Facts of the Case

The petitioner, Sanjay Kaul, was an employee of M/s Laureate Education Pvt. Ltd. and filed his return of income for Assessment Year 2014-15 declaring taxable income of ₹7,86,72,780 and paid tax of ₹2,07,95,141. The case was selected for scrutiny and assessment was completed under Section 143(3) on 25.07.2016, accepting the returned income. During the relevant year, the petitioner reported long-term capital gains of ₹9,81,71,989 and short-term capital loss of ₹4,25,94,622 on sale of shares of Indian Infotech and Software Ltd. (IISL) and SRK Industries Ltd., resulting in net capital gains of ₹5,55,36,505.

On 30.03.2019, the Assessing Officer issued a notice under Section 148 seeking to reopen the assessment for AY 2014-15 based on information received from the Investigation Wing alleging that IISL and SRK were penny stock companies used for providing accommodation entries through bogus capital losses. The petitioner sought reasons and filed detailed objections, which were rejected by the Assessing Officer on 24.09.2019, leading to the present writ petition.

Issues Involved

Whether the reassessment proceedings initiated under Sections 147 and 148 were valid when based solely on generalized Investigation Wing reports and third-party statements without any specific material linking the petitioner to the alleged accommodation entry scheme, and whether such material satisfied the statutory requirement of “reason to believe”.

Petitioner’s Arguments

The petitioner contended that the reopening was based purely on suspicion and conjecture arising from Investigation Wing reports and the statement of a third party, Mr. Anil Kedia, Director of Excel Stock Broking Pvt. Ltd., with whom the petitioner had no dealings. It was submitted that all transactions were executed through a registered broker on the BSE platform, supported by time-stamped contract notes, demat statements, and banking channels. The petitioner argued that no tangible material existed to show his involvement in any bogus arrangement and that a concluded scrutiny assessment could not be reopened merely on generalized allegations.

Respondent’s Arguments

The Revenue argued that the Investigation Wing reports constituted tangible material and that statements of persons involved in rigging penny stocks established a reasonable basis to form belief of escapement of income. It was contended that at the stage of issuing notice under Section 148, the Assessing Officer was not required to conclusively establish escapement but only form a belief based on human probabilities.

Court Order / Findings

The Delhi High Court examined the reasons recorded for reopening and the material relied upon by the Assessing Officer. The Court held that the Investigation Wing reports and the statement of Mr. Anil Kedia were general in nature and did not specifically implicate the petitioner. It observed that merely because the petitioner traded in shares of companies later identified as penny stocks, it could not automatically lead to the conclusion that his transactions were sham or that he was a beneficiary of accommodation entries.

Relying on the principles laid down by the Supreme Court in ITO v. Lakhmani Mewal Das and its own decision in CNB Finwiz Ltd. v. DCIT, the Court reiterated that “reason to believe” cannot be equated with “reason to suspect” and that there must be a live nexus between the material and the belief of escapement of income. The Court found that no such nexus existed in the present case and that the reopening was based on mere suspicion.

Important Clarification

The High Court clarified that concluded assessments cannot be reopened on the basis of generalized investigation reports or third-party statements unless there is specific, tangible material establishing a live link between the assessee and the alleged tax evasion. Penny stock investigations, by themselves, do not justify reopening without individualized evidence.

Final Outcome

The writ petition was allowed. The notice dated 30.03.2019 issued under Section 148 for Assessment Year 2014-15 was set aside, and the reassessment proceedings initiated pursuant thereto were quashed.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769677505_SANJAYKAULVsTHEINCOMETAXOFFICERWARD244NEWDELHIORS..pdf

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