Reassessment Notice Quashed: AO Failed to Apply Mind, Mixed Up Assessment Years

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Case Name

Bharatkumar Nihalchand Shah vs. Assistant Commissioner of Income Tax (High Court of Gujarat)

R/Special Civil Application No. 17709 of 2018

Date: 19th March 2021

Key Takeaways

• Reassessment notices must be based on clear, relevant facts and proper application of mind by the AO.
• Mixing up facts from different assessment years (AYs) is a serious procedural error.
• Section 147 and Section 148 of the Income Tax Act, 1961, require the AO to have a “reason to believe” that income has escaped assessment, based on material evidence.
• Mechanical or assumption-based reopening of assessments is not permitted.
• The court emphasized the importance of following due process, including proper approval from higher authorities as per Section 151.
• The notice was quashed because the AO’s reasons were based on assumptions, typographical errors, and lacked a direct link to the relevant AY.

Issue

Did the Assessing Officer validly reopen the assessment for AY 2011-12, or was the notice under Section 148 invalid due to lack of proper reasoning and mixing up of assessment years?

Facts

• The Petitioner: Bharatkumar Nihalchand Shah, a trader/broker in shares, securities, and commodities.
• Return Filed: For AY 2011-12, he filed a return showing a loss of Rs. 1,98,14,401, processed under Section 143(1).
• Reassessment Notice: On 29.03.2018, the AO issued a notice under Section 148 to reopen the assessment for AY 2011-12, claiming income had escaped assessment.
• Basis for Reopening: The AO relied on information from a survey at the National Multi Commodity Exchange (NMCE), which suggested that certain entities, including the petitioner, were involved in creating artificial trading volumes and booking contrived losses/profits to evade tax.
• Key Error: The AO’s reasons for reopening referred to a profit of Rs. 15,55,275 earned in transactions with Pinnacle Commodities during the previous year relevant to AY 2010-11, not AY 2011-12.
• Petitioner’s Objection: Shah argued that the AO had mixed up the assessment years and that the reasons for reopening were not relevant to AY 2011-12.
• AO’s Response: The AO claimed the error was a “human error” or typographical mistake and tried to justify the reopening based on general information about tax evasion at NMCE.

Arguments

Petitioner (Bharatkumar Nihalchand Shah)

• The reasons for reopening the assessment for AY 2011-12 were based on facts and transactions relevant to AY 2010-11.
• The AO did not apply his mind and mechanically issued the notice.
• The AO wrongly invoked clause (a) to Explanation 2 of Section 147, which applies to non-filers, even though the petitioner had filed his return.
• There was no material or evidence to show that income had escaped assessment for AY 2011-12.
• The approval process under Section 151 was not properly followed.

Respondent (Assistant Commissioner of Income Tax)

• The AO received credible information from the investigation wing about tax evasion at NMCE.
• The mention of AY 2010-11 instead of AY 2011-12 was a typographical error.
• The AO did apply his mind and obtained the necessary approval from the Principal Commissioner.
• The notice was valid, and the petitioner could challenge the reassessment in appeal if aggrieved.

Key Legal Precedents & Provisions

• Section 147 of the Income Tax Act, 1961: Deals with the AO’s power to assess or reassess income that has escaped assessment.
• Section 148: Governs the procedure for issuing a notice for reassessment.
• Section 151: Requires prior approval from higher authorities for reopening assessments after four years.
• Clause (a) to Explanation 2 of Section 147: Applies to cases where no return of income has been filed.
• No specific case law names are cited in the judgment, but the court repeatedly references the above sections and the need for “reason to believe” based on material evidence.

Judgement

• Court’s Decision: The High Court quashed the notice dated 29.03.2018 issued under Section 148 for AY 2011-12.
• Reasoning: The AO failed to form an independent opinion and mixed up facts from different assessment years. The reasons for reopening were based on assumptions, typographical errors, and lacked a direct link to the relevant AY. The AO also wrongly invoked provisions meant for non-filers, even though the petitioner had filed his return.
• Order: The impugned notice was set aside, and the petition was allowed. No costs were awarded.

FAQs

Q1: Why did the court quash the reassessment notice?

A: Because the AO’s reasons for reopening were based on facts from the wrong assessment year, lacked proper application of mind, and were not supported by material evidence relevant to AY 2011-12.

Q2: What is the significance of “reason to believe” in Section 147?

A: The AO must have a genuine, evidence-based belief that income has escaped assessment. Mere assumptions or mechanical application of information is not enough.

Q3: Can the AO reopen an assessment based on information from another year?

A: No, the information must be directly relevant to the assessment year being reopened.

Q4: What happens if the AO makes a typographical or procedural error in the notice?

A: If such errors affect the substance of the notice or show lack of application of mind, the notice can be quashed, as in this case.

Q5: Does this case mean all reassessment notices are invalid?

A: No, only those where the AO fails to follow due process, mixes up facts, or acts mechanically without proper reasoning.

1. Rule. Learned Standing Counsel Ms. Mauna Bhatt waives service of notice of rule for respondent.

2. Having regard to the controversy involved in this petition, which is in a very narrow compass, with the consent of the learned advocates for the respective parties, the same is taken up for hearing today.

3. By way of this petition, the petitioner has challenged the notice dated 29.3.2018 issued by the respondent under section 148 of the Income Tax Act, 1961 (For short “the Act, 1961”) seeking to reopen the assessment of the

petitioner for assessment year 2011­2012.

4. The facts stated briefly are that the petitioner

filed the return of income for the assessment

year 2011­2012 on 28.09.2011 disclosing loss of

Rs. 1,98,14,401/­. The return was processed

under section 143(1) of the Act,1961.

Thereafter, by the impugned notice dated

29.3.2018, the respondent sought to reopen the

assessment of the petitioner for the assessment

year 2011­2012. The reasons recorded for

reopening the assessment are as under :

“The return of income was filed on 28/09/2011 at

Rs.Nil.The same was processed u/s.143(1) of the act

on 10/11/2011.

1. This office is in receipt of information through the

Office of the DDIT(Inv),Unit­3(1) Kolkata.vide his

letter No.DDIT(Inv.)/Kol/NMCE/ Report/2017­18/10742

dated 12.03.2017. As per information it was observed

that A survey action u/s.133A of the IT Act was

conducted by the O/o Pr.DIT(Inv.), Ahmadabad at the

premises of NMCE and it was found that

clients/members of NMCE were found to be involved in

creating artificial volume and suspected evasion of

income­tax by misuse of NMCE platform. After

analysis of data,85 entities as identified who had

booked contrived losses. During the

investigation/enquiry statements of entry operators

i.e.Shri devesh Upadhyay,Shri pankaj agarwal,Shri

Prakash Jajodia etc.are recorded and they accepted

in the statement that these companies which are

shell/paper companies which are engaged in providing

accommodation entries in various forms to the

beneficiaries. These entities are engaged in sub

broking business, resorted to facilitate

accommodation bogus loss/profits to enable

beneficiaries to set off such losses against their

taxable profits to reduce their tax liability. The

misuse of NMCE platform carried out by these shell

companies was thus used as a systematic tool for

evasion of taxes.

2. As per data received, it was found that most of

the trading was done through member/broker of NMCE

who was penalized/suspended because they were found

to be involved in artificial trading of shares by

misuse of NMCE platform. These members/brokers

created dummy entities which have neither filed

their return of income nor shown income earned

through commodities profit,to accommodate bogus

loss.

3. As per data received from the o DDIT(Inv.),

Unit­3(1), Kolkata, Shri BHARAT NIHALCHAND SHAH is

one of the beneficiary and has entered into

transaction through Counter Party Client i.e.

Pinnacle commodities during the previous year

relevant to the A.Y.2010­11 and booked profit of

Rs.15,55,275/­ by way of misuse of NMCE Platform.

4. The assessee has declared net loss of

Rs.198,14,401/­under the head Loss from business

other then loss from speculative business including

unabsorbed depreciation allowance u/s 35(4)'' in

SCHEDULE CFL of the return of income. From the

information as mentioned above,it is clear that the

assessee has booked the profit of Rs.15,55,275/­

From the information gathered, the assessee has

failed to disclose these income in his return of

income.

5. In view of the above, I have reason to believe

that the assesee's income has escaped assessment to

the tune of Rs.15,55,275/­ within the meaning of

clause (a) to the Explanation­2 to section 147 of

the Income­tax Act,1961. I am therefore satisfied

that this is a fit case for re­opening the

assessment u/s.147 r.w.s.148 of the Income ­tax act,

1961.

6. In view of the above, the provisions of clause (a)

of Explanation 2 of the Section 147 are applicable

to the facts of the case and assessment year under

consideration is deemed to be a case where income

chargeable to tax has escaped assessment. It is

further to be mentioned that in this case more than

four years have elapsed from the end of the

assessment year under consideration. Hence,

necessary sanction to issue the notice u/s 148 has

been obtained separately from the Principal

Commissioner of Income Tax­1,AHMEDABAD as per the

provisions of sec 151 of the I.T.Act.

In view of the above, issue notice u/s 148 of the I

T Act.”

5. The respondent assessing officer provided

reasons for reopening vide letter dated 8.5.2018

to the petitioner. The petitioner raised various

objections and requested to drop the

reassessment proceedings vide letter dated

6.10.2018. The respondent disposed of the

objections vide order dated 25.10.2018. The

petitioner has therefore, preferred this

petition challenging the impugned notice issued

under section 148 of the Act.

6. The learned advocate Mr. B.S. Soparkar for the

petitioner submitted that the reasons recorded

to reopen the assessment for the Assessment Year

2011­2012 are based upon the facts pertaining to

the transactions relevant to the Assessment Year

2010­2011. The learned advocate Mr. Soparkar

invited the attention of the Court to paragraph

no.3 of the reasons recorded which refers to the

transactions with one Pinnacle commodities

during the previous year relevant to A.Y. 2010­

2011. It was therefore, pointed out that while

in the opening part of the reasons recorded, the

Assessing Officer records that the assessee had

filed return of income on 28.9.2011 showing

income Rs. Nil which was processed under section

143(1) of the Act on 10.11.2011 but in paragraph

nos. 5 and 6, it is recorded that he has reasons

to believe that the income has escaped

assessment within the meaning of clause(a) to

the Explanation­2 to section 147 of the

Act,1961. It was submitted that clause(a) to

Explanation­2 to section 147 of the Act, 1961

would be applicable when no return of income has

been filed by the assessee. The learned advocate

Mr. Soparkar would therefore, submit that the

reasons recorded for reopening the assessment

for the A.Y. 2011­2012 are without proper

application of mind on the part of the Assessing

Officer.

7. The learned advocate Mr. Soparkar further

pointed out that the reasons have been recorded

on 29.3.2018 which is the date reflected in the

reasons furnished to the petitioner whereas in

the Form for recording reasons for initiating

the proceedings under section 148 of the Act for

obtaining approval of the Additional

Commissioner/Commissioner of Income­tax, the

same shows date 28.3.2018 which is prior to the

date of recording of the reasons. It was

therefore, submitted that though the petitioner

had raised such objection against reopening of

the assessment, the same is brushed aside in the

order rejecting the objections on the ground

that discrepancies are in the nature of human

error while typing which is an inadvertent

mistake. It was submitted that in paragraph no.

3.14 of the order rejecting the objections, the

Assessing Officer has recorded that the mistake

has happened in mostly all the cases re­opened

on information based and of non­filers. It was

therefore, submitted that the Assessing Officer

has mechanically recorded the reasons without

properly appreciating the facts of the case of

the petitioner.

8. The learned advocate Mr. Soparkar also invited

the attention of the Court to the objections

raised by the petitioner against the reopening

of the assessment to point out that even on

merits, the reopening of the assessment is not

justified.

9. The learned advocate Mr. Soparkar submitted that

the reasons recorded are erroneous inasmuch as

no income has escaped assessment because the

reopening of assessment for the A.Y. 2011­2012

could not have been made on the ground that the

petitioner has booked profit of Rs. 15,55,275/­

by way of misuse of the National Multi Commodity

Exchange (for short “the NMCE”)) platform for

the A.Y. 2010­2011. It was therefore, submitted

that the impugned notice is required to be

quashed and set aside.

10. On the other hand, the learned Standing

Counsel Ms. Mauna Bhatt for the Revenue at the

outset submitted that the petitioner is filed at

a pre­mature stage inasmuch as only notice under

section 148 read with section 147 of the Act has

been issued and in the event if the petitioner

is aggrieved by reassessment, the petitioner has

alternative efficacious remedy by way of filing

appeal before the CIT(Appeals).

11. The learned counsel Ms. Bhatt submitted

that during the survey under section 133A of

the Act at the premises of the NMCE, it was

found that the members/clients of the NMCE were

involved in creating artificial volume and

suspected evasion of tax by misuse of the NMCE

platform. It was found that the entities were

engaged in special business resorted to

facilitate the accommodation entries of bogus

losses or profits to enable the beneficiaries to

set off such losses against their taxable profit

to reduce their tax liability. It was also found

that the assessee was one of such beneficiary

and had entered into transaction through one

Pinnacle Commodities during the Previous Year

relevant to the Assessment Year 2011­2012.

12. The learned advocate Ms. Bhatt submitted

that due to inadvertent error it was stated in

the reasons in paragraph no.3 that it pertained

to year relevant to the A.Y. 2010­2011 and in

fact, it was for the previous year relevant to

Assessment Year 2011­2012 and even notice under

section 148 was issued for Assessment Year

2011­2012.

13. The learned advocate Ms. Bhatt further

submitted that upon receipt of information, the

Assessing Officer applied its mind and recorded

reasons which were forwarded to Principal CIT

and the reasons were recorded by the respondent

on 28.3.2018 and the approval was granted by the

Principal CIT on 29.3.2018 and therefore, there

is no question of having obtained the approval

prior to recording of the reasons. It was

submitted that notice issued under section 148

is legal and valid and petition being devoid of

merit, is required to be dismissed.

14. Having heard the learned advocates for the

respective parties and having gone through the

materials on record, the reasons recorded for

reopening of the assessment year 2011­2012

clearly shows non application of mind on part of

the Assessing Officer. Paragraph no.3 of the

reasons recorded refers to the transactions

relevant to assessment year 2010­2011 pertaining

to profit of Rs.15,55,275/­. The Assessing

Officer could not have issued notice for

reopening of the A.Y. 2011­2012 with respect to

income escaping assessment to the tune of

Rs.15,55,275/­ pertaining to A.Y. 2010­2011,

though such mistake is accepted in the affidavit

in reply being a human error while typing.

However, on perusal of the reasons recorded

together with the return of income and the audit

report along with the balance sheet and Profit

and Loss account for the Financial Year 2010­

2011 relevant to the A.Y. 2011­2012, there is no

data available with regard to the transactions

through the counter party i.e. Pinnacle

Commodities by way of alleged misuse of the NMCE

platform. In paragraph no.4 of the reasons

recorded, it is mentioned that the assessee has

declared net loss of Rs.1,98,14,401/­ which is

as per computation of total income, however

there is no basis or material placed on record

by the respondent to prima facie show that

profit of Rs.15,55,275/­ is earned by the

petitioner with regard to the transactions

relevant to the A.Y. 2011­12. Therefore, it

cannot be said that the Assessing Officer has

issued notice under section 148 of the Act, 1961

on the basis of the information received for

the assessment year 2011­2012.

15. The respondent has tried to buttress the

error committed in recording the reasons in the

affidavit in reply by stating that there was a

typing error in mentioning the assessment year

in paragraph no.3 of the reasons recorded by

referring to the statement of so­called entry

operators recorded wherein they have accepted

that 85 entities were identified through which

contrived losses were booked and all the

companies which were counter party clients were

shell/paper companies engaged in providing

accommodation entries in various firms to its

beneficiaries.

16. From the averments made in the affidavit in

reply filed on behalf of the respondent, it

emerges that the letter dated 12.3.2017 was

received from the office of the DCIT

(Investigation) Unit 3(1), Kolkatta during

survey action under section 133A of the Act,

1961 at the premises of the NMCE and it was

found that members/client of the NMCE were found

to be involved in creating artificial volume and

suspected evasion of tax by misuse of the NMCE

platform. However, on perusal of the said letter

which is annexed at Annexure­R/1 to the

affidavit in reply, it clearly states that

information with respect to A.Y. 2010­11 was

shared and said report is meant to disseminate

the rest of data for AY 2011­12 and AY 2012­13

only. It appears that the said report is the

basis for recording the reasons by the Assessing

Officer to reopen the assessment for A.Y.2011­

12. There is no live link between the

information received and reasons recorded so as

to enable the Assessing Officer to form a reason

to believe that income has escaped assessment

for AY 2011­12.

17. On perusal of the material on record, it

also appears that the Assessing Officer has

nowhere found that how amount of Rs.15,55,275/­

was earned as profit by the petitioner and the

same was not offered to tax for A.Y.2011­12.

Therefore, the reasons recorded are only based

upon the assumption and presumption. The

petitioner is engaged in trading/broking of

shares/ securities/ commodities including

derivatives transactions and has carried out

number of transactions and earned profit as well

as losses with respect to them and as per Income

Tax Act, loss of Rs. 1,98,14,401/­ is computed

and reflected in the statement of income and

after considering the materials on record,

return was processed under section 143(1) of the

Act, 1961. On perusal of the report at Annexure-

R/1, it pertains to contrived losses claimed by

the beneficiaries on the alleged modus operandi

adopted by manipulative practices done at the

NMCE. The Assessing Officer has failed to form

his own opinion with regard to the petitioner

for alleged escapement of income of

Rs.15,55,275/­ by merely stating that such

amount pertains to profit earned for A.Y. 2011­

12 though in the reasons recorded, it is

mentioned for A.Y. 2010­11. It is also pertinent

to note that paragraph no. 5 and 6 of the

reasons recorded refers to clause (a) to the

Explanation­2 to section 147 of the Act, 1961

for assuming jurisdiction to issue notice under

section 148. However on perusal of the said

clause which applies to non filer of the return

of income but as the petitioner has filed the

return of income,it would not be applicable.

Thus the Assessing Officer has recorded the

reasons without proper application of mind.

18. The Assessing Officer has recorded reasons

on 29.3.2018 as reflected in the copy of the

reasons provided to the petitioner and produced

on record. However, there is no reference to

approval sought from the Additional

Commissioner/Commissioner of Income­tax for

issuance of notice under section 148 as provided

in section 153 of the Act, 1961. Inspite of the

fact that the petitioner raised the objections

against the reopening of the assessment on the

issue of approval from Additional Commissioner/

Commissioner of Income­tax, the same is brushed

aside in the impugned order rejecting the

objections on the ground that such discrepancy

is in nature of human error while typing. In

paragraph no. 3.14 of the impugned order

rejecting the objections, the Assessing Officer

has recorded that the mistake has happened in

mostly all the cases reopened during the year

because the cases were reopened on the

information based and also of non­filers which

depicts that the Assessing Officer has

mechanically recorded the reasons without

properly appreciating the facts of the case.

19. Thus, taking into consideration the reasons

recorded, the Assessing Officer cannot be said

to have formed the reason to believe that the

income has escaped assessment. Therefore, in

view of facts and circumstances of the case, the

impugned notice dated 29.3.2018 issued under

section 148 of the Act, 1961 cannot be sustained

and is accordingly quashed and set aside.

20. The petition is disposed of. Rule is made

absolute to the aforesaid extent. No order as to

cost.