Judgment Title
Principal Commissioner of Income Tax 2, Kolkata v. M/s Alosha Marketing Pvt. Ltd.
(Calcutta High Court, Judgment dated 16 June 2025 by Chief Justice T.S. Sivagnanam and Justice Chaitali Chatterjee (Das))
Court’s Decision
The Calcutta High Court dismissed the appeal filed by the Income Tax Department under Section 260A of the Income Tax Act, 1961. It upheld the order of the Income Tax Appellate Tribunal (ITAT), which had quashed the reassessment proceedings initiated against the assessee. The Court found that the reasons for reopening were vague, lacked rational nexus, and failed to demonstrate the assessee’s specific involvement. It concluded:
“Reopening must be based on concrete material, not vague suspicion… reasons must establish live link between material and belief.”
Facts
The appeal arose from a reassessment order passed under Section 143(3) read with Section 147 of the Income Tax Act for the assessment year 2011–12. The original reassessment was triggered by a notice issued under Section 148 dated 28.03.2016, citing investigation reports that alleged tax evasion through bogus long-term capital gains (LTCG) from penny stock transactions.
The report mentioned that several individuals/entities had booked fictitious LTCG by trading in penny stocks. The assessee was alleged to have earned bogus LTCG of ₹5,47,749 and short-term capital loss (STCL) of ₹35,31,930 from dealings in JMD Telefilm scrips. Based on this, the Assessing Officer concluded that income of ₹40,79,679 had escaped assessment.
However, the assessee objected to the reopening, claiming that:
- It had not earned any LTCG.
- No exemption under Section 10(38) was claimed.
- The loss on shares was treated as business loss (not capital loss) since they were held as stock-in-trade.
These objections were rejected by the Assessing Officer, leading to the reassessment order which was upheld by the Commissioner of Income Tax (Appeals). The ITAT, however, allowed the assessee’s appeal.
Issues
- Whether the reopening of assessment under Section 147 was legally sustainable?
- Whether the Tribunal erred in deleting the addition of ₹29,90,203 under Section 68 of the Income Tax Act?
- Whether the case fell under the exceptions outlined in CBDT Circular No. 5/2024 dated 15.03.2024?
Petitioner’s Arguments
The Department contended that:
- The Assessing Officer had valid justification to reopen the assessment based on the investigation report which indicated large-scale accommodation entries.
- The Tribunal erred in holding that the reopening was invalid and deleting the addition of ₹29,90,203.
- The case involved accommodation entries and thus attracted clause (h) of para 3.1 of CBDT Circular No. 5/2024 which disallowed certain benefits.
Citing PCIT v. Swati Bajaj (2022) 446 ITR 56 (Cal), the Department argued that the assessee had failed to prove the identity, creditworthiness, and genuineness of the transactions.
Respondent’s Arguments
The assessee’s counsel argued that:
- There was no direct evidence against the assessee; the investigation report did not name it.
- The reasons recorded were generic and lacked any live link to the assessee.
- No LTCG was shown in the return, and there was no claim under Section 10(38).
- The shares in question were treated as stock-in-trade, and the losses were declared as business losses, not capital losses.
- The Assessing Officer failed to independently examine the assessee’s return before issuing notice under Section 148.
Judgments relied on:
- GKN Driveshafts (India) Ltd. v. ITO, (2003) 259 ITR 19 (SC) – on disposal of objections.
- ITO v. Lakhmani Mewal Das – reopening requires rational connection with actual escapement of income.
- PCIT v. Shri Sanjay Mehta, PCIT v. Eastern Coalfields Ltd., and PCIT v. Prasant Desai – on procedural lapses invalidating reassessment.
Analysis of the Law
The Court analysed the legal standard for reopening assessments under Section 147:
- There must be “reason to believe” that income has escaped assessment.
- Such belief must be based on concrete material and not vague allegations.
- There must be a live link or rational connection between the information and the formation of belief.
- Mere reference to investigation reports or generalised suspicion is insufficient.
The Court criticised the use of the term “bogus” in the reasons for reopening without any independent verification of the assessee’s records.
It reiterated the binding nature of the GKN Driveshafts judgment on the need to dispose of objections properly before reassessment.
Precedent Analysis
- GKN Driveshafts (India) Ltd. v. ITO, (2003) 259 ITR 19 (SC)
➤ Mandates disposal of objections to reopening before proceeding further. - ITO v. Lakhmani Mewal Das
➤ Reopening must be based on material that has a live link with escapement. - PCIT v. Swati Bajaj, 446 ITR 56 (Cal)
➤ Dealt with accommodation entries; relied on by revenue but distinguished on facts. - PCIT v. Sanjay Mehta, 2024(3) TMI 1014
➤ Reassessment quashed due to lack of direct connection with the assessee. - PCIT v. Prasant Desai, 2025(6) TMI 984
➤ Reiterated that reasons must not be vague or based on borrowed satisfaction.
Court’s Reasoning
- The investigation report was a general statement and did not name the assessee.
- The word “bogus” was used without proper examination of the return or evidence.
- The Assessing Officer failed to establish omission or failure by the assessee to disclose material facts.
- The objections raised by the assessee were not disposed of in accordance with GKN Driveshafts.
The Court held:
“It is not any and every material, howsoever vague and indefinite or distant, remote and farfetched which would warrant the formation of belief.”
Conclusion
The High Court held that the reassessment proceedings were bad in law and upheld the Tribunal’s findings. The appeal filed by the Department was dismissed, and the questions of law were answered against the revenue.
Implications
- Reiterates the limits on the power of reopening assessments under Section 147.
- Clarifies that generic investigation reports cannot justify reassessment.
- Reinforces judicial scrutiny over procedural lapses in reopening.
- Highlights the necessity for Assessing Officers to record detailed and independent reasons before invoking Section 148.
