2025 (11) TMI 748 - AT - Income Tax

Reopening under s.147/148 void ab initio; reassessment quashed for borrowed satisfaction and reliance on incorrect broker information

ITAT KOLKATA (AT) held that reopening under s.147/148 was void ab initio and set aside the reassessment. The Tribunal found the reasons recorded were ... Validity of reopening of assessment u/s 147 - as alleged reasons recorded which are invalid and nullity in the eyes of law - non application of independent application of mind to the information received from the wing as well as on borrowed satisfaction HELD THAT:- We find that merit in the contention of AR that the correct broker through whom the assessee executed the trades was M/S preferred securities Pvt. ltd. and the evidences are available in the form of stock ledger in respect of the said broker and the contract notes in respect all the derivatives trades executed on behalf of the assessee. We also note that the assessee has never executed any trade with these 6-7 brokers as mentioned in the assessment order as well as appellate order. Therefore, the reasons were recorded with the complete non-application of mind and in a very casual manner. Reopening of assessment based on the said reasons cannot be sustained. Moreover, the assessee’s broker named was never mentioned in the investigation wing report and therefore, this was another blatant mistake on the part of the learned AO. AO has to exercise powers as conferred upon him by section 147 r.w.s. 148 of the Act with great care and caution as by exercising the reassessment jurisdiction u/s. 147, the AO unsettles the already completed assessment putting the assessee to a huge inconvenience and harassment. In the present case, the AO has incorrectly reopened the assessment by not even verifying the facts that there were no trades in F & O segments executed by the brokers referred to by the both the authorities. Therefore, reopening of assessment is void ab initio and invalid in the eyes of law on the ground of non application of independent application of mind to the information received from the wing as well as on borrowed satisfaction. Reopening proceedings set aside - Decided in favour of assessee. 1. ISSUES PRESENTED AND CONSIDERED Whether the reopening of assessment under section 147 read with section 148 was valid where the reasons recorded relied upon an investigation report but incorrectly identified brokers and thus constituted a borrowed satisfaction without independent application of mind. Whether reassessment framed on the basis of such reasons is void ab initio where the Assessing Officer failed to verify key factual particulars (identity of stock broker and transaction records) before forming the belief that income had escaped assessment. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening under section 147/148 where reasons recorded mirror investigation report and misidentify brokers Legal framework: Sections 147 and 148 require the Assessing Officer to have a reason to believe that income has escaped assessment and to record that reason; the formation of that belief must be based on tangible material and an independent application of mind by the AO rather than a mere reproduction of conclusions from an investigation report. Precedent treatment: The Court followed established decisions that hold a reasons-to-believe document invalid where it merely reproduces conclusions from an investigation without independent analysis (i.e., borrowed satisfaction doctrine); such precedents have set aside reassessments founded on non-verification and parroting of third-party reports. Interpretation and reasoning: The Tribunal found that the reasons recorded identified several brokers as the conduits for contrived losses, whereas the contemporaneous ledger and contract notes on record showed trades executed only through a differently named broker. The AO and appellate authority failed to confront or reconcile these documentary materials with the investigation report. That omission demonstrated absence of independent application of mind - the reasons were essentially a reproduction of the investigation's conclusions and contained factual inaccuracies (wrong broker identities), undermining the validity of the recorded belief. Ratio vs. Obiter: Ratio - A reasons-to-believe that reproduces an investigation report's conclusions and ignores or contradicts contemporaneous documentary evidence (here, ledger and contract notes identifying the correct broker) constitutes a borrowed satisfaction and renders reopening invalid. Obiter - Observations regarding the inconvenience and harassment caused by reassessment jurisdiction reinforce the need for cautious exercise of section 147 powers but are ancillary to the holding. Conclusion: The reopening was invalid because the AO did not independently apply mind to the tangible material available and relied on a misidentified set of brokers from the investigation report; the reasons recorded therefore amounted to borrowed satisfaction and could not sustain reassessment. Issue 2 - Whether failure to verify key factual particulars (identity of broker and transaction records) renders reassessment void ab initio Legal framework: The power to reopen is exceptional; the AO must verify material facts and form a reasoned belief grounded in evidence. The presence of primary documents (contract notes, ledger accounts) that contradict the investigation's assertions imposes a duty on the AO to examine and reconcile such material before recording reasons for reopening. Precedent treatment: The Tribunal applied controlling principles from prior rulings holding that where the AO omits verification of available records and bases reopening on uncorroborated or misapplied investigation findings, the reopening is void ab initio. The Tribunal expressly followed those authorities. Interpretation and reasoning: The record contained contract notes and a stock-broker ledger that clearly showed all derivatives trades were executed through the correctly identified broker. The AO neither noticed nor considered this evidence when recording reasons; similarly, the appellate authority affirmed the reopening without correcting the factual misidentification. That procedural and substantive lapse demonstrated non-application of independent judgment and failure to exercise statutory power with the required care and caution. Ratio vs. Obiter: Ratio - Failure to verify and reconcile primary transaction records that are inconsistent with the information relied upon for reopening converts the reasons for reopening into a nullity and renders reassessment void ab initio. Obiter - The Tribunal's admonition that reassessment powers unsettle completed assessments and therefore must be exercised cautiously supports the ratio but is not the decisive legal premise. Conclusion: Because the AO failed to verify crucial contemporaneous documents and wrongly adopted the investigation's broker identification, the reassessment was void ab initio and had to be quashed along with the consequent assessment. Cross-reference and combined conclusion The two issues are interlinked: the misidentification of brokers and the AO's uncritical reliance on the investigation report together demonstrate borrowed satisfaction and lack of independent application of mind. Applying settled principles, the Tribunal quashed the reopening and the consequential assessment. The Tribunal followed prior authorities establishing that reasons must contain followable reasons (not mere conclusions) and must be grounded in verified material before reassessment can be validly initiated.