Reopening of assessment u/s. 148 for making fishing inquiry is not permissible under law

DCIT Vs Rakesh Ramanlal Shah (Supreme Court of India)

Supreme Court held that reopening of assessment under section 148 of the Income Tax Act for making a fishing inquiry without any live link or fresh material is not permissible under the law. Accordingly, notice u/s. 148 quashed and set aside.

Facts- By this petition under Article 226 of the Constitution of India, the petitioner has challenged the notice dated 30.03.2021 issued under section 148 of the Income Tax Act,1961.

Conclusion- Held that on the basis of the information received from DDIT Investigation Unit-5(1), New Delhi, the respondent has formed a prima facie belief that there is escapement of income as the petitioner has earned substantial amount of long term capital claiming the same as exemption under section 10(38) of the Act. However, reasons recorded do not disclose any live link or fresh material to connect the transaction entered into by the assessee with the information in possession of the Assessing Officer. Therefore, it is clear that the Assessing Officer has assumed the jurisdiction on the basis of the borrowed satisfaction without there being any live link between the information and the material on record. It is therefore, apparent that the impugned notice under section 148 of the Act is issued for making a fishing inquiry which is not permissible under the law.

FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER

Heard the learned Additional Solicitor General appearing for the petitioners.

Delay condoned.

No case for interference is made out in exercise of our jurisdiction under Article 136 of the Constitution of India. The Special Leave Petition is accordingly dismissed.

Pending application, if any, also stands disposed of.

1. Heard learned advocate Mr. B.S.Soparkar for the petitioner and learned Senior Standing Counsel Mr. Varun K. Patel for the respondents.

2. Rule returnable forthwith. Learned Senior Standing Counsel Mr. Varun Patel waives service of notice of rule for the respondents.

3. Having regard to the controversy in narrow compass, with the consent of the learned advocates for the respective parties, the matter is taken up for final hearing.

4. By this petition under Article 226 of the Constitution of India, the petitioner has challenged the notice dated 30.03.2021 issued under section 148 of the Income Tax Act,1961 [for short ‘the Act’].

5. Brief facts of the case are as under:

5.1 The petitioner filed return of income for Assessment Year 2014-15 on 26.07.2014 declaring total income of Rs. 39,61,071/-.

5.2 The return of the petitioner was processed and the case of the petitioner was selected for scrutiny. A detailed scrutiny was undertaken by the Assessing Officer by issuing notice dated 21.09.2016 under section 142(1) of the Act requiring the petitioner to furnish various details relating to the capital gain earned during the year under consideration along with documentary evidence. The petitioner filed detailed reply dated 09.11.2016 furnishing requisite details. The Assessing Officer passed the assessment order under section 143(3) of the Act on 18.11.2016 and has assessed income without making any addition.

5.3 Thereafter, the respondent No.1 issued impugned notice under section 148 of the Act asking the petitioner to file return of income for A.Y. 2014-15.

5.4 The petitioner filed return of income in compliance of the notice under section 148 of the Act on 24.07.2021 and also sought for copy of reasons recorded for reopening of the assessment.

5.5 Respondent No.1 provided the copy of the reasons recorded which are reproduced hereunder:

“BASIS OF FORMING REASON TO BELIEVE AND DETAILS OF ESCAPEMENT OF INCOME:

An information was received from DDIT (Inv)Unit §(1), New Delhi wherein, beneficiades of penny stock of Looks Health Services Ltd was discussed. As per the information, the Looks Health Services Ltd is a penny stock company, which has been used by beneficiaries (sellers of shares) to launder money in the grab of long term Capital Gains while claiming tax exemption under section 10(38) of the IT Act. As per the information, the assessee is one of the beneficiaries/memher of this, syndicate. The DDIT further reported that large. scale manipulation of trades and fabricated trading activity has taken place in the scrip. This has led to generation of fictitious profits and loss derived by various traders which were not genuine and were pre-determined. It can also be stated that the trades were carried out between a set of very few persons which were responsible for trade matching and placing huge orders which were matched against the corresponding counter orders immediately after the orders are placed. Even the price of the scrip was manipulated by the traders by manipulating closing price of the scrip on a particular trading day. This is important as closing price direcily influences the opening price of the next trading day. This also is necessary to artificially jack up the price of the scrip so that it can be raised up to certain level and the shares are sold to predetermined parties thereby earning bogus longterm capital gains which is exempt from tax u/s 10(38) of the Income Tax Act, 1961. Reverse modus operandi is adopted in order to provide entry of bogus ShortTerm Capital Loss. As per the information, the assessee has indulged in this sham transaction and has made total sale during the year of Rs. 2,27,30,800/-.

In the investigation report, it is reported that the assessee had received an amount of Rs. 2,27 ,30,800/as the sale consideration on account of sale in the shares of Looks Health Services Ltd. Further, looking to the investigation report, the transaction in this share is to be considered as sham. Therefore, the entire sale consideration received by the assessee has to be considered as unexplained income. The assessee who received Rs. 2,27,30,800/from the selling of Looks Health . Services Ltd shares is also one of the bogus beneficiary of long term capital gain to be claimed exempt income u/s. 10(38) of the Act or artificial loss. Hence, the only un-rebuttable conclusion is that the assessee has concealed the particulars of his income by introducing bogus exempted long term ’ capital gain on sale of shares of Looks Health Services Ltd and thus, the same is out of the ambit of tax-net. In view of the above facts and circumstances of the case, | have reason to believe that the income chargeable to tax has escaped to the extent of Rs. 2,27,30,800 /for the A.Y. 2014-15 within the meaning of section 147 of the |.T. Act,1961 and this is a fit case for re-opening by issuing the notice u/s 148 of the Act.”

5.6 The petitioner filed objections before the respondent No.1 and pointed out the following facts:

• • “The assessee has subscribed to the initial Public Offer of the Monarch Health Services Ltd (Now Known as Looks Health Services Ltd) and by virtue of the same the assessee has been allotted with 54000 equity shares of the said company. The said shares were de materialized and credited to the DEMAT Account of the assessee on 26.05.2012. A copy of such DEMAT statement showing such credit of shares is attached herewith vide Annexure-I.
  • The said shares were sold on the floor of recognized stock exchange through registered stock broker namely Networth Stock Broking Ltd having its registered office at 1001/1002, 10^thFloor, Opp. Udhyog Bhavan, Garegaon (E), Mumbai. The copies of contract note cum bill of the sale of shares are attached herewith vide Annexure 2. Such shares were debited from the DEMAT statements attached in Annexure 1 herein above.
  • The above sale transaction of share was subject to Security Transaction Tax (STT) The form for evidence of payment of STT entered in a recognized stock exchange in Form No. 10DB is enclosed herewith for your perusal vide Annexure 3.
  • The sale proceeds form the
    aforesaid sale transaction was credited to the assessee’s bank account through RTGS in its Savings Account.”

5.7 The respondent-Assessing Officer No.1, however, rejected the objection by order dated 10.08.2021. It appears that the petitioner again requested to supply reasons recorded separately instead of providing extract of the reasons recorded and filed objection on 18.08.2021. The respondent No.2 disposed of the objections filed by the petitioner on 08.02.2022. The petitioner has therefore preferred this petition challenging issuance of impugned notice.

6. Learned advocate Mr. Soparkar for the petitioner submitted that the impugned notice is without jurisdiction as the petitioner has disclosed fully and truly all the material facts at the time of filing of the return and during the course of regular assessment by providing the details of purchase and sales of the shares of M/s. Monark Health Care Limited [Now known as Looks Health Services Limited].

6.1 It was submitted that the petitioner has purchased the shares through Initial Public Offer [IPO] of the said Company by investing Rs. 21,60,000/-on 25.05.2012 and later on sold the shares in five batches from 28.10.2013 to 29.01.2014 through the registered share broker on the stock exchange and the petitioner has also received the consideration of sale of the share through RTGS in the bank account. It was therefore, submitted that the reasons recorded by the respondent No.1 for reopening assessment are based upon the borrowed satisfaction and therefore, the action of reopening is without jurisdiction.

6.2 In support of his submissions, reliance is placed on the following decisions:

• • Principal Commissioner of Income Tax (Central) vs. Affluence Commodities (P) Ltd reported in [2024] 161 com479 (Guj);
  • Shashi Mohan Garg vs Income Tax Officer reported in [2023] 157 com549 (Delhi);
  • Jainam Investments vs. Assistant
    Commissioner of Income Tax, Central Circle 8(1), Mumbai reported in [2021] 131 com327 (Bombay);
  • Rita Rajkumar Singh vs. Assistant Commissioner of Income Tax reported in [2022 ] 139 com245 (Bombay)

6.3 Learned advocate Mr.Soparkar further submitted that re-opening is done by the respondent No.1 for fishing inquiry for purchase and sale of the shares on the basis of the information received without there being any live nexus or any tangible material for assuming the jurisdiction under section 147 of the Act. In support of his submissions, reliance was placed on the following decisions:

• • Surani Steel Tubes Ltd reported in [2022] 136 com139 (Gujarat);
  • Valley Iron & Steel Co. Ltd [2023] 155 com348 (Delhi)
  • Movish Realtech (P.) Ltd reported in 152 com666 (Delhi)
  • U.Bhandari Autrolines (P.) ltd
    reported in [2023 ]149 taxmann.com(Bom)

6.4 It was further submitted that during the course of regular assessment, Assessing Officer has made inquiry with regard to details of long term capital gain of the petitioner which is claimed as exemption. The attention of the Court was invited to Page No. 20 Item No. 12 in the notice dated 21.09.2016 issued under section 142(1) of the Act and the reply given by the assessee at Page 23 disclosing the entire transaction of the purchase and sale of the shares during the year under consideration.

6.5 It was therefore submitted that the issuance of notice under section 148 of the Act by the Assessing Officer is nothing but the change of opinion as the same issue was already considered during regular course of assessment.

7. On the other hand, learned advocate Mr. Patel for the respondent submitted that on the basis of the information received from the DDIT Investigation Unit-5(1), new Delhi the shares of M/s. Looks Health Services Ltd is a penni stock company and the petitioner was one of the beneficiary member of the said Company to launder money in garb of long term capital gain and it is necessary for the Assessing Officer to do the inquiry with regard to such information and therefore the Assessing Officer has rightly assumed the jurisdiction having reason to believe that the income has escaped assessment.

7.1 It was submitted that there is no change of opinion as no opinion was formed during the course of regular assessment in absence of the information by the then Assessing Officer and therefore, once there is prima facie conclusion that there is escapement of income on the basis of the independent reasoning and the information in possession of the Assessing Officer, no interference may be made while exercising the extraordinary jurisdiction under Article 226 of the Constitution of India.

8. Considering the submissions made by both the sides and the material placed on record, it is not in dispute that the petitioner acquired the shares of M/s. Monark Health Care Limited (New Name Looked Health Care )through initial public offer (IPO) on 25.05.2012 by investing Rs. 21,60,000/- through banking transaction. The petitioner was allotted 54,000 equity shares of the said Company in IPO and the said shares were dematerilized and credited to the DEMAT Account of the petitioner on 26.05.2012. These facts are not disputed by the respondent No.1 in the reasons recorded.

9. It also emerges from the record that during the course of the regular assessment, the Assessing Officer had called for information with regard to the long term capital gain which claimed as exempt and the requisite details was provided by the petitioner along with reply dated 09.11.2016. The petitioner also submitted bills of shares sold during the year under consideration and break up of the capital gain along with the ledger account of the said company.

10. On perusal of the reasons recorded also it is apparent that on the basis of the information received from DDIT Investigation Unit-5(1), New Delhi, the respondent has formed a prima facie belief that there is escapement of income as the petitioner has earned substantial amount of long term capital claiming the same as exemption under section 10(38) of the Act.

However, reasons recorded do not disclose any live link or fresh material to connect the transaction entered into by the assessee with the information in possession of the Assessing Officer. Therefore, it is clear that the Assessing Officer has assumed the jurisdiction on the basis of the borrowed satisfaction without there being any live link between the information and the material on record. It is therefore, apparent that the impugned notice under section 148 of the Act is issued for making a fishing inquiry which is not permissible under the law.

11. In view of the foregoing reasons, the petition succeeds and is accordingly allowed. Impugned notice under section 148 of the Act is quashed and set aside. Rule is made absolute to the aforesaid extent. No order as to costs.