Rita Rajkumar Singh Vs ACIT (Bombay High Court)
Summary: The Bombay High Court, in Rita Rajkumar Singh Vs Assistant Commissioner of Income Tax, Central Circle–4(1) & Ors., quashed reassessment proceedings for Assessment Year 2013-14 initiated in relation to alleged penny stock transactions involving Finalysis Credit and Guarantee Company Ltd. The Court held that where an assessment had already been completed under Section 143(3) of the Income Tax Act, 1961, reopening beyond four years was subject to the additional statutory requirement that income had escaped assessment because of the assessee’s failure to disclose fully and truly all material facts necessary for assessment. Since the assessee had specifically disclosed the disputed share transactions during the original assessment proceedings, the jurisdictional condition for reopening was not satisfied.
The assessee had filed her return of income on 13 September 2013 declaring nil total income. During scrutiny proceedings, the Assessing Officer issued a notice dated 12 November 2015 under Section 142(1), specifically seeking details of capital gains claimed as exempt and proof of payment of Securities Transaction Tax (STT). In response, the assessee submitted a letter dated 28 December 2015 furnishing particulars of long-term capital gains, relevant contract notes and supporting evidence of STT payment. These documents included the purchase and sale of shares of Finalysis Credit and Guarantee Company Ltd. After examining the submissions, the Assessing Officer completed the assessment on 11 February 2016 under Section 143(3), accepting the returned income.
Subsequently, the assessee received a notice dated 28 March 2021 under Section 148 alleging escapement of income. The recorded reasons referred to information received from the Deputy Director of Income Tax (Investigation), Mumbai, describing Finalysis as a penny stock company. According to the investigation material, the company’s share price had risen from approximately Rs.7 in March 2012 to Rs.180 in March 2013 before falling to Rs.5 in October 2013. The Revenue also relied upon statements of directors allegedly admitting that Finalysis was a paper company. It was alleged that the assessee had sold shares worth Rs.29,37,208 during the relevant assessment year and that the transaction warranted reassessment.
The High Court observed that the recorded reasons themselves acknowledged that the assessee had disclosed her transactions in Finalysis during the original scrutiny proceedings. The Assessing Officer had raised a specific query concerning capital gains and the assessee had furnished the relevant details and supporting documents. Consequently, the transactions were already under active consideration during the original assessment. Applying the principle recognised in Aroni Commercials Ltd. v. Deputy Commissioner of Income Tax 2(1), [2014] 44 taxmann.com 304 (Bombay), the Court reiterated that once an Assessing Officer raises a query and the assessee replies, the matter is treated as having been considered, even if the assessment order does not expressly discuss it.
The Revenue argued that subsequent investigations had revealed the alleged manipulation of Finalysis shares and that the Department was entitled to examine persons claiming non-genuine transactions. However, the Court noted that neither the recorded reasons nor the Revenue’s affidavit alleged that the assessee was the mastermind of, or actively involved in, manipulation of Finalysis share prices. The statement of Mr. Bipin Divecha, relied upon by the Revenue, also did not establish such involvement. The Court expressly clarified that whether trading in Finalysis shares actually resulted in escapement of income was a separate question that it was not deciding in the writ petition.
Examining the first proviso to Section 147 as applicable to the proceedings, the Court held that the Revenue had failed to establish the necessary condition for reopening an assessment completed under Section 143(3) after expiry of four years. The mere receipt of later investigation information could not overcome the fact that the assessee had already disclosed the relevant share transactions and responded to the Assessing Officer’s queries. This distinction is also relevant to the broader principles governing reopening of completed assessments beyond four years and the prohibition against reassessment based solely on a reconsideration of previously examined facts.
Accordingly, the Bombay High Court granted relief in terms of prayer clause (a), setting aside the impugned reassessment notice, scrutiny notice, sanction and order challenged by the petitioner. The writ petition was disposed of. The decision reinforces that the statutory disclosure-failure requirement for reopening beyond four years must be independently satisfied, even where the Revenue subsequently obtains information suggesting that an earlier disclosed transaction may be questionable. A related application of the same statutory principle appears in TaxGuru’s discussion of penny stock reassessment and the four-year limitation.
Cases Discussed
Aroni Commercials Ltd. v. Deputy Commissioner of Income Tax 2(1) — [2014] 44 taxmann.com 304 (Bombay High Court); also reported at [2014] 362 ITR 403 (Bom.): Relied upon for the principle that when the Assessing Officer raises a query during scrutiny assessment and the assessee responds, the issue is treated as having been considered. The assessment order need not expressly discuss every query or record satisfaction on every reply. The Bombay High Court applied this principle in holding that the disclosed Finalysis share transactions had already been examined in the original assessment.
FULL TEXT OF THE JUDGMENT OF BOMBAY HIGH COURT
1. Petitioner is an individual assessed to tax. Petitioner had, for the Assessment Year 2013-2014 filed return of income under Section 139 of the Income Tax Act, 1961 (the said Act) on 13th September, 2013 declaring a total income a “Nil”. Petitioner thereafter received a notice dated 12th November, 2015 under Section 142(1) of the Act, calling upon Petitioner to produce the accounts and documents mentioned therein. One item which is relevant to the Petition at hand is at serial No.6 in the said notice and it reads, “During the year you have declared capital gain on sale of shares and claimed the same as exempt. Please furnish the following statement with proof of payment of STT”.
By a letter dated 28th December, 2015, Petitioner filed a response to the notice and provided details of long term capital gain on sales of shares claimed as exempt (enclosed as Annexure-5) and attached contract notes showing payment of STT. In these documents to which Mr. Thakkar took us through, Petitioner has disclosed the purchase and sale of shares in Finalysis Credit and Guarantee Company Ltd. (Finalysis). Following this, an assessment order dated 11th February 2016 came to be passed, accepting Petitioner’s income as per the return of income filed. In the assessment order, it is also mentioned notices were issued under Sections 142(1) and 143(2) and Petitioner had also submitted all documents including copies of audit report, balance-sheet and profit and loss account.
2. Over four years later, Petitioner received a notice dated 28th March, 2021 under Section 148 of the Act alleging that there were reasons to believe that Petitioner’s income chargeable to tax for A.Y. 2013-14 has escaped assessment within the meaning of Section 147 of the Act. At Petitioner’s request, reasons recorded for re-opening was also provided vide communication dated 1st July, 2021. As per the reasons recorded, based on information received from DDIT (Inv)-8(1), Mumbai, Petitioner had done transactions in the share of Finalysis which is a penny stock company traded in the Bombay Stock Exchange. The share price of Finalysis moved from a low of Rs.7/- per share in March 2012 to Rs.180/- in March 2013 and dipped to Rs.5/- in October 2013. Since the financials of Finalysis for that period did not support such a huge share price move, investigations have been carried out by SEBI on Finalysis. The reasons also mentioned that statements of directors of Finalysis have been recorded and they have admitted that the Company was a paper company. Investigation revealed that Petitioner had sold shares of Finalysis worth Rs.29,37,208/- during the relevant assessment year and therefore, assessment of the said transactions has escaped assessment. As per the reasons, admittedly Petitioner has disclosed during the assessment proceedings and it is seen that Petitioner has claimed long term capital gain at 10% of Rs.29,37,208/-. Thus, information received by the DDIT (Inv)-8(1) has live link with the financials of Petitioner. We have to emphasize that in the reasons itself Respondents admit that Petitioner has disclosed during the assessment proceedings that Petitioner had traded in Finalysis.
3. This is a case where the proposed re-opening is after expiry of four years from the end of the relevant assessment year. Admittedly, assessment under Section 143(3) has been completed and an assessment order dated 11th February, 2016 has also been passed. In fact, the assessment order is under Section 143(3) of the Act. Therefore, the proviso to Section 147 of the Act would apply which provides that re-opening of assessment after four years from the expiry of the end of the relevant assessment year is barred unless escapement of income has happened due to failure on the part of assessee to truly and fully disclose material fact for the relevant assessment year. The onus is on Respondents to show that there was such a failure on the part of Petitioner to truly and fully disclose.
4. It is also trite that if during the assessment proceedings a query is raised and the assessee has replied to it, it follows that the query raised was a subject of consideration of the Assessing Officer while completing the assessment and it is not necessary that the Assessment Order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. (Aroni Commercials Ltd. v. Deputy Commissioner of Income Tax 2(1)1).
5. It is not clear when the investigation was commenced, though Mr.Thakkar states that investigation commenced on Finalysis much before the assessment order in Petitioner’s case was passed. The entire basis of Respondents’ case is that in 2020 Respondent No.1 got information that Finalysis was a paper company or a penny stock company based on certain investigations. Mr.Suresh Kumar submitted that it came to light during the investigation that Petitioner also had traded in the scrip of Finalysis during A.Y. 2013-2014 and therefore, Respondent was entitled to re-open. Mr. Suresh Kumar submitted that revenue has to go to the root of the matter and take action against those involved in this price rigging and assess people claiming non genuine transactions in its books. We have to note that there is no allegation at all in the reasons recorded for re-opening or in the Affidavit in Reply that investigations have revealed that Petitioner was the master mind or actively involved in rigging of share price of Finalysis in the stock market. Whether trading in Finalysis shares would result in escapement of income is a separate question which we are not dealing with in this matter because, that is not the subject of consideration. Even in the statement of Mr. Bipin Divecha on which reliance has been placed, it does not show anywhere Petitioner was involved.
6. Therefore, what we have to see in this case, since re-opening is proposed after the expiry of four years from the end of the relevant assessment year, whether there has been any failure on the part of Petitioner to disclose truly and fully material facts. As noted earlier the reasons recorded admit that Petitioner had disclosed that it had traded in the shares of Finalysis. To a query raised under Section 142(1), Petitioner has also admitted that it has traded in Finalysis and even provided documents thereto. The issue of capital gains from shares which included the shares of Finalysis was under active consideration before the Assessing Officer. That would also show there was no failure to disclose. Therefore, it cannot be stated that Respondents have crossed the threshold or the fetter provided for in the proviso to Section 147 of the Act that re-opening after the expiry of four years is permissible only when there is failure to truly and fully disclosed material facts.
7. In these circumstances, in our view, Petitioner should be granted relief in terms of prayer clause (a), which we hereby grant and the same is reproduced hereunder :
“(a) that this Hon’ble Court be pleased to issue a Writ of Certiorari or any other writ order or direction under Article 226/227 of the Constitution of India calling for the records of the case leading to the issue of the Impugned Notice dated March 22, 2021 (Exhibit E), issuance of Impugned Scrutiny Notice dated June 28, 2021 (Exhibit G), Impugned Sanction dated March 22 2021 (Exhibit O) and passing of the Impugned Order dated January 29, 2022 (Exhibit M) and after going through the same and examining the question of legality thereof quash, cancel and set aside the Impugned Notice dated March 22, 2021 (Exhibit E), the Impugned Scrutiny Notice dated June 28, 2021 (Exhibit G), the Impugned Sanction dated March 22, 2021 (Exhibit O) and the Impugned Order dated January 29, 2022 (Exhibit M).”
8. Petition disposed accordingly.
1 [2014] 44 taxmann.com 304 (Bombay). ↩
