No Fresh Evidence available with AO Supporting Income Escapement Claim against Stock Market Trader: Gujarat HC quashes Income Tax Reassessment Notice [Read Order]

The income tax reassessment notice against the stock market trader was quashed by the Gujarat High Court as the Assessing Officer lacked fresh tangible evidence for supporting the income escapement claim out of his profit of Rs. 5 crores. 

The bench of Justices Bhargav D. Karia and Niral R. Meta observed that “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.”

The assessee, Deepak Natvarlal Pankhiyani (HUF) 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/-.

The assessee's case underwent limited scrutiny under section 143(2) of Income Tax Act, 1961 due to derivative transactions, with timely responses to subsequent notices under section 142(1). After an assessment under section 143(3) on 30.12.2017, rectification was sought and partially allowed on 01.02.2018, followed by an appeal partly allowed on 30.08.2018.

Subsequently, an Income Tax Assistant Commissioner issued a notice under section 148 on 27.03.2021 for Assessment Year 2015-16. The assessee filed their return and sought reasons for reopening, receiving a notice under section 143(2) on 24.05.2021. Objections were filed on 22.07.2021 challenging the notice, with respondent No.2 disposing of these objections on 10.01.2022. The current petition before the High Court challenged the notice dated 27.03.2021 and the objection disposal order dated 10.01.2022.

The assessee's counsel argued that the notice and order by respondent No.1 are based on a single reason to believe income escaped assessment, specifically Rs. 5,66,96,530/- from share trading under section 68.

He criticised the reopening notice for lacking independent scrutiny and relying on undisclosed third-party information.

The counsel contended that the reasons for reopening constituted a change of opinion, as share trading was thoroughly assessed previously. He urged the court to quash the notice, calling it a fishing expedition without new evidence.

Mr. Sanghani, the income tax department’s counsel, argued against entertaining the petition, noting the availability of an appeal to the Commissioner of Income Tax (Appeals) [CIT(A)] for any future assessment order.

He stressed that the notice was issued with proper reasons and sanction, based on new information about manipulative stock practices not disclosed during the original assessment.

The counsel asserted that this justified the reopening under Section 147, as the initial assessment did not address these specific issues. Therefore, he concluded that the petition lacked merit and should be dismissed.

After hearing arguments and reviewing the case, the bench found that the petitioner had fully disclosed all material facts, including derivatives transactions, which were assessed under Section 143(3) on 30.12.2017. The court noted that the petitioner had already offered the profit in question for taxation, as evidenced by the profit and loss account submitted.

The Gujarat High court criticized the Income tax Assessing Officer for relying blindly on external information without verifying the petitioner's records, especially since the issue had been thoroughly scrutinized during the regular assessment.

The bench concluded that Respondent No.1 failed to cross-reference the external information with the existing records, despite thorough scrutiny during the regular assessment. They noted that the petitioner had fully disclosed all material facts during the assessment process.

Therefore, the court deemed the inome tax show cause notice to be without jurisdiction and contrary to legal provisions. They found it lacked fresh tangible material to reasonably suggest income had escaped assessment.

The bench further observed that the notice appeared to be based solely on a change of opinion, as the entire profit had been declared in the petitioner's tax return and scrutinized under section 143(3) of the Act.

As a result, the High Court deemed the income tax reassessment notice unjustified and without jurisdiction, citing it as a mere change of opinion. Consequently, the court allowed the petition, quashing the income tax notice dated 27.03.2021 under section 148 and the order dated 10.01.2022 rejecting objections.

Mr. B.S.Soparkar appeared for the petitioner.

To Read the full text of the Order CLICK HERE

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