assessment including the aforesaid transaction carried out by the assessee in the derivative segment. Moreover, the issue relating to the losses incurred from derivative transactions was duly scrutinized and verified by the AO during the original assessment proceeding u/s. 143(3) of the Act. All the necessary information, evidences and explanation, whatsoever called for by the AO during original assessment proceeding, were duly furnished by the assessee. Assessment has been reopened by the AO on the basis of borrowed satisfaction from the Investigation Wing - AO, as observed above, did not corelate the information received from the Investigation Wing with the accounts and assessment records of the assessee, especially when all the record was available to the AO. As noted above, there is a lot of difference in the amount of derivative loss mentioned in the Investigation Wing’s report in the reasons recorded as compared to the actual derivative losses incurred by the assessee as noted in the assessment order. This shows that the AO even did not verify the facts relating to the derivative transactions and loss incurred thereto from the assessment record after getting information from the Investigation Wing. Therefore, the reopening in this case has been made by the AO on the basis of borrowed satisfaction from the Investigation of Wing. Alleged interim report of the SEBI was very much available in public domain even before passing of original assessment and no new information had come to the possession of department after passing of the assessment order - The already existing and available report cannot be made basis to reopen the assessment subsequently. It has been held time and again that for reopening of the assessment, some new tangible material must come to the knowledge and possession of the AO to form the belief that the income of the assessee has escaped assessment. Counsel has duly demonstrated that the interim report of the SEBI was not relating to the financial year under consideration. The same in fact pertained to Financial Year 2014-15. As demonstrated that in the interim report of the SEBI, it was noted that the matter was required to be further investigated and further in the final report, the SEBI has not included the name of the broker of the assessee namely M/s. GBSPL in the list of suspects, therefore, nothing adverse even against the broker of the assessee found by the SEBI. Hence, the entire case of the revenue gets demolished on this count only. Reopening in this case is held to be bad in law and, therefore, the consequential assessment order passed u/s. 147 of the Act is hereby quashed. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment under section 147 read with section 148 was valid where original assessment under section 143(3) was completed and reopening was made after the four-year period without specific finding of failure to disclose fully and truly all material facts? 2. Whether the Assessing Officer's belief that income had escaped assessment was valid when formed on the basis of information received from the Investigation Wing / SEBI report without independent application of mind or correlation with the assessee's assessment records (i.e., whether 'borrowed satisfaction' was permissible)? 3. Whether reopening could be sustained where the material relied upon (an interim SEBI report) either did not pertain to the relevant assessment year or was publicly available prior to completion of the original assessment (i.e., whether fresh/tangible material had come to AO's knowledge post-assessment)? 4. Consequential: Whether the reassessment order and additions founded on the reopening are liable to be quashed if the reopening is held invalid? ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening after four years where original assessment under section 143(3) was completed Legal framework: The first proviso to section 147 restricts reopening after four years from the end of the relevant assessment year unless the AO records that income has escaped assessment by reason of the assessee's failure to disclose fully and truly all material facts. Precedent Treatment: The Court relied on the established principle that the proviso requires demonstration of such failure to disclose; reopening cannot proceed merely on suspicion or general information absent a specific finding of nondisclosure. Interpretation and reasoning: The Tribunal found the AO made no reference in the reasons recorded to any particular failure by the assessee to disclose material facts during the original scrutiny assessment. The subject matter (losses in derivative transactions) had been specifically questioned, documentary material and explanations obtained and considered during the original 143(3) assessment. Thus no basis existed to invoke the proviso permitting reopening beyond four years. Ratio vs. Obiter: Ratio - where original assessment under section 143(3) has fully examined an issue and requisite material was furnished, the AO must identify a specific failure to disclose to reopen post-four years; failure to do so makes reopening invalid. Conclusion: Reopening was invalid on this ground and the reassessment could not stand. Issue 2 - Reliance on borrowed satisfaction from Investigation Wing / SEBI without application of mind Legal framework: For valid reopening the AO must form his own belief based on material that is examined and correlated with the assessee's records; borrowed satisfaction from another authority or wing is impermissible absent independent verification. Precedent Treatment: The Tribunal applied the controlling principle that AO's belief must be his own and based on material particulars; mere transposition of an investigative report into reasons recorded is insufficient. Interpretation and reasoning: The AO relied on information from Project Falcon / Investigation Wing and the interim SEBI report but failed to reconcile that information with the assessee's assessment record. Quantitative disparities (investigation report referenced a loss figure different from the assessee's books) and lack of follow-up enquiry indicated absence of independent scrutiny. The AO did not show any covetable fact discovered in departmental records that contradicted what was already placed on record at the time of original assessment. Ratio vs. Obiter: Ratio - reopening predicated on borrowed satisfaction without independent application of mind and without correlating the investigative material with the assessee's records is invalid. Conclusion: Reopening was held to be vitiated by borrowed satisfaction and lack of application of mind, rendering the reassessment order unsustainable. Issue 3 - Requirement of new/tangible material and relevance of period of investigative report Legal framework: Reopening is permissible only when new material comes to AO's knowledge after assessment which leads to bona fide belief that income has escaped assessment; material in public domain or available to AO prior to assessment cannot justify reopening. Precedent Treatment: The Tribunal applied the settled tenet that availability of the same information before passing the original order precludes reopening on that basis. Interpretation and reasoning: The interim SEBI report relied upon was publicly available before the date of original assessment. Further, the SEBI interim report as referenced in the reasons recorded was shown on analysis to pertain to a different financial year (FY 2014-15) and thus not relevant to the assessment year reopened (AY 2013-14). The final SEBI report later did not even include adverse findings against the broker through whom the assessee transacted. Thus (a) no new tangible material emerged after original assessment, and (b) the material relied upon was not relevant to the year under consideration. Ratio vs. Obiter: Ratio - reopening cannot validly rest on material (investigative reports) that was available before the original assessment or that does not pertain to the relevant assessment year; absence of new material is fatal to reopening. Conclusion: Reopening was invalid because the AO had no new material post-assessment and relied on a report irrelevant to the assessment year. Issue 4 - Effect of SEBI final report and lack of adverse finding against broker Legal framework: Reliability and relevance of investigative material must be established; subsequent exoneration in a final investigation weakens the basis for reassessment founded on preliminary interim findings. Precedent Treatment: The Tribunal treated definitive investigative conclusions (final report) as significant where interim or preliminary observations had been relied upon to reopen assessments. Interpretation and reasoning: The final SEBI report did not include adverse findings against the broker alleged to have facilitated alleged bogus trades. The interim report itself had invited further investigation. Reopening and consequential additions premised on preliminary, non-conclusive findings which were later not borne out were therefore unsustainable. Ratio vs. Obiter: Ratio - reliance on preliminary investigative observations that are subsequently not substantiated undermines the validity of reassessment based on such observations. Conclusion: The later absence of adverse findings in the final SEBI report contributed to quashing the reassessment. Issue 5 - Consequence of invalid reopening for consequential additions and adjudication on merits Legal framework: If reopening is quashed as bad in law, consequential reassessment and additions founded thereon fall and merits need not be adjudicated. Precedent Treatment: The Tribunal followed the ordinary consequence that invalid procedural reopening renders the ensuing assessment order void. Interpretation and reasoning: Having held reopening invalid on multiple independent grounds (failure to show nondisclosure, borrowed satisfaction, no new material, wrong period of report, and subsequent exoneration of broker), the Tribunal quashed the reassessment order. As the appeal succeeded on legal grounds, merits of the additions were declared academic and not adjudicated. Ratio vs. Obiter: Ratio - quashing of reassessment follows from invalid reopening; merits of additions need not be decided where reassessment is invalidated. Conclusion: The reassessment order and the additions were quashed; appeal allowed on legal grounds and merits left unaddressed.