AO cannot reopen the assessment only on suspicion: ITAT Mumbai

V. K. Nanavaty Share and Stock Brokers Pvt. Ltd Vs ITO (ITAT Mumbai)

In a significant ruling, the Income Tax Appellate Tribunal (ITAT) Mumbai quashed the reopening of the assessment for V. K. Nanavaty Share and Stock Brokers Pvt. Ltd by the Income Tax Officer (ITO) under section 148 of the Income Tax Act. This decision, dated May 30, 2023, concerns the assessment year 2012-13. The Tribunal found the notice issued for reopening the assessment to be wholly without jurisdiction and bad in law.

Background of the Case

V. K. Nanavaty Share and Stock Brokers Pvt. Ltd, engaged in share broking and related services on the Bombay Stock Exchange (BSE), initially filed its return of income on September 30, 2012, declaring a loss of ₹47,77,007. Later, it revised this computation, declaring a total loss of ₹45,84,419. The assessment under section 143(3) of the Income Tax Act was completed on March 23, 2015, accepting the revised loss figure.

However, the case was reopened on March 30, 2019, based on a notice issued under section 148 of the Act. The Assessing Officer (AO) noted that during the relevant year, the assessee had sold shares of M/s. VAS Infrastructure Ltd, considered “Penny Stock,” and claimed long-term capital loss (LTCL) and short-term capital loss (STCL) on these transactions. The AO argued that these transactions were part of a scheme involving circular trading, meant to manipulate share prices and create fictitious gains or losses.

Legal Issue and Assessee’s Argument

The central legal issue revolved around whether the AO had jurisdiction to reopen the assessment. The assessee challenged the reopening, asserting that the reasons recorded by the AO did not satisfy the legal requirements for such action. Specifically, they argued that:

1. The AO had not demonstrated any tangible material to justify the reopening.
2. The reassessment was based on a mere change of opinion, which is not permissible.
3. The AO had not established any failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.

Tribunal’s Examination of the Case

The ITAT examined the reasons recorded by the AO for reopening the assessment. Under section 147 of the Income Tax Act, the AO must have “reasons to believe” that income has escaped assessment, supported by tangible material. Additionally, if reopening occurs after four years from the end of the relevant assessment year, it must be shown that the assessee failed to disclose material facts fully and truly.

The Tribunal noted that the original assessment was completed under section 143(3), wherein the AO had scrutinized all relevant details, including the transactions involving M/s. VAS Infrastructure Ltd. The assessee had provided all necessary documents, such as broker contracts and transaction statements, during the original assessment.

Findings and Rationale

The ITAT found that the reopening of the assessment was based solely on a general investigation report, labeling the shares of M/s. VAS Infrastructure Ltd as penny stocks. There was no specific evidence connecting the assessee to any malpractices, such as dealing with entry operators or exit providers.

The Tribunal emphasized that “reason to believe” should be based on concrete information and not mere suspicion. The AO failed to provide any new tangible material or evidence that justified the reopening of the assessment. The Tribunal also highlighted that revisiting the same facts and details already scrutinized during the original assessment constituted a change of opinion, which is not permissible under the law.

Conclusion

The ITAT Mumbai’s decision to quash the reopening of the assessment against V. K. Nanavaty Share and Stock Brokers Pvt. Ltd underscores the importance of adhering to the legal requirements for reassessment under section 147 of the Income Tax Act. The Tribunal’s ruling highlights that reopening an assessment requires concrete and tangible material evidence, rather than mere suspicion or change of opinion. This verdict serves as a significant precedent, reinforcing the safeguards against arbitrary reassessments by tax authorities.