Aryan Share & Stock Brokers Ltd. Vs ITO (ITAT Chennai)
Reopening Based on “Reason to Suspect” Is Invalid: ITAT Chennai Quashes Section 147 Proceedings Against Stock Broker
The Chennai Bench of the ITAT allowed the assessee’s appeal for AY 2017-18 and quashed the reopening as well as the consequential reassessment, holding that the Assessing Officer lacked valid “reason to believe” as required under Section 147. The assessee, a SEBI-registered stock broker, was subjected to reassessment on the allegation that it had received bogus accommodation entries of ₹7.15 crore from a client company, M/s Orange Mist Productions Pvt. Ltd., which was alleged to be engaged in suspicious transactions. Based on this premise, the AO reopened the assessment and made an addition under Section 69A. The NFAC-CIT(A) upheld the reassessment.
The Tribunal found that the reasons recorded for reopening were vague, mechanical and based on an erroneous understanding of the nature of stock-broking business. It noted that the AO wrongly compared the client-funds routed through the broker’s client account with the assessee’s turnover, without appreciating that a stock broker acts merely as an intermediary and holds client monies in a fiduciary capacity. Such client funds do not constitute the broker’s income or turnover; only brokerage forms part of taxable receipts. The reasons recorded did not disclose any tangible material or live nexus showing escapement of income, but merely reflected suspicion arising from receipt of funds from a client alleged to be non-genuine.
Relying on settled principles laid down by the Supreme Court and High Courts, the ITAT reiterated that “reason to believe” must be founded on tangible material and cannot be substituted by “reason to suspect” or a roving enquiry. Since the assumption of jurisdiction itself was invalid, the Tribunal held the reopening to be coram non judice and quashed the notice under Section 148 as well as the reassessment order. The appeal was allowed in full.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This is an appeal preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeal)/NFAC, (hereinafter referred to as ‘Ld.CIT(A)‘), Delhi, dated 23.09.2025 for the Assessment Year (hereinafter referred to as ‘AY‘) 2017-18.
