Case Law Details
Deepak Natvarlal Pankhiyani (HUF) Vs ACIT (Gujarat High Court)
The petitioner, Deepak Natvarlal Pankhiyani (HUF), engaged in trading shares and securities, filed their original income tax return for the Assessment Year (AY) 2015-16 on September 21, 2015, declaring a total loss of ₹2,00,23,842. The case was selected for limited scrutiny by issuing a notice under Section 143(2) of the Income Tax Act, 1961, on September 20, 2016, focusing on “Derivative (Future) transactions.” The petitioner responded with detailed information regarding these transactions. After further scrutiny, the assessment under Section 143(3) was completed on December 30, 2017, determining an income of ₹1,11,49,610. The petitioner filed an application for rectification on January 24, 2018, and the order under Section 154 was passed on February 1, 2018, accepting the error and rectifying it.
Reopening of Assessment:
The petitioner filed an appeal challenging the assessment order, which was partially allowed on August 30, 2018. Subsequently, the respondent issued a notice under Section 148 on March 27, 2021, asking the petitioner to file a return of income for AY 2015-16. The petitioner complied and sought the reasons for reopening, which were provided on May 24, 2021. The petitioner then filed objections on July 22, 2021, challenging the validity of the notice under Section 148, which the respondent dismissed on January 10, 2022. This led the petitioner to file a writ petition under Article 226 of the Constitution of India, seeking to quash the notice dated March 27, 2021, and the order disposing of the objections.
Arguments by the Petitioner:
Advocate Mr. B. S. Soparkar, representing the petitioner, argued that the reopening notice and the subsequent order were based on a singular reason: the belief that income had escaped assessment regarding a profit of ₹5,66,96,530 earned by trading shares. He pointed out that the reopening was beyond the four-year period and that all details of derivative transactions had been fully disclosed during the original assessment. He contended that the notice was issued without independent application of mind and was based on borrowed satisfaction from third-party information without disclosing the contents. Furthermore, the reopening was essentially a change of opinion, which is not permissible under the law as the issue of trading in shares and stock was already thoroughly examined during the original assessment.
Arguments by the Respondent:
Advocate Mr. Karan Sanghani, representing the respondent, countered that the petitioner had the alternative remedy to appeal before the Commissioner of Income Tax (Appeals). He stated that the reopening notice was issued after recording reasons and obtaining the necessary sanctions based on information received from investigations. This information indicated that the petitioner was involved in non-genuine trades, creating artificial volumes in the stock options segment of BSE, which was not available during the original assessment. Therefore, the reopening was justified and not merely a change of opinion.
Court’s Analysis and Decision:
The court, after hearing both parties, noted that the petitioner had disclosed all material facts fully and truly during the original assessment. The details of derivative transactions were scrutinized, and the assessment was completed considering these details. The reopening notice was based on information regarding reversal trades in stock options, which indicated manipulative practices. However, the court found that the information regarding these trades was not new but was available during the original assessment.
The court observed that the reopening was based on the same set of facts already examined during the original assessment, amounting to a change of opinion. The Assessing Officer had not applied an independent mind and relied on third-party information without conducting a fresh inquiry or having tangible new material. Therefore, the reopening notice lacked jurisdiction and was contrary to the proviso to Section 147 of the Income Tax Act, which prohibits reopening after four years unless there is a failure to disclose material facts fully and truly.
Conclusion:
The court quashed the notice dated March 27, 2021, and the order dated January 10, 2022, disposing of the objections. The court held that reopening of assessment was invalid in the absence of new material or independent application of mind, reinforcing the principle that reassessment should not be based merely on a change of opinion.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
Heard learned advocate Mr. B. S. Soparkar for the petitioner and learned Senior Standing Counsel Mr. Karan Sanghani for learned advocate Mrs. Kalpana K Raval for the respondent.
2. Rule returnable forthwith. Learned Senior Standing Counsel Mr. Karan Sanghani waives service of notice of rule for the respondents.
3. Having regard to the controversy in the narrow compass, with the consent of the learned advocates for the parties, the matter is taken up for hearing.
4. By this petition under Article 226 of the Constitution of India, the petitioner has prayed for quashing and setting aside the notice dated 27.03.2021 issued under section 148 of the Income Tax Act,1961 [for short ‘the Act’] as well as the impugned order dated 10.01.2022 rejecting the objection filed by the petitioner.
5. Brief facts as stated in the memo of the application are as under:
5.1 The petitioner is engaged in the business of trading in shares and security. The petitioner filed its original return of income for AY 2015-16 on 21.09.2015 declaring total loss of Rs. 2,00,23,842/-.
5.2 The case of the petitioner was selected for limited scrutiny by issuing notice u/s. 143(2) dated 20.09.2016 where on of the specific reasons for selection of case for scrutiny was “Derivative (Future) transactions” and in response to the same, the petitioner filed a reply dated 26.09.2016 submitting all the details regarding such derivatives transactions. Thereafter, notice u/s. 142(1) issued which were replied to by the petitioner from time to time. Vide notices dated 04.08.2017 and 19.09.2017, specific questions relating to the trading in future in a recognized stock exchange was raised. Details regarding the same were provided vide letter dated 29.08.2017 and 22.09.2017. Thereafter, the assessment u/s. 143(3) was framed on 30.12.2017 at Rs. 1,11,49,610/-.
5.3 The petitioner filed an application for rectification on 24.01.2018. Thereafter, order u/s. 154 dated 01.02.2018 was passed accepting the error and rectifying the same.
5.4 An appeal was also filed by the petitioner challenging the said assessment order and the appeal of the petitioner was partly allowed vide order dated 30.08.2018.
5.5 The respondent no.1 thereafter issued the impugned notice under section 148 of the Act dated 27.03.2021 asking the petitioner to file return of income for the Assessment Year 2015-16. The petitioner without prejudice filed its return of income and sought for the reasons recorded for reopening. The petitioner was thereafter provided with the notice u/s. 143(2) recording issues as per reasons recorded for reopening on 24.05.2021.
5.6 Thereafter, the petitioner filed the objections on 22.07.2021 challenging the validity of the notice issued u/s. 148 of the Act. The respondent No.2 has disposed of the objections of the petitioner on 10.01.2022.
Hence, the petitioner preferred this petition challenging the notice dated 27.03.2021 issued u/s. 148 of the Act and the order disposing of the objections raised dated 10.01.2022.
6. Learned advocate Mr. Soparkar for the petitioner submitted that the impugned notice and the order passed by the respondent No.1 are based upon only one reason to believe that income has escaped assessment regarding profit of Rs. 5,66,96,530/- earned by the petitioner by carrying out trading in shares treating the same as unexplained credit under section 68 of the Act.
6.1 It was submitted that the impugned notice for Assessment Year 201516 is beyond the period four years and learned advocate Mr. Soparkar referred to the notice dated 20.09.2016 issued under section 143(2) of the Act wherein the details of the derivatives (future transactions) were called for by the Assessing Officer which was replied by the petitioner by reply dated 26.09.2016 disclosing that the petitioner has entered into various derivatives (future transactions) during the year for which ledger accounts and contract notice were provided. It was further submitted that further scrutiny was also made by the Assessing Officer during the regular course of assessment by issuing notices dated 19.06.2017 and 04.08.2017 which were replied by the petitioner and thereafter the assessment order dated 30.12.2017 under section 143(3) of the Act was passed by the Assessing Officer after considering the details provided by the petitioner. It was therefore submitted that the petitioner has disclosed truly and fully all material facts during the course of regular assessment. Therefore, the impugned notice is without jurisdiction contrary to the proviso to section 147 of the Act.
6.2 It was further submitted that the impugned notice for reopening is issued without independent application of mind and is only based on borrowed satisfaction merely information received from the third party without disclosing the contents thereof in the reasons recorded.
6.3 It was further submitted that once the reasons recorded are nothing but change of opinion, as the issue of trading into shares and stock by the petitioner was examined thoroughly at the time of regular assessment and all the trades entered into by the petitioners were also considered and therefore, having examined the issue in detail and having formed an opinion the attempt of respondent to reopen again is merely a change of opinion and hence, no admissible as per the settled legal position.
6.4 It was therefore, submitted that the impugned notice is liable to be quashed and set aside as the same is issued only for making roving and fishing inquiry without application of mind by the respondent-Assessing Officer in absence of any fresh tangible material to show that the income has escaped assessment.
6.5 It was further submitted that the assessing officer while passing impugned order rejecting the objections also has failed to consider the explanation already provided by the petitioner during the regular course of assessment.
6.6 Learned advocate Mr. Soparkar also referred to the additional affidavit filed on behalf of the petitioner wherein it is specifically stated that the petitioner has earned profit of Rs. 5,66,96,530/- from total 09 trades and the petitioner has filed return of income on 21.09.2015 disclosing loss from business amounting to Rs. 2,00,24,774/-which was scrutinized in detail after the petitioner submitted various details in response to the notice dated 04.08.2017. It was also pointed out that the petitioner had supplied ledger account contract notes and details of derivatives transaction carried out through broker-Good Luck Securities in reply dated 26.09.2016 to the show-cause notice issued by the Assessing Officer. It was pointed out that on perusal of these documents, it has become clear that income arising from 09 referred transaction of BSE F&O trading Account which is under review by the Assessing Officer and reasons for reopening is fully accounted for in the books of accounts as it appears from the profit and loss account and tax audit report and therefore, it is not correct to state that the said income is not reflected in the income tax return.
6.7 Learned advocate Mr. Soparkar therefore submitted that the impugned notice is contrary to the facts on record and is liable to be quashed and set aside. In support of his submissions reliance was placed on the decision of Alliance Filaments Ltd reported in [2021] 434 ITR 537 (Gujarat).
7. On the other hand, learned advocate Mr. Sanghani for the respondent-Assessing Officer submitted that the petitioner has alternative remedy to prefer appeal before CIT(A) against the assessment order which may be passed and therefore, the petition may not be entertained. It was further submitted that the impugned notice is issued after recording reasons and after obtaining requisite sanction in accordance with law based on the information received by the Assessing Officer as there is failure on the part of the petitioner to disclose truly and fully all material facts as stated in the reasons recorded.
7.1 It was therefore submitted that the no interference is required in the impugned notice.
7.2 Learned Senior Standing Counsel Mr Karan Sanghani invited attention of the Court to the information received by the Assessing Officer that large scale reversal of tax in stock segment of the BSE Limited was reported wherein the investigation revealed that total of 291643 trades (comprising 81.38% of all the trades executed in the Stock Options Segment of BSE) involved reversal of buy and sell positions and petitioner is one of such entity which excluded total 09 units contracts by reversing its non-genuine trades within few minutes and in view of such reversal trades in quick succession with substantial price difference indicates towards employing a manipulative device in connection with its dealing in a liquid Stock Options Contracts. It was therefore submitted that such information was not available during the regular course of assessment and Assessing Officer passed assessment order under section 143(3) in absence of such information and therefore, the reopening of the assessment cannot be said to be based upon change of opinion.
7.3 It was further submitted that the Assessing Officer did not form any opinion while passing order under section 143(3) on the issue under consideration as the case of the petitioner was selected for limited scrutiny only on the issue of mat liability mismatch derivatives (future transaction), sales turn over mismatched, security transaction. It was therefore, submitted that in absence of any investigation into information which subsequently received by the respondent No.1, it cannot be said that there was change of opinion for reopening of the assessment.
7.4 It was submitted that respondent No.1 after application of mind have formed a reason to believe that income as escaped assessment on the basis of the information received need not be interfered at this stage.
7.5 In support of his submissions, learned Senior Standing Counsel Mr. Sanghani referred to and relied upon the following averments made in the affidavit-in-reply filed on behalf of the respondent:
“(v). With reference to paragraph 3.11 it is submitted that the escapement of income has been elaborated upon in the reasons recorded by the AO. There is clear escapement of income due to which the case was reopening for assessment. It is stated that mere production of account books or other evidence before the Assessing Officer from which material evidence could with due diligence have been discovered by the Assessing Office does not necessarily amount to disclosure.
Reliance is placed on the case of Rajat Export import India Pvt. Ltd vs. ITO (2012) 341 ITR 135; 307 (Delhi) (High Court). “In this case, the Court had dismissed the writ petition challenging the reopening on the ground that in the reasons recorded the Assessing Officer had referred to the investigation made byt eh Director of Income Tax (investigation) who was in charge of the investigation into groups that operated as entry operators, in the various branches of banks to introduce unaccounted money in the guise of gifts, loans, share application money etc. After referring to the broad and general modus operandi adopted by the entry providers, the Assessing Officer specifically noticed from the list of entries given to him by the investigation wing that assessee had taken accommodation entry in the amount of Rs. 3 Lakhs. The reasons to believe recorded in writing by the Assessing Officer were detailed and showed application of mind. At the stage when reasons are recorded for reopening the
assessment, the Assessing Officer is not required to build a fool proof case for making addition to the assesse’s income; all that is required to do at that stage is to form a prima facie opinion or belief that income has escaped assessment. On the facts of the Court up held the reopening of assessment and dismissed the writ petition (A.Y. 2004-05)”.
Reliance is also placed on the decision in case of A.L.A firm vs. CIT (1991) 189 ITR 285 (SC). In this case, the Hon’ble Supreme Court held that the jurisdiction of the Income Tax Officer to reassess income arises if he has, in consequence of specific and relevant information coming into his possession subsequent to the previous concluded assessment, reason to believe that income chargeable to tax had escaped assessment. It was held that even if the information be such that if could have been obtained by the Income Tax Officer during the previous assessment proceedings by conducting an investigation or an enquiry but was not in fact so obtained, it would not affect the jurisdiction of the Income Tax Officer to initiate reassessment proceedings if the twin conditions prescribed under section 147 of the Act are satisfied.”
7.6 It was therefore submitted that the petition being devoid of any merit, is liable to be dismissed summarily.
8. Having heard learned advocate for the respective parties and having considered the facts of the case and the material placed on record it is apparent that the petitioner has disclosed truly and fully all material facts including the derivatives (future transactions) which are referred to in the reasons recorded in the books of accounts and after scrutinizing the same, the Assessing Officer has passed the order under section 143(3) of the Act on 30.12.2017 assessing total income of Rs. 1,11,49,610/- for the Assessment Year 2015-16.
9. The Assessing Officer-respondent No.1 has recorded the reasons on the basis of the information received with regard to reversal of trade in liquid stock as under:
“2.1 During the investigation period, total 34 trades for 11,55,000 units were executed in the said contract wherein Deepak Natvarlal Pankhiyani HUE was party to 10 trades for total 9,95,000 units on March 10, 2015 while deaing in the said contract on March 10, 2015 Deepak Natvarlal Pankhiyani HUE at 12:23:55 hrs entered into buy trade for 4,97,500 units at premium rate of Rs. 20.50 per unit with counterparty viz. PAT Financial Consultants Pvt Ltd. Subsequently, within 11 seconds of the above trade, Deepak Natvarlal Pankhiyani HUF during 12:24:06 hrs to 12:38:59 hrs entered into 9 sell trades with same counterparty viz. PAT Financial Consultants Pvt. Ltd for total 4,97,500 units at the average premium rate of Rs. 31.25 per unit. Further it is noted that while dealing in the said contract during the I.P., Deepak Natvarlal Pankhiyani HUF executed total 10 reversal trades (1 buy trade + 9 sell trades) with same counterparty viz. PAT Financial Consultants Pvt Ltd. It is also noted that the said trades were reversed in short interval with significant price difference in buy and sell rates. Thus, Deepak Natvarlal Pankhiyani HUF, throug its dealing in the contract viz. “AXIS15MAR560.00CEW2” executed 10 non genuine trades which is 29% of the total trades from the market in the said contract during the investigation period and thereby, Deepak Natvarlal Pankhiyani HUF generated artificial volume of Total 9,95,000 units which is 86% of the volume traded in the said contract form the market.
2.2 A similar modus operndi was adopted by Deepak Natvarlal Pankihyani HUE in respect of remaining trades in other unique contracts. It is observed from the trading of Deepak Natvarlal Pankhiyani HUE that is most of the trades the buy order and sell order has been entered in quick succession of each other . In all the 9 unique contracts Deepak Natvarlal Pankhiyani HUE had reversed its non-genuine trades within few minutes. The buy orders placed by Deepak Natvarlal Pankhiyani HUE were matched with sell orders of counterparties and sell orders placed by Deepak Natvarlal Pankhiyani HUE were matched with buy orders of counterparties in terms of number of units and price and time. Thus, the total volume generated through such non-genuine trades was 71,27,000 units.
2.4 Above reversal of trades in quick succession with substantial price difference indicates towards employing of a manipulative device in connection with its dealing in said illiquid Stock Options contracts. The non-genuineness of these transactions executed by Deepak Natvarlal Pankhiyani HUE is evident from the fact that there was no commercial basis as to why, within a short span of time Deepak Natvarlal Pankhiyani HUF reversed the position with his counterparties with significant price difference.
2.5 In view of the aforementioned factual findings of the investigation, it was alleged that Deepak Natvarlal Pankhiyani HUF had indulged in execution of reversal trades in stock options with same counterparty on the same day which are non genunine in nature and have created false or misleading appearance of trading in terms of artificial volumes during the investigation period.”
10. From the above reasons recorded by the Assessing Officer, it is clear that though the assessee has offered to tax the profit of Rs. 5,66,93,530/- in its return of income which was already assessed during the regular course of assessment, the petitioner has also filed additional affidavit placing on record the profit and loss account to demonstrate that the petitioner has already offered profit earned from the 09 transactions referred in the reasons recorded in the profit and loss account.
11. Therefore, it cannot be said that the income of the assessee to the tune of Rs. 5,66,96,530/- is not reflected and has escaped the assessment. It appears that the respondent No.1-Assessing Officer without verification of the record has blindly relied upon the information received and picked up the 09-transaction entered into by the petitioner in BSE F&O Segment. Respondent No.1 has not even co-related such information with the material available with on the record, more particularly, when the said issue has been thoroughly scrutinized in the regular assessment. It is also apparent that the petitioner has provided all the information and thereby disclosed truly and fully all material facts during the regular course of assessment. Therefore, the impugned show-cause notice is without jurisdiction and contrary to the provision of the Act and is liable to be quashed and set aside as there is no fresh tangible material available on record with the Assessing Officer to have reasonable belief that the income has escaped assessment. Therefore, it is apparent that the impugned notice for reopening is issued on merely change of opinion in respect of the fact of that the entire profit is offered to tax by the petitioner in the books of accounts and the same is reflected in the return of income filed by the petitioner which was scrutinized and the assessment order under section 143(3) of the Act was passed.
12.In view of the foregoing reasons, the petition succeeds and accordingly allowed. Impugned notice dated 27.03.2021 issued under section 148 of the Act and order dated 10.01.2022 rejecting the objection raised by the petitioner are hereby quashed and set aside. Rule is made absolute to the aforesaid extent. No order as to costs.
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