Gujarat High Court
Nimesh Maheshbhai Shah Huf Thro Nimesh … vs Income Tax Officer on 7 January, 2025
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/SCA/2036/2022 JUDGMENT DATED: 07/01/2025
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 2036 of 2022
With
R/SPECIAL CIVIL APPLICATION NO. 2039 of 2022
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR.JUSTICE D.N.RAY
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Approved for Reporting Yes No
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NIMESH MAHESHBHAI SHAH HUF THRO NIMESH MAHESHBHAI SHAH
Versus
INCOME TAX OFFICER
==========================================================
Appearance:
MR DHINAL A SHAH(12077) for the Petitioner(s) No. 1
MS MAITHILI D MEHTA(3206) for the Respondent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR.JUSTICE D.N.RAY
Date : 07/01/2025
ORAL JUDGMENT
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Heard learned Senior Advocate Mr.
Tushar Hemani with learned advocate Mr.
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Dhinal A. Shah for the petitioner and
learned advocate Ms. Maithili D. Mehta for
the respondent.
2. Having regard to the controversy
involved in this petition which is in a
narrow compass, with the consent of the
learned advocates for the respective
parties, the matter is taken up for
hearing.
3. Rule returnable forthwith. Learned
advocate Ms. Maithili Mehta waives service
of notice of rule on behalf of the
respondent State.
4. Since the issue involved in both the
petitions are identical for different
assessment years, they have been heard
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together and would be disposed of by this
common judgment. For the sake of
convenience, facts are recorded from
Special Civil Application No.2036 of 2022.
5. By this petition under Article 226 of
the Constitution of India, the petitioner
has challenged notice dated 31.03.2021
issued by the respondent under section 148
of the Income Tax Act, 1961 (For short
“the Act”) proposing to reopen the
assessment of the petitioner for
Assessment Year 2016-2017 as well as order
dated 13.12.2021 dismissing the objections
raised by the petitioner against reopening
of the assessment.
6. Brief facts of the case are that the
petitioner is an HUF and is regularly
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assessed to tax. The petitioner filed its
return of income on 30.07.2016 for the
Assessment Year 2016-2017 whereby the
petitioner claimed Long Term Capital Gain
exemption under section 10(38) of the Act.
7. It is the case of the petitioner that
petitioner bought 60,000 equity shares of
M/s. Kaushal Limited on 10.12.2013 in the
Financial Year 2013-2014 relevant to
Assessment Year 2014-2015 having face
value of Rs.10/- each which were split in
face value of Rs. 2/- each in September,
2015. Thus, 60,000 equity shares of face
value of Rs.10/- held by the petitioner
were split into 3,00,000 equity shares of
face value of Rs.2/-. Further it is the
case of the petitioner that 1,05,465
equity shares were sold in Assessment Year
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2016-2017 against a consideration of
Rs.1,09,98,307/- and thereby Long Term
Capital Gain of Rs.1,02,74,815/- was
earned and was claimed as exempt under
section 10(38) of the Act. The equity
shares of M/s. Kaushal Limited were held
by the petitioner for more than 25 months
and were sold in tranches.
8. Respondent issued the impugned notice
under section 148 of the Act for
Assessment Year 2016-2017 on 31.03.2021
proposing to reassess the total income
treating the Long Term Capital Gain shown
by the petitioner in the return of income
as bogus.
9. The petitioner thereafter filed return
of income on 20.04.2021 declaring total
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income at Rs.17,75,216/- pursuant to the
impugned notice for reassessment and
claimed exemption in respect of Long Term
Capital Gain income on sale of equity
shares.
10. Respondent supplied the reasons for
reopening the said assessment vide letter
dated 10.05.2021.
11. The petitioner filed its objections to
such notice for reopening vide reply dated
09.06.2021.
12. Respondent thereafter issued notice
under section 143(2) read with section 147
of the Act providing further
clarifications on certain issues in the
reasons recorded for reopening the
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assessment proceedings under section 147
of the Act.
13. Respondent by the impugned order dated
13.12.2021 disposed off the objections
raised by the petitioner. The petitioner
had also filed rejoinder to its objections
vide letter dated 20.12.2021.
14. Being aggrieved by the impugned notice
as well as order disposing off the
objections, the petitioner has preferred
the present petition.
15. Learned Senior Advocate Mr. Tushar
Hemani with learned advocate Mr. Dhinal
Shah for the petitioner submitted that
the impugned notice and the consequential
order disposing off the objections raised
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by the petitioner are illegal, bad in law
and without jurisdiction as the conditions
precedent for reopening under section 147
of the Act are not satisfied.
16. It was submitted that even on a plain
reading of the reasons recorded for
reopening the assessment, no prima facie
finding with respect to discovery/recovery
of present petitioners name during the
search proceedings at M/s. Kushal
Tradelink Limited is reflected.
17. It was submitted that the respondent
has merely attempted to establish that
Kushal group is involved into
accommodation entries and thereafter the
respondent has vaguely claimed that the
petitioner is also a beneficiary of such
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actions of Kushal group without any
tangible material available with the
department since the petitioner was one
amongst the buyers who had bought the
shares of M/s. Kushal Limited. It was
further submitted that issuance of notice
is nothing but to initiate action against
all the investors of a public listed
company thereby imposing liability over
all the investors for the alleged wrong
committed by the public listed company.
18. It was further submitted that the
respondent has issued impugned notice only
and solely upon suspicion and has presumed
that the alleged capital gain is bogus
without there being any nexus or live link
with the information gathered and
reflected in the reasons recorded for
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reopening the assessment inasmuch as the
respondent has completely failed to
establish any nexus between the petitioner
and M/s. Kaushal Limited including its
agents and representatives. It was also
submitted that the respondent in its
letter dated 10.05.2021 apprising the
reasons for reopening has not reproduced
any specific evidence involving
petitioner’s name or its role in M/s.
Kushal Limited and the related anomalies.
19. It was therefore submitted that the
respondent has failed to satisfy the
prerequisite of “reason to believe” as
prescribed in section 147 of the Act. It
was submitted that reassessment is
resorted to on the basis of information
from Investigation wing which had nowhere
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stated that petitioner had claimed bogus
long term capital gain. Further, there was
no independent application of mind by
Respondent. In support of his submission,
reliance was placed upon decision of
Hon’ble Delhi High Court in case of Pr.
CIT v. Meenakshi Overseas (P.) Ltd.
Reported in [2017] 395 ITR 677 (Delhi),
wherein it is held as under:
“20. Coming to the second part,
this tells us what the AO did with
the information so received. He
says: “The information so received
has been gone through.” One would
have expected him to point out
what he found when he went through
the information. In other words,
what in such information led him
to form the belief that income
escaped assessment. But this is
absent. He straightaway records
the conclusion that “the abovesaid
instruments are in the nature of
accommodation entry which the
Assessee had taken after paying
unaccounted cash to the
accommodation entry given (sic
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giver)”. The AO adds that the said
accommodation was “a known entry
operator” the source being “the
report of the Investigation Wing”.
“22. As rightly pointed out by the
ITAT, the reasons to believe’ are
not in fact reasons but only
conclusions, one after the other.
The expression ‘accommodation
entry is used to describe the
information set out without
explaining the basis for arriving
at such a conclusion. The
statement that the said entry was
given to the assessee on his
paying “unaccounted cash” is
another conclusion the basis for
which is not disclosed. Who is the
accommodation entry giver is not
mentioned. How he can be said to
be “a known entry operator” is
even more mysterious. Clearly the
source for all these conclusions,
one after the other, is the
Investigation report of the DIT.
Nothing from that report is set
out to enable the reader to
appreciate how the conclusions
flow therefrom.
23. Thus, the crucial link between
the information available to the
AO and the formation of belief
is absent. The reasons must be
self evident, they must speak for
themselves. The tangible materialPage 12 of 37
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which forms the basis for the
belief that income has escaped
assessment must be evident from a
reading of the reasons. The entire
material need not be set out.
However, something therein which
is critical to the formation of
the belief must be referred to.
Otherwise the link goes missing.
24. The reopening of assessment
under Section 147 is a potent
power not to be lightly exercised.
It certainly cannot be invoked
casually ог mechanically. The
heart of the provision is the
formation of belief by the AO that
income has escaped assessment. The
reasons so recorded have to be
based on some tangible material
and that should be evident from
reading the reasons.”
20. It was submitted that the respondent
has completely relied upon the information
of Investigation Wing, Ahmedabad and has
completely failed to apply its own mind
and therefore, it amounts to borrowed
satisfaction, meaning that there is no
satisfaction recorded by Assessing officer
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himself, which is a precondition as per
section 147 of the Act.
21. Reliance was placed on the decision
of this Court in case of Harikishan
Sunderlal Virmani vs Deputy Commissioner
of Income Tax, reported in Circle-2(1) 394
ITR 146 wherein it is held as under:
“Thus from the reasons recorded,
the reopening of the assessment is
on the information/data supplied
by the office of the Principal
Director of Income Tax
(Investigation), Ahmedabad. From
the information received, it
appears that though the client
code of the assessee with the
broker Guinness Securities Limited
was WW/2647, modified client code
was found to be WW/2108 and
therefore, to verify the
genuineness of the modification of
the client code, by applying
Lavenshtein Distance Analysis or
digit edit analysis utility,
distance was found to be 3 and
therefore, it is believed that the
code is not wrongly typed and itPage 14 of 37
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is termed as deliberate change and
establishing non-genuineness and
contrived nature of the code
change. From the reasons recorded,
it does not appear that
verification of the material on
record there is independent
formation of opinion by the A.O.
and that any income has escaped
assessment due to any failure on
the part of the assessee in not
disclosing truly and correct
facts/material necessary for
assessment. From the reasons
recorded, it appears that the
impugned reopening proceedings are
on the borrowed satisfaction. No
independent opinion is formed. On
the plain reading of the reasons
recorded what emerges is that the
A.O. on considering the
information received from the
Principal Director of Income Tax
(Investigation), Ahmedabad,
reassessment proceedings have been
initiated on the ground that the
income escaped assessment.
However, there is no assertion
regarding the basis on which
material on record, he has come to
such conclusion. Therefore, the
material on the basis of which the
A.O. seeks to assume the
jurisdiction under section 147 if
the Act is the information
received from the external source
viz. the Principal Director of
Income Tax (Investigation),Page 15 of 37
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Ahmedabad. It cannot be disputed
that on the basis of the
information received from another
agency, there cannot be any
reassessment proceedings. However,
after considering the
information/material received from
other source, A.O. is required to
consider the material on record in
case of the assessee and
thereafter is required to form an
independent opinion on the basis
of the material on record that the
income has escaped assessment.
Without forming such an opinion,
solely and mechanically relying
upon the information received from
other source, there cannot be any
reassessment for the
verification.”
22. Reliance was also placed on the
judgment of Hon’ble Supreme Court in the
case of ACIT vs Rajesh Zaveri Stock
Brokers Pvt. Ltd. reported in [2007] 161
Taxmann 316 (SC) wherein it is observed as
under:
“………At the stage of issue of
notice, the only question is whetherPage 16 of 37
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there was relevant material on which a
reasonable person could have formed a
requisite belief……”
23. Learned Senior Advocate Mr. Hemani
invited the attention of the Court to an
RTI application dated 24/12/2021 whereby
the Petitioner sought information about
the documents which have been relied upon
in issuing the Impugned Notice.
24. Reliance was also placed on the
decision of Hon’ble Calcutta High Court in
case of S.P. Agarwalla alias Sukhdeo
Prasad Agarwalla vs. ITO reported in
(1983) 140 ITR 1010 (Cal.).
25. It was therefore, submitted that the
respondent has not formed any independent
opinion about escapement of income nor
does it appear that there stands any
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belief upon which the respondent has
issued the Impugned Notice for escapement
of Income and the respondent has wholly on
the basis of information received,
initiated the reassessment proceedings and
therefore, the impugned reassessment
proceedings have been initiated only and
solely upon borrowed satisfaction of the
investigation wing, which is not
permissible.
26. Reliance was also placed on the
decision of this Court in the case of
Varshaben Sanatbhai Patel Versus Income
Tax Officer, reported in (2015) 64
Taxmann.com 179 (Gujarat).
27. It was further submitted that the
crucial link or nexus between the
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information available to the respondent
and the formation of belief is absent in
the reasons recorded. The formation of
belief by the respondent that income of
the petitioner chargeable to tax had
escaped assessment, was unreasonable and
irrational, as it could not be related to
the underlining information, something
which is discernible from a bare reading
of the letter recording reasons. It was
submitted that the expression “reason to
believe” which is found in Section 147 of
the Act does not have the same connotation
as “reason to suspect”. It was therefore,
submitted that the impugned notice is
liable to be quashed as illegal and
without jurisdiction on this ground
itself.
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28. It was submitted that as per section
10(38) of the Act, capital gain on sale of
equity shares in a company is exempted
provided the capital assets (being shares)
are long term in nature i.e. period of
holding of shares is more than one year.
However, in the given case, the petitioner
has held the shares for a period of around
25 months, which aspect has been
completely ignored by the respondent and
reassessment is sought to be initiated
merely on the basis of suspicion.
29. It was further submitted that a
perusal of the reasons recorded would
indicate that the higher authorities had
granted approval in a mechanical manner
without any application of mind or cogent
reasoning which is not permissible in law
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as held in case of Mohinder Singh Malik
vs. CCIT reported in (267 ITR 716)(PH). It
was submitted that the satisfaction
arrived at by the concerned officer should
be discernible from the sanction- order
passed under Section 151 of the Act. In
support of such contention, reliance was
placed on decision of this Court in case
of Chhugamal Rajpal vs. S.P. Chaliha,
reported in (1971) 1 SCC 453 wherein it is
held as under:
“… Further the report submitted by
him under Section 151(2) does not
mention any reason for coming to the
conclusion that it is a fit case for
the issue of a notice under Section
148. We are also of the opinion that
the Commissioner has mechanically
accorded permission. He did not
himself record that he was satisfied
that this was a fit case for the issue
of a notice under Section 148. To
Question 8 in the report which reads
“whether the Commissioner is satisfied
that it is a fit case for the issue ofPage 21 of 37
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notice under Section148“, he just
noted the word “yes” and affixed his
signatures thereunder. We are of the
opinion that if only he had read the
report carefully, he could never have
come to the conclusion on the material
before him that this is a fit case to
issue notice under Section 148. The
important safeguards provided in
Sections 147 and 151 were lightly
treated by the Income Tax Officer as
well as by the Commissioner. Both of
them appear to have taken the duty
imposed on them under those provisions
as of little importance. They have
substituted the form for the
substance.”
30. It was further submitted that in
the impugned order it is categorically
stated that “It would be relevant to
mention that a detailed enquiry was made
by the investigation wing through which it
has been revealed that a large scale of
tax evasion had been made in the form of
bogus long term capital gain by providing
accommodation entries and as per the
information, you are one of the
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beneficiaries out of them.”. However, the
said enquiry report has neither been
reflected in the reasons for reopening nor
has been furnished to the petitioner.
31. It was submitted that without
prejudice to the case of the petitioner,
even if it is assumed though not admitted,
that the petitioner herein is involved
into any accommodation entries and such
information has been recovered from the
search and seizure carried at M/s Kushal
Ltd., even then the petitioner’s
assessment can be reopened for assessment
under Section 153C of the Act. Thereby,
any action pursuant to search and seizure,
as is the case of the Petitioner,
proceedings under Section 153C of the Act
are required to be followed. It was
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further submitted that the construct of
Section 153 C of the Act, incorporates a
notwithstanding clause relevant to Section
148 of the Act and thereby the present
Impugned Notice and consequential
proceedings are bad in law and thereby are
required to quashed by this Court.
32. On the other hand learned advocate Ms.
Maithili D. Mehta for the respondent
submitted that as per the information
available, a search and seizure under
section 132 of the Act was carried out in
Kushal group of Ahmedabad on 05.02.2019
wherein incriminating evidences in the
form of digital data, loose papers,
diaries etc. were found and seized and
said entity was providing accommodation
entries and the assessee was such
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beneficiary of accommodation entries
provided by Kaushal group.
33. Learned advocate Ms. Mehta placed
reliance on decision in case of Lalita
Ashwin Jain v. Income tax officer reported
in (2014) 45 taxmann.com 404 wherein it
was held that Assessing Officer while
placing reasons recorded for approval of
Commissioner prior to issuance of notice
under section 148, recorded in Form
No.ITNS 10 that income which escaped
assessment was more than Rs. One lakh and
therefore, statutory bar imposed against
reopening of assessment would not operate
in such a case. Further it was held that
where Joint Commissioner nodded in favour
of Assessing Officer by writing ‘yes’ to
reasons recorded and accorded permission
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for reopening of assessment, notice of
reopening on that count alone cannot fail
holding that assumption of jurisdiction
under section 147 was invalid, if
application of mind is otherwise
demonstrable from material on record. It
was therefore, submitted that assessee’s
contention regarding issuance of notice
without jurisdiction is not tenable and
the notice issued under section 148 of the
Act is as per law.
34. Relying upon the decision in case of
ACIT v. Rajesh Jhaveri Stock Brokers Pvt.
Ltd. reported in (2007) 291 ITR 500 and
in case of GVK Gautami Power Ltd. v.
Asstt. CIT reported in (2011) 336 ITR 451
it was submitted that the phrase “reasons
to believe” means cause or justification
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for the Assessing Officer to know or
suppose that income had escaped
assessment. It does not mean that the
Assessing Officer should have finally
ascertained the facts by legal evidence or
conclusion. At the stage of reopening of
assessment, the final outcome of the
proceedings is not relevant. The only
question is whether there was relevant
material on which a reasonable person
could have formed a requisite belief.
Whether or not the material would
conclusively prove escapement is not the
aspect or concern at the stage of
initiation of reassessment proceedings but
this aspect has to be examined
subsequently during the course of
reassessment proceedings.
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35. It was further submitted that a
detailed inquiry was made by the
investigation wing through which it has
been revealed that a large scale of tax
evasion had been made in the form of bogus
long term capital gain by providing
accommodation entries and therefore, the
proposed action of holding the LTCG of the
assessee as non-genuine and liable for tax
under section 68 of the Act was legal and
valid. In support of such contention
reliance was placed on decision in case of
CIT v. Durga Prasad More reported in
(1971) 82 ITR 540 (SC) and in case of
Sumati Dayal v. Commissioner of Income Tax
reported in 214 ITR 801 (SC), wherein it
is held that even if a transaction or
entry prima facie appears to be legal and
is duly supported by documentary evidence,
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the tax authorities not only have the
right but also an obligation to make
deeper inquires and examine the
transaction in the light of surrounding
circumstances and test to uncover its real
nature. Reliance was also placed on
decision in case of ITAT, Nagpur Bench in
ITA No.61/Nag/2013 in case of Shri Sanjay
Bimalchand Jain v. ITO Ward 4(2), Nagpur
delivered on 18.07.2016, wherein the Bench
upheld the addition of LTCG claimed exempt
by the assessee.
36. It was submitted that said judgment of
ITAT Nagpur has also been upheld by
Hon’ble Bombay High Court in Income Tax
Appeal No.18/2017 delivered on 10.04.2017.
37. It was submitted that issue of LTCG
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was also confirmed by ITAT Chennai Bench
in case of Mrs. Vidya Reddy v. ITO Int.
Taxation 1(2) Chennai in ITA
No.2016/Chny/2017 dated 15.05.2018.
38. Reliance was also placed on decision
in case of Narendra Shrikishan Agarwal v.
ITO reported in TS-670-4TAT2019(PUN) as
well as in case of Shri Sandeep Bhargava
v. ACIT Circel-60(1), New Delhi passed in
ITA No. 420/Del/2019 vide judgment dated
20.08.2019. Further reliance was placed on
decision of Delhi High Court in case of
Suman Poddar v ITO, Delhi passed in ITA
No. 841/2019 dated 17.09.2019 wherein it
was held that Cressanda Solutions Ltd was
in fact identified by the Bombay Stock
Exchange as a penny stock being used for
obtaining bogus Long Term Capital Gain.
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It was submitted that Special Leave to
Appeal No.26864/2019 against the said
judgment of Delhi High Court was also
dismissed vide order dated 22.11.2019. It
was therefore, submitted that notice
issued under section 148 of the Act is
legal and valid and requires no
interference by this Court.
39. Having considered rival submissions
made by learned advocates for the
respective parties and on perusal of the
material on record as well as documents
placed by the petitioner, it appears that
the details of shares purchased and sold
as per Contract note, copy of ledger of
broker ASE Capital Markets Ltd and copy of
bank statement of assessee for purchase of
share and sale of shares were produced
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by the petitioner and the purchase and
sale of share have order number, order
time, trade number and trade time
mentioned in the contract. The assessee
purchased 60,000 shares of Kushal Ltd. The
assessee has sold 1,05,465/- shares for
Rs. 1,09,98,307/- leaving the balance of
1,94,535 shares as closing investments as
on 31.03.2016 which is disclosed in the
balance sheet and part of demat statement.
It, therefore, cannot be said that the
petitioner has not disclosed fully and
truly all material facts relevant for
assessment.
40. It also appears from the reasons
recorded that the no verification of the
material on record is made by the
respondent and there is no independent
opinion that any income has escaped
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assessment due to any failure on the part
of the assessee in not disclosing fully
and truly all material facts necessary for
assessment.
41. Moreover, from the reasons recorded
it appears that the initiation of
reopening proceedings are on the borrowed
satisfaction as no independent opinion is
formed and on bare perusal of the reasons
recorded, it emerges that the Assessing
Officer, considering the information
received from the insight portal, has
issued impugned notice forming reason to
believe that the income has escaped the
assessment on the presumption that the
petitioner has been involved in creating
the non-genuine profit which is already
offered to tax in the return of income
which is accepted in the regular course of
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assessment by passing the order under
section 143(3) of the Act.
42. It is also pertinent to note that there is
no basis to form reasonable belief for
escapement of income except the
information made available on the insight
portal. The respondent-Assessing Officer
has not considered the material on record
to come to the conclusion that there is
failure on the part of the petitioner to
disclose truly and fully all material
facts to have reason to believe for
escapement of income. Therefore, on the
basis of the information received from
another agency on insight portal or from
the SEBI report, there cannot be any
reassessment proceedings unless the
respondent, after considering such
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information/material received from other
sources, consider the same with the
material on record in the case of the
petitioner assessee and thereafter, is
required to form independent opinion that
income has escaped assessment. Without
forming such opinion solely and
mechanically relying upon the information
received from the other sources, the
respondent-Assessing Officer could not
have assumed the jurisdiction to reopen
the assessment based on such information.
This Court in case of Raajratna
Stockholdings Pvt. Ltd. v. Assistant
Commissioner of Income Tax Circle 1(1)(1)
(judgment dated 25.11.2024 rendered in
Special Civil Application No.3696 of 2022)
in similar circumstances has quashed and
set aside the impugned notice issued under
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section 148 of the Act and consequential
order disposing off the objections raised
by the petitioner.
43. Considering the facts the case, we are of
the opinion that the respondent-Assessing
Officer could not have assumed the
jurisdiction merely and solely relying
upon the information made available on the
insight portal without forming any
independent opinion on the basis of the
material on record vis-a-vis the
petitioner is concerned.
44. The petitions therefore, succeed and are
accordingly allowed. Impugned notice dated
31.03.2021 issued under section 148 of
the Act and the consequential order dated
13.12.2021 dismissing the objections
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raised by the petitioner are hereby
quashed and set aside. Rule is made
absolute to the aforesaid extent. No order
as to costs.
(BHARGAV D. KARIA, J)
(D.N.RAY,J)
RAGHUNATH R NAIR
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