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Facts
The Revenue appealed against the CIT(A)'s order, which had held that reassessment proceedings initiated by the AO were invalid and deleted the alleged fictitious loss. The AO had reopened the assessment based on information suggesting tax evasion through trading in illiquid stocks and options, leading to a claimed fictitious loss of Rs. 3,56,25,248/-.
Held
The Tribunal held that the reassessment proceedings were not valid because the AO was unclear whether the escaped assessment related to 'losses' or 'profits'. The AO failed to apply his mind independently and verify information received from the Investigation Wing. Since the assessee had not claimed any loss in its return, such a disallowance could not be made.
Key Issues
Whether the reassessment proceedings under Section 147 were validly initiated without proper application of mind and clear identification of escaped income (profit vs. loss). Whether addition on account of loss is permissible when no loss was claimed by the assessee.
Sections Cited
147, 144B, 142(1), 148, 153
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DIVISION BENCH, ‘A’ CHANDIGARH
Before: SHRI RAJPAL YADAV & SHRI KRINWANT SAHAY
The Revenue is in appeal against the order of ld. Commissioner of Income Tax (Appeals) [in short ‘the CIT (Appeals)] dated 27.06.2024 passed for assessment year 2015-16.
The Revenue has taken four grounds of appeal out of which Ground Nos. 3 and 4 are general in nature which do not call for recording of any finding.
ITA No.863/CHD/2024 A.Y.2015-16 2
In brief, grievance of the Revenue is that ld. CIT (Appeals) has erred in holding that re-assessment proceedings initiated by the ld. AO was not valid and also deleting the alleged fictitious loss claimed by the assessee amounting to Rs.3,56,25,248/-.
The brief facts of the case are that assessee has filed its return of income on 16.09.2015 declaring ‘nil’ income. The ld. AO has observed that Department received specific information regarding rampant tax evasion through coordinated and premeditated trading in illiquid stock and ‘options’ in the Bombay Stock Exchange. Thus, on the basis of information transmitted, he formed an opinion that assessee has generated fictitious loss in derivative trading to the tune of Rs.3,56,25,248/-. He reopened the assessment and thereafter passed the re-assessment order on 27.03.2022 u/s 147 read with Section 144B of the Income Tax Act. The ld. AO has made the addition of the above amount.
On appeal, ld. CIT (Appeals) has re-appreciated the issue and held that there is no proper analysis by the AO whether assessee has claimed fictitious profit or fictitious loss, A.Y.2015-16 3 therefore, re-opening is bad. The CIT (Appeals) further held that no trading loss has been claimed by the assessee in the return, therefore, no disallowance could be made. Thus, ld. CIT (Appeals) has allowed the appeal of the assessee and the relevant finding of the CIT (Appeals) reads as under :
DECISION 5. I have considered the grounds of appeal as well as the contentions of the appellant and also perused the material available on record. Ground of Appeal No. 8 is general in nature and as such does not call for any adjudication. The remaining grounds are adjudicated as under: Violation of principles of natural justice:
6. In Ground No. 4, the appellant contented that proper opportunity was not given to it before passing the assessment order. In the instant case, the appellant not only responded to the notice u/s. 142(1) dated 10.12.2021, but also, participated in the proceedings at the assessment stage. The appellant uploaded its reply on 10.02.2022 in ITBA portal during assessment proceedings, which was duly considered by the AO. Having responded and participated in the proceedings the appellant cannot be allowed to turn around and raise objection that the appellant was not given proper opportunity before passing the assessment order. In the circumstances, this ground is dismissed. Validity of reopening of assessment u/s. 148 and re-assessment proceedings
7. In Ground of Appeal Nos. 1, 2, 3, 5 and the amended ground (in the place of Grounds No. 1 and 2), the appellant contended that the entire reopening and assessment process is against the provisions and intent of the law. According to the appellant, the impugned assessment was framed on wrong set of facts and without application of mind, and deserves to be quashed. 7.1 In support of his grounds of appeal, the appellant has submitted the following pointers before me vide written submission dated 28.09.2023: (i) Ld. AO is unclear on what has escaped assessment i.e., "Losses" or "Profits" ? (ii) Ld. AO failed to test the Wing's information viz - a-viz ITR's information. (iii) Details forming basis of escaped amount provided by Ld. AO, NFAC doesn't match the amount quoted in reasons. (iv) Ld. AO NFAC has made addition of Rs. 3,56,25,248/- on account of loss even though no loss stands claimed by the assessee.
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What has escaped assessment i.e., "Losses" or "Profits"? 7.2 I have verified the reasons for reopening from the assessment order, which is reproduced in para 3.1 of this order. On perusal of reasons, it is clear that the information received from the Wing was on the issue of 'Fictitious Losses in Trading'. However, AO has recorded reasons as 'Fictitious Profits in Trading' . For the sake of reference, the relevant portion of the Reasons is reproduced herewith. "From the perusal of the information from the Investigation wing uploaded on Insight portal, it is found that In the case of our assessee M/S Findoc Investment Pvt. Ltd. has done transaction in equity/derivative trading and generated fictitious profits in equity/derivative trading. Further, from the perusal the return of AY. 2015-16 of our assessee it is found that assessee has claimed to generate profits in speculative trades of amount of Rs 3,56,25,248/- which are actually fictitious profits From the above whole facts it is submitted that the amount of Rs. 3,56,25,248/- has been found to be escaped as per the provision of section 147 of the IT. Act, Actually the assessee income from this script is bringing unaccounted income into books without payment of tax. There was no scrutiny of assessee for A.Y. 2015-16. 7.3 The appellant has compiled a chart highlighting the ambiguity between the 'Losses" or "Profits" in the impugned assessment order. The same is as under.
The above compilation by the appellant shows that the AO has not taken enough care in recording reasons for reopening the case under section 147 of the Act and in completing the re-assessment under section 147 r.w.s. 144B of the Act. Based on the above ambiguity between "losses" and "profits", the appellant contended that the A.Y.2015-16 5 assessing officer was unclear on what has escaped assessment, i.e., 'Losses" or "Profits". The appellant contended that both the jurisdictional assessing officer and the NFAC are unclear and unsure of the information shared by the Investigation Wing. The appellant further alleged that the assessing officer never applied his mind and never verified the details from the financials of the appellant which were already on record. 7.4 In view of the above glaring facts and seemingly visible ambiguity between "losses" and/or "profits" in the impugned order, I am in agreement with the above contentions raised by the appellant. I am of the view that the AO failed to take note of the information shared by investigation wing. Hence, it is clear that reassessment notice was issued in a mechanical manner without application of mind and without any independent verification of information received from the Investigation Wing. I hold so. No loss claimed by the appellant in the return of income 7.5 It is undisputed that the main reason as recorded by the assessing officer for reopening the impugned assessment was the "fictitious loss generated by the appellant in derivative trading to the tune of Rs. 3,56,25,248 supposed to have "escaped the assessment". However, the appellant submitted that no loss stands claimed by the appellant in the return of income. The appellant contented that the AO failed to test the Wing's information viz-a-viz ITR's information and made addition of Rs. 3,56,25,248 on account of alleged loss, even though no such loss was claimed. 7.5 The Assessing officer has given a finding in the assessment order on page no. 9 as under: "In this light the transactions done by the assessee is analysed and found to be an unfair trade practice with an intention to create an artificial loss by entering into option contract almost nearing the expiry date. By buying huge quantity of derivatives and allowing the same to expire, the assessee was able to access a loss of Rs. 3,56,25,248 which was used by him to set it off against due tax to be paid."
(emphasis supplied) As can be seen from the above extract, the assessing officer while passing the assessment order has made the addition of Rs.3,56,25,248 holding that the said amount of loss has been debited to the profit and loss account. However, he has nowhere highlighted under which head the loss has been debited in the profit and loss account. The appellant has submitted before me that as per audited accounts for the assessment year under consideration, the appellant-company earned a total revenue of Rs. 1.34 crores from operations. The appellant further submitted that as per the return of income, the income under the head business and profession was Rs 8,72,698, against which the brought forward business loss of last year was adjusted and income for the year was returned at Nil.”
ITA No.863/CHD/2024 A.Y.2015-16 6
With the assistance of ld. Representative, we have gone through the record carefully. A perusal of opening line of Section 147 would indicate that this Section contemplates that “if the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Section 148 to 153, assess and re-assess such income………….”. thus, there should be an information possessed by the AO which would enable him to believe that income chargeable to tax has escaped. Thus, information vis-à-vis formation of belief should have a live nexus demonstrating the escapement of income. The ld. CIT (Appeals) has observed that there is no live nexus available in the information vis-à-vis formation of belief. The AO himself was not sure whether fictitious profit on derivative trading has escaped assessment or assessee has claimed a fictitious loss. Therefore, we are of the view that ld. First Appellate Authority has rightly analyzed the finding of the AO and has rightly held that re-opening of the assessment is not valid. Similarly, when assessee has not made any claim in the return of income as a loss in trading of derivatives, then how it could be disallowed to it. Therefore, after considering A.Y.2015-16 7 the well reasoned order of the ld.First Appellate Authority, we do not find any merit in this appeal. It is dismissed.
In the result, appeal is dismissed.
Order pronounced on 23.06.2025.