Facts of the Case

The petitioner, Ankit Khandelwal, a resident individual, filed his return of income for Assessment Year 2014-15 declaring total income of ₹9,43,944 arising from short-term capital gains on sale of shares of PMC Fincorp Limited and paid tax of ₹1,20,337. On 08.04.2021, the Assessing Officer issued a notice under Section 148 under the pre-Finance Act, 2021 regime. Pursuant to the Supreme Court decision in Union of India v. Ashish Agarwal, the notice was deemed to be a notice under Section 148A(b), and information was furnished to the petitioner on 20.05.2022.

The information alleged fictitious profits of ₹61,95,000 from bogus equity/derivative trading. The petitioner responded on 01.06.2022 explaining that the transaction resulted only in short-term capital gains of ₹9,43,944, fully disclosed in the return, supported by contract notes, broker statements and bank statements. Despite this, the Assessing Officer passed an order dated 22.07.2022 under Section 148A(d) holding it to be a fit case for issuance of notice under Section 148, asserting that income exceeding ₹50 lakh had escaped assessment. The petitioner challenged the proceedings.

Issues Involved

Whether the reassessment notice issued under Section 148 was barred by limitation under Section 149(1)(a) where the alleged escapement was below ₹50 lakh, whether there was any material to indicate escapement of income when the amount was already disclosed and taxed, and whether the order under Section 148A(d) suffered from non-application of mind.

Petitioner’s Arguments

The petitioner contended that he had not claimed any long-term capital gains and had fully disclosed and paid tax on short-term capital gains of ₹9,43,944. It was argued that even if the transaction was suspected to be non-genuine, the maximum possible income that could be brought to tax was ₹9,43,944, which was far below the ₹50 lakh threshold required to invoke extended limitation under Section 149. The petitioner submitted that the Assessing Officer relied on incorrect information alleging long-term capital gains of ₹61,95,000, which was demonstrably false.

Respondent’s Arguments

The Revenue argued that the information received from the Investigation Wing suggested bogus transactions and that the gross sale value of shares credited to the bank account constituted income represented in the form of an asset exceeding ₹50 lakh. It was contended that at the stage of initiation, the value indicated in the information should be considered for limitation purposes.

Court Order / Findings

The Delhi High Court examined the material on record and held that the information alleging long-term capital gains of ₹61,95,000 was incorrect and unsupported by any evidence. The Court noted that the petitioner had not received the gross sale value and had only received ₹9,43,944 as net gain, which was duly disclosed and taxed.

The Court held that even if the transaction were assumed to be bogus, the income that could be said to have escaped assessment could not exceed ₹9,43,944. There was no material to support the Assessing Officer’s conclusion that income exceeding ₹50 lakh had escaped assessment. The Court further held that the Assessing Officer failed to apply his mind to the petitioner’s response as required under Section 148A(d).

Accordingly, the Court held that the notice was barred by limitation under Section 149(1) and was also without jurisdiction as there was no escapement of income.

Important Clarification

The High Court clarified that for determining limitation under Section 149, the Assessing Officer must determine, at the stage of passing the order under Section 148A(d), the actual income alleged to have escaped assessment based on material on record and the assessee’s response. Incorrect or unsubstantiated information cannot be mechanically relied upon to invoke extended limitation.

Final Outcome

The writ petition was allowed. The order dated 22.07.2022 passed under Section 148A(d) and the consequential notice issued under Section 148 for Assessment Year 2014-15 were quashed. All proceedings pursuant thereto were set aside.

Link to download order https://www.mytaxexpert.co.in/uploads/1769755801_ANKITKHANDELWALVsINCOMETAXOFFICERORS..pdf 

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