Gujarat HC quashes Reopening of Income Tax Assessment on Change of Opinion

Rikin Industries Vs ITO (Gujarat High Court)

Gujarat High Court held that reopening of assessment is based on change of opinion since exact entry which was already scrutinised and accepted by department during scrutiny assessment. Accordingly, re-opening u/s. 148 is liable to be quashed.

Facts- The Petitioner entered into certain transactions in Futures & Options which resulted into loss of Rs.67,72,832/- and such loss is duly reflected in the Profit & Loss account. The case of the Petitioner was selected for scrutiny assessment. AO, while framing the assessment vide order dated 18.03.2016 under section 143(3) of the Act, consciously chose not to make any addition in respect of such loss on account of F&O transactions in view of details and explanation furnished by the Petitioner.

Thereafter, the Respondent issued the impugned notice dated 30.03.2021 u/s. 148 of the Act seeking to reopen the case of the Petitioner for the year under consideration. As an outcome of enquiry/perusal and analysis of details available on record, it was noticed that the genuineness of such transactions remained unproved. In view of the same, the Respondent has reason to believe that income of Rs.67,66,600/- has escaped assessment. Hence, the case has been reopened.

The Petitioner, vide letter dated 06.09.2021, raised objections against reopening. In view of the same, the Respondent was requested to drop the reassessment proceedings. The Respondent, vide order dated 15.12.2021, disposed off such objections and, inter-alia, held that reopening is justified.

Conclusion- Held that the petitioner had disclosed in its return for the Assessment Year 2013-14 the particulars of the loss under the head of “future and options” which was subsequently scrutinized and accepted by the Department. Therefore, the notice for re-opening the assessment on the exact entry under the head of “future and options” is based on change of opinion. The assessee cannot be said to have failed to have fully and truly disclosed all materials facts which would warrant the re-opening after a period of four years, anyways. Therefore, this petition succeeds and impugned notice issued under Section 148 of the Income Tax Act, 1961 dated 30th March, 2021 is hereby quashed and set aside. Rule is made absolute to the aforesaid extent.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1. Heard learned Senior Advocate Mr.Tushar Hemani with learned Advocate Ms. V.K.Parikh for the petitioner and learned Senior Standing Counsel Mr. Varun K.Patel for the respondent No.1.

2. Rule returnable forthwith. Mr.Varun Patel, learned Senior Standing Counsel waives service of notice of rule on behalf of the respondent No.1. Since the controversy involved is short, the matter is finally heard and disposed off.

3. This petition is filed under Article 226 of the Constitution of India with a prayer to quash and set aside the impugned notice dated 30.3.2021. Accordingly, the following prayers have been made :-

(a) quash and set aside the impugned notice at “Annexure A” to this petition.

(b) Pending the admission, hearing and final disposal of this petition, to stay the implementation and operation of the notice at Annexure “A” to this petition and stay the further proceedings for the Assessment Year 2013-14.

(c) any other and further relief deemed just and proper be granted in the interest of justice;

(d) to provide for the cost of this petition.

3.1 The brief case of the facts are as under:-

3.2 The Petitioner, during the year under consideration, was engaged in the business of manufacturing of dyes & chemicals and trading in color chemicals. The Petitioner had also entered into certain transactions in Futures & Options (hereinafter referred to as “F & O” for the sake of brevity) which resulted into loss of Rs.67,72,832/- and such loss is duly reflected in the Profit & Loss account. Such transactions were carried out through the broker namely “ASE Capital Markets Ltd.”.

3.3 The case of the Petitioner was selected for scrutiny assessment. The then Assessing Officer called upon the Petitioner to furnish various details including details pertaining to the loss on account of F & O transactions. The Petitioner, vide letter dated 10.09.2015, furnished details in respect of such loss and furnished following documentary evidences in support of the same:

(i) Ledger of F&O trading control account;

(ii) Contract note cum bills of broker;

(iii) Ledger of broker in the books of the Petitioner;

(iv) Contra ledger of Petitioner in the books of broker;

3.4 The then Assessing Officer, while framing the assessment vide order dated 18.03.2016 under section 143(3) of the Act, consciously chose not to make any addition in respect of such loss on account of F&O transactions in view of details and explanation furnished by the Petitioner.

3.5 Suddenly thereafter, the Respondent issued the impugned notice dated 30.03.2021 under section 148 of the Act seeking to reopen the case of the Petitioner for the year under consideration.

3.6 The Petitioner, in response to the impugned notice, filed return of income on 03.04.2021 and further requested the Respondent to supply copy of reasons for reopening.

3.7 The Respondent supplied copy of reasons for reopening vide letter notice 15.07.2021 issued under section 143(2) read with section 147 of the Act. Perusal of reasons for reopening reveals that the case has been reopened broadly on the count that the Petitioner has entered into transactions with ASE capital Markets Ltd. and genuineness of such transactions is not conclusively proved. Briefly, the case of the Respondent is that the case of the Petitioner has been identified as potential case flagged by the Directorate of Income Tax (Systems) after risk profiling based on enquiry reports and findings of the Directorate of Income Tax (Investigation) and Directorate of Intelligence & Criminal Investigation. The said information was sent to the office of the Respondent from the insight portal wherein enquiry reports and findings have been uploaded by the field officers of the respective directorate. As per the details available on record, it was noticed that the Petitioner had entered into transactions of Rs.67,66,600/- with ASE Capital Markets Ltd. As an outcome of enquiry/perusal and analysis of details. available on record, it was noticed that the genuineness of such transactions remained unproved. In view of the same, the Respondent has reason to believe that income of Rs.67,66,600/- has escaped assessment. Hence, the case has been reopened.

3.8 The reasons for reopening the assessment as can be found from the notice dated 15.7.2021 under Section 143(2) of the Act are as under:-

“2. The case of the assessee has been identified as potential case flagged by the Directorate of Income tax (Systems) after risk profiling based on enquiry reports and findings of the Directorate of Income tax (Investigation) and Directorate of Intelligence & Criminal Investigation. The information has been disseminated to this office through the Insight Portal wherein enquiry reports and findings have been uploaded by the field officers of the respective directorate. In this case, information has been received that during the year under consideration, as per details available on records, it is noticed that the assessee has entered into transactions of Rs. Rs.67,66,600/- with ASE Cpital Markets Ltd. As an outcome of enquiry / perusal and analysis of details available on records, it is noticed that the genuineness of the said transactions is not conclusively proved. After considering the materials available on records, I am satisfied that the said amount of Rs. Rs.67,66,600/- is required to be brought under tax net.

3. From the above details and Insight information available on the system for the year under consideration, it is found that the assessee has made transaction with ASE Cpital Markets Ltd.where during the investigation carried out by the department has revealed that the group had provided accommodation entries to the beneficiaries were unearthed as a result of the investigation.

4 The report is perused and having satisfied with the outcome and no further enquiry is necessary. I have gone through the information received and I have also gone through the material available on records. The ITBA/ITD data available in this office is also verified. The information and facts are found to be correct. On personal analysis of the data, prima facie, I have reason to believe that an amount of Rs.67,66,600/- has escaped assessment within the meaning of section 147 of the I T. Act. In view of this, the case is fit to be proceeded u/s. 147 and u/s. 148 of the I. T. Act. “

3.9. The Petitioner, vide letter dated 06.09.2021, raised objections against reopening. In view of the same, the Respondent was requested to drop the reassessment proceedings.

3.10 The Respondent, vide order dated 15.12.2021, disposed off such objections and, inter-alia, held that reopening is justified.

4.1 Learned Senior Advocate Mr. Hemani submits that the reasons for reopening are absolutely vague, scanty and non-specific. According to him, the respondent has not provided details of the date of receipt of information which is the foundation for reopening the petitioner’s case. Neither has the department provided any clarity either on the date of transactions or the nature of transactions . Further, it is not clear that the transactions pertain to an item reflected in the balance-sheet or profit and loss account and therefore, it can be safely concluded that the reopening is in a mechanical manner without any independent application of mind and devoid of any prima facie belief as to the escapement of income chargeable to tax.

4.2 Mr. Hemani, learned Sr. Advocate further submitted that there is crucial difference between ‘Futures & Option’ (F&O) and “stocks”. According to the petitioner,

(a)”Derivatives” are assets values of which are derived from the underlying assets.

(b)”Futures” and “Option” fall within the ambit of “Derivatives”;

(c)Futures” are essentially a contract which casts an obligation on the buyer to purchase / sell a specific asset at a specific future date and at a specific price unless holder’s position is closed prior to expiration;

(d)”Option” is a contract which gives its buyer an option, but not obligation, to purchase / sell a specific asset at a specific price at any time during the life of contract,

(e) Transactions in “Futures” & “Option” (hereinafter referred to as “F&O”) are carried out on the floor of “recognized stock exchange”;

(f)”Transactions in F&O” are very much different from “transactions in shares”;

(g) Transactions in F&O are “strictly regulated by SEBI and have “no connection with the underlying shares”;

(h) Unlike “stocks”, there are very few “F&O” wherein trading is permissible on recognized stock exchange;

(i) Unlike “stocks” (where there can be a “penny stock”), there is nothing like “penny F&O”.

4.3 In view of the aforesaid vital differences between F&O and ‘stocks’ there could never be any ‘non genuine loss’ in F&O transcation and thus there could not be any escapement of income chargeable to tax on the aforesaid basis. Lastly, it was submitted that the assessment for the year under consideration was framed under Section 143(3) of the Act and the same is sought to be reopened beyond the period of four years from the end of the relevant assessment year and therefore, the petitioner having filed a return under Section 139 of the Act and disclosed fully and truly all material facts necessary for its assessment for that Assessment Year, the impugned notice issued by the respondent deserves to be quashed.

5.1 Mr. Varun Patel, learned Senior Standing Counsel appearing for the respondent submitted that the petition is filed at a pre-mature stage inasmuch as only a notice u/ s 148 read with section 147 of the Income Tax Act (‘the Act’ for short) for A.Y. 2013-14 has been issued. In the event, the petitioner is aggrieved by the reassessment, alternative efficacious remedy is available by way of an Appeal to the CIT(A) and thereafter to the Tribunal as per the provisions of the Act. On this ground alone, learned Senior Standing Consel Mr. Patel submitted that the petition is devoid of any merits and be summarily rejected.

5.2 He has further submitted that the reopening has been resorted to on the basis of information received under “Project Falcon” from DGIT(Investigation), Mumbai in March, 2021 through Insight Portal regarding coordinated and premeditated trading by brokers on behalf of their clients on the Bombay Stock Exchange by engaging in reversal trades in illiquid stock options resulting in non-genuine business loss/gains to the beneficiary. He has further submitted that the present petitioner is a party to such manipulation through ASE Capital Markets Ltd. and is the beneficiary of such fictitious loss and the petitioner had consistently recorded losses for each contract.

5.3 He has further submitted that thus, based on the analysis of trade data and comparing with chief characteristics of reversal trades, the Assessing Officer is of the prima facie belief that the petitioner has indulged in generating non-genuine loss amounting to Rs. 67,66,600 by trading in illiquid stock options on the BSE during the year under consideration and such amount has escaped assessment on account of failure on part of the petitioner to disclose truly and fully all material facts necessary for assessment.

5.4 Learned Senior Standing Counsel Mr. Varun Patel for the respondent submitted that the contention of the petitioner that the losses are genuine are merely self serving inasmuch as, there is coordinated and pre­meditated trading by brokers on behalf of their clients on the Bombay Stock Exchange by engaging in reversal trade in illiquid stock options resulting in non-genuine business loss/gains to the beneficiary since the petitioner is one of such beneficiary, their case must be dealt with during the course of reassessment proceedings, strictly on merits.

5.5 Learned Senior Standing Counsel Mr. Patel vehemently stressed that since the assessee is the beneficiary of a non-genuine loss, that by itself goes to show that there is a failure on the part of the petitioner with regard to full and true disclosure. It is further submitted that since the Assessing Officer has best the reopening on new and tangible material available with the office and armed with the knowledge based on the report of the investigation wing that the petitioner has booked fictitious losses and illegal trade, the reopening of assessment on the basis of such newly disclosed material is fully justified. Mr. Patel, learned Senior Standing Counsel concluded by submitting that there are many cases where under the investigation of reversal project (Falcon) where there have been no losses booked by the assesses. However, in the present case, where a huge loss has been booked by the petitioner, the petitioner’s case must stand on a different footing.

5.6 In view of the aforesaid Mr.Patel submitted that this Court must not interfere in the reassessment proceedings and present petition deserves to be dismissed.

6. Having heard learned advocates appearing for the respecitve parties and on perusal of the records, this Court arrives at the following findings :-

(i) It will be seen from the profit and loss account for Assessment Year 2013-14 that the petitioner had shown the losses on futures and Options amounting to Rs.67,72,832/- in the profit and loss account for the relevant year. Based upon such disclosure the assessment proceedings of the petitioner came to be finalized. Thereafter, the department had undertaken scrutiny assessment proceedings for A.Y. 2013-14. In the petitioner’s response to such scrutiny, the petitioner by communication dated 10.09.2015 had categorically submitted as under:-

“In regard to your requirement to submit details in respect of F & O trading loss claimed of Rs.67,72,832/-for which, we submit herewith copy of ledger account of F & O Trading Control account with contact cum bills of broker viz ASE Capital Markets Ltd copy of ledger account of the said broker from our books as well as the contra account from the books of the said broker.

(ii) Based upon such response, the department concluded assessment proceedings by assessment order dated 18.03.2016 the total income of the assessee was recomputed as under:-

After verification and discussion and from the date made available, the total income of the assesee is computed as under:-

Assessed u/s.143(3) of the Income tax Act, 1961. Charge Interest u/s.234A, 234B, 234C & 234D as the case may be. Give credit for pre-paid taxes, if any, after due verification. Issue demand notice. Penalty notice u/s. 271(1)(c) of the Act issued.”

(iii) Thereafter, the notice under Section 148 of the Act was issued on 30.03.2021 and the reasons were supplied on 15.07.2021.

7. We find that the petitioner had categorically responded to the issues raised against the petitioner in respect of the F&O trading loss as under:

“8. “In this connection, on going thoroughly the observations/contents for re-opening the completed assessment for A.Y.2013-14, we could notice in Para-2 the observation and conclusion reproduced as under:

“Para 2

In his case, information has been received that during under consideration, as per details available on records, it is noticed that the assessee has entered into transaction of Rs.67,66,600/- with ASE Capital Market Ltd. As an outcome of enquiry/ perusal and analysis of details available on records, it is noticed that the genuineness of the said transaction is not conclusively proved. After considering the materials available on records, I am satisfied that the said amount of Rs.67,66,600/- is required to be brought under tax net.”

Your observation as re-produced hereinabove carries many flaws in so far as the alleged amount of transaction entered with ASE Capital Market Ltd as mentioned by you is incorrect as against the correct amount of Rs.67,72,832/- being Future & Option trading loss incurred debited to P&L account. Hence, details available on your records for forming your opinion for bringing the said alleged amount to tax is fallacious since, your observation based on your records simply refers to the transaction and not F&O trading loss. Hence, on the basis of such wrongful observation, no alleged amount of Rs.67,66,600/- could be brought to tax.

Observations made under Para-3 and Para-4 are general in nature and in the form of simple wild allegation which does not conclusively prove as to how the transactions entered into with ASE Capital Market Ltd has provided accommodation entries to the beneficiaries were unearthed as a result of Investigation and hence, such incorrect and Invalid observations cannot termed as your independent satisfaction capable of invoking provisions of Section 147 of the IT Act, 1961.

Para-6

“It is pertinent to mention here that the assessee filed return of income but chosen not to disclose fully and truly all particulars of income in the ITR filed as discussed above and no assessment was made in this case.”

Your above referred observation re-produced is completely lie and far from the truth. The correct fact is that in P&L account filed with the ROI, an amount of Rs.67,72,832/- was debited claiming is as Future & Option Loss. Such details along with audited B/S, P&L account and all required Annexures etc were filed along-with the original RIO filed and thus, all material facts were disclosed fully and truly by way of particulars with ROI. It is further submitted that in our case, detailed Scrutiny assessment was under taken and in response to the various enquiries made during the said assessment proceedings, a reply dt. 10-09-2015 was furnished with all supporting evidences. Your kind attention is drawn to the reply given under Para-9 of the said reply dated 10-09-2015 which is reproduced for the sake of your reference as under:

“In regard to your requirement to submit details in respect of F & O trading loss claimed of Rs.67,72,832/- for which, we submit herewith copy of Ledger account of F & O trading Control account with contract cum bills of broker Viz. ASE Capital Market Ltd, Copy of Ledger account of the said broker from our books as well as the contra account from the books of the said broker.”

On the basis of above mentioned submission made in reply dated 10-09-2015, the then A.O. Ward 1(2)(5) was convinced and satisfied about the allowability of the claim of F & L trading loss and thus, passed the assessment order u/s 143(3) of the IT Act vide dated 18- 03-2016 without disallowance of the said claim of loss. Thus, your observation made in this regard is false and misleading. In view of such factual backdrop, your actions to re-open the completed assessment on wrong presumption cannot be pursued. We furnish herewith the copy of reply dated 10-09-2015 along-with all the attachment forwarded to AO by way of supporting evidences. We also file here-with copy of assessment order passed u/s 143(3) dated 18-03-2016 for your perusal. Thus, the genuineness of the transaction entered with ASE Capital Market Ltd was conclusively proved.

8. The aforesaid objections were disposed of by order dated 15.12.2021 wherein, the respondent by categorically holding as under :-

“4. The objection of the assessee that the reopening of assessment has been made on the basis of wrongful observation is not acceptable. The assessee has accepted that it had entered into transactions with M/s.ASE Capital Market Ltd. which formed the basis of information. The differences in the amount of transactions as per the Department’s records and as per the assessee can be proven during the course of reassessment proceedings. Whether the contentions of the assessee for the reopening is correct or not can be determined only through scrutiny of the facts and law and for the very purpose, the assessment has been reopened. Without going through the process of assessment proceedings by giving opportunity to the assessee as per law, etc., it would not be possible to arrive at a decision.” 

9. Thus, we find that at no point of time was there any failure on the part of the petitioner.

“(i) to make a return u/s. 139 or in response to the notice issued under sub-section (1) of section 142 or section 148;

(ii) to disclose fully and truly all material facts necessary for his assessment for that Assessment Year”

10. Having gone through the assessment proceedings and scrutiny where, the specific issue of losses on account of F&O trade was raised by the department, it cannot be held that the department was justified in reopening the assessment for Assessment Year 2013-14, which, we may add, has been done mechanically without application of mind, in the absence of any tangible material.

11. It also appears from the reasons recorded that the no verification of the material on record is made by the respondent and there is no independent opinion that any income has escaped assessment due to any failure on the part of the assessee in not disclosing fully and truly all material facts necessary for assessment.

12. Moreover, from the reasons recorded it appears that the initiation of reopening proceedings are on the borrowed satisfaction as no independent opinion is formed and on bare perusal of the reasons recorded, it emerges that the Assessing Officer, considering the information received from the insight portal, has issued impugned notice forming reason to believe that the income has escaped the assessment on the presumption that the petitioner has been involved in creating the non-genuine profit which is already offered to tax in the return of income which is accepted in the regular course of assessment by passing the order under section 143(3) of the Act.

13. It is also pertinent to note that there is no basis to form reasonable belief for escapement of income except the information made available on the insight portal. The respondent-Assessing Officer has not considered the material on record to come to the conclusion that there is failure on the part of the petitioner to disclose truly and fully all material facts to have reason to believe for escapement of income. Therefore, on the basis of the information received from another agency on insight portal or from the SEBI report, there cannot be any reassessment proceedings unless the respondent, after considering such information/material received from other sources, consider the same with the material on record in the case of the petitioner assessee and thereafter, is required to form independent opinion that income has escaped assessment. Without forming such opinion solely and mechanically relying upon the information received from the other sources, the respondent-Assessing Officer could not have assumed the jurisdiction to reopen the assessment based on such information. This view is fortified by the decision of this Court in case of Harikishan Sunderlal Virmani vs. Deputy Commissioner of Income Tax reported in 394 ITR 146.

14. Considering the facts the case, we are of the opinion that the respondent-Assessing Officer could not have assumed the jurisdiction merely and solely relying upon the information made available on the insight portal without forming any independent opinion on the basis of the material on record vis-a-vis the petitioner is concerned.

15. This Court has held in the decision of this Court in the case of The Principal Commissioner of Income Tax-1 Vs. M/s. Farmson Pharmaceuticals Gujarat Pvt. Ltd. passed in Tax Appeal No. 229 of 2024 following the decision in the case of CIT Vs. The Kelvinator of India Ltd. reported in (123 Taxmann.com 433) as under:

“9. Respectfully following the above judicial precedents, we have no hesitation in holding that when there is no failure on the part of the assessee in disclosing the income and No new tangible material on record, the reopening of assessment after 4 years period amounts to “change of opinion” only. Therefore the reopening of assessment invalid in law. Thus the finding arrived by the Ld. CITIA) does not require any interference. Therefore the grounds raised by the Revenue is devoid of merits and the same is hereby dismissed.

10. In the result, the appeal filed by the Revenue is hereby dismissed.”

16. In view of the foregoing reasons, this Court is of the opinion that the petitioner had disclosed in its return for the Assessment Year 2013-14 the particulars of the loss under the head of “future and options” which was subsequently scrutinized and accepted by the Department. Therefore, the notice for re-opening the assessment on the exact entry under the head of “future and options” is based on change of opinion. The assessee cannot be said to have failed to have fully and truly disclosed all materials facts which would warrant the re-opening after a period of four years, anyways. Therefore, this petition succeeds and impugned notice issued under Section 148 of the Income Tax Act, 1961 dated 30th March, 2021 is hereby quashed and set aside. Rule is made absolute to the aforesaid extent. No order as to costs.