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June 25, 2022

Reopening an assessment based on wrong and invalid premises was unlawful

by CA Shivam Jaiswal in Income Tax

Reopening an assessment based on wrong and invalid premises was unlawful

Facts and Issue of the case

The assessee, in the present case, is an individual. As per the information received by the Assessing Officer from the Office of the Principal Director of Income-tax, the assessee had entered into certain transactions in shares resulting in Long Term Capital Gain of Rs.7,92,237/-. Since no return of income for the year under consideration was filed by the assessee, the Assessing Officer reopened the assessment and issued a notice under Section 148 of the Income-tax Act after recording reasons. In response to the said notice, the return of income was filed by the assessee declaring a total income of Rs.1,47,860/-. During the course of assessment proceedings, it was found by the Assessing Officer that the assessee had entered into share transactions through various agencies on Bombay Stock Exchange amounting to Rs.7,92,237/-.According to the Assessing Officer, amount represented bogus claim of the assessee on account of Long Term Capital Gain; and, treating the same as undisclosed income of the assessee, he made an addition of Rs.7,92,237/- to the total income of the assessee under Section 69 of the Act in the assessment completed under Section 143(3) r.w.s. 147 of the Act.

Against the order passed by the Assessing Officer under Section 143(3) r.w.s. 147 of the Act , an appeal was preferred by the assessee before the learned CIT(A) challenging the validity of the said assessment made by the Assessing Officer as well as disputing the addition of Rs.7,92,237/- made therein on account of the bogus claim of the Long Term Capital Gain by treating the same as undisclosed investment under Section 69 of the Act. During the course of appellate proceedings before the learned CIT(A), it was submitted by the assessee that total transactions of Rs.7,92,237/- made by him in the shares during the year under consideration had resulted in a Short Term Capital Loss of Rs.3,61,645/- and it was not a case of any Long Term Capital Gain of Rs.7,92,237/- earned by the assessee. It was contended that the reopening of the assessment by the Assessing Officer thus was based on wrong information and there being no escapement of income of the assessee from the assessment on account of any Long Term Capital Gain as stated to be believed by the Assessing Officer, the reopening itself was bad in law. It was further contended that the entire value of the share transactions made by the assessee was treated by the Assessing Officer as his undisclosed investment without application of mind since the entire value of transactions cannot be treated as undisclosed income/investment of the assessee by any stretch of imagination. It was also contended that the Long Term Capital Gain was only exempt from tax as per the relevant provisions applicable to the year under consideration and since there was nothing to show that there was any wrong or bogus claim made by the assessee for Long Term Capital Gain, the addition made by the Assessing Officer by treating the same as undisclosed income of the assessee was totally unjustified. The learned CIT(A) did not find merit in this contention raised on behalf of the assessee and rejecting the same, he proceeded to uphold the validity of the assessment made by the Assessing Officer under Section 143(3) r.w.s. 147 of the Act and also confirmed the addition of Rs.7,92,237/- made therein by treating the alleged bogus claim of Long Term Capital Gain as undisclosed investment of the assessee. Aggrieved by the order of the learned CIT(A), the assessee has preferred this appeal before the Tribunal. In Ground Nos. 1 & 2, a preliminary issue challenging the validity of the assessment made by the Assessing Officer under Section 143(3) r.w.s. 147 of the Act is raised by the assessee while in Ground Nos. 3 & 4 the assessee has challenged the addition of Rs.7,92,237/- made by the Assessing Officer by treating the entire value of transactions in shares as bogus Long Term Capital Gain by treating the same as undisclosed investment of the assessee.

Observation by the court

The court had heard the arguments of both the sides and also perused the relevant material available on record. In support of the preliminary issue raised by the assessee challenging the validity of the assessment made by the Assessing Officer under Section 143(3) r.w.s. 147 of the Act, learned Counsel for the assessee at the outset has invited my attention to the copy of reasons recorded. As submitted by the learned Counsel for the assessee, the assessment was reopened by the Assessing Officer for the reason that bogus Long Term Capital Gain of Rs.7,92,237/- was claimed by the assessee for the year under consideration. He has contended that the entire value of transactions made by the assessee in the year under consideration amounting to Rs.7,92,237/- has accepted by the Assessing Officer himself during the course of assessment proceedings and it was thus not a case of Long Term Capital Gain of Rs.7,92,237/- earned by the assessee. The court has contended that the basis of reopening itself therefore was wrong inasmuch as the assessee had not earned any Long Term Capital Gain from the entire value of share transactions of Rs.7,92,237/- and what in fact had resulted from that transactions was a Short Term Capital Loss of Rs.3,61,645/- as pointed out by the assessee – specifically before the authorities below. The court has contended that the reason as recorded by the Assessing Officer thus was non-existent and the belief entertained by the Assessing Officer on the basis of the said information was wrong and baseless. The court has contended that the reopening of assessment on such wrong premises thus was not valid and the assessment completed by the Assessing Officer under Section 143(3) r.w.s. 147 of the Act in pursuance of such invalid reason is liable to be quashed being bad in law. Although the learned DR has opposed this proposition by relying on the orders of the authorities below, I find merit in the contention of the learned Counsel for the assessee raised on this issue.

It is observed that the entire value of transactions in shares entered into by the assessee for the year under consideration was only Rs.7,92,237/- as accepted by the Assessing Officer himself in the assessment order and this entire amount, therefore, could not give rise to Long Term Capital Gain of Rs.7,92,237/- by any stretch of imagination. As pointed out on behalf of the assessee, the said transaction in fact had given rise to Short Term Capital Loss of Rs.3,61,645/- to the assessee. The very basis of reopening of the assessment as reflected in the reasons recorded by the Assessing Officer thus was unfounded and there being no claim of any Long Term Capital Gain of Rs.7,92,237/- made by the assessee much less a bogus Long Term Capital Gain as believed by the Assessing Officer, the reopening of assessment itself on the basis of such wrong and non-existent premises was bad in law as rightly contended by the learned Counsel for the assessee and the assessment made in pursuance therein under Section 143(3) r.w.s. 147 of the Act is liable to be quashed being invalid. As further contended on behalf of the assessee before there learned CIT(A) as well as before the Tribunal, the entire value of share transactions cannot be treated as unexplained investment by the assessee and that too without giving the assessee an opportunity to explain the exact quantum of investment as well as source thereof and the addition so made by the Assessing Officer and confirmed by the learned CIT(A) on account of such unexplained investment allegedly made by the Assessing Officer is not sustainable on merit also.

Conclusion

The appeal of the assessee is allowed by the court.

Vrajeshkumar-N.-Chokshi-Vs-ITO-ITAT-Ahmedabad

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