Reassessment cannot be reopened on suspicion without a direct nexus between material and alleged income escapement.

Royal Chains P Ltd., engaged in the manufacture and trading of jewellery, filed its return for A.Y. 2016–17 declaring total income of ₹5,04,43,130.

A limited scrutiny assessment under Section 143(3) of the Income-tax Act, 1961 was completed on 28 November 2018.

The scrutiny specifically examined the share premium received by the petitioner, including the applicability of Section 56(2)(viib), and the petitioner furnished documents concerning the share issue, valuation, foreign investment and regulatory compliances.

The petitioner had allotted shares to Viren Jewellers LLC, Dubai, first at a premium of ₹5 per share and subsequently, within four months, at a premium of ₹59 per share.

The total amount received was ₹15,55,79,207.

A survey under Section 133A had been conducted on 7 September 2018, during which statements were recorded and the share transactions were examined.

On 30 March 2021, the Assessing Officer issued a notice under Section 148 proposing to reopen the assessment.

The petitioner sought the reasons, filed objections and challenged the reopening proceedings by writ petition.

The Assessing Officer rejected the objections on 17 January 2022.

The High Court granted interim protection restraining further reassessment proceedings.

Whether the Assessing Officer had a valid “reason to believe” that the petitioner’s share capital/share premium of ₹15,55,79,207 had escaped assessment, based on the survey report, statements and alleged defects in the transaction.

Whether the reopening of the assessment was impermissible as a change of opinion after the issue of share premium had been examined in the original scrutiny assessment under Section 143(3).

Whether the alleged escapement of ₹21,636 on account of delayed PF and ESIC contributions could constitute a valid basis for reopening when the contributions had been deposited before the due date for filing the return under Section 139(1).

Whether reliance on material not furnished to the petitioner, including the statements of Sanjay Bavishi and the survey report, violated the principles of natural justice.

The Court applied Sections 147 and 148 of the Income-tax Act, under which reassessment requires the Assessing Officer to possess a genuine “reason to believe” that income chargeable to tax has escaped assessment; mere suspicion is insufficient.

The material relied upon must have a rational connection, direct nexus or live link with the alleged escapement of income, although the Court does not ordinarily examine the sufficiency or adequacy of such material.

This principle was derived from ITO v. Lakhmani Mewal Das, 103 ITR 437 (SC), and followed in Sesa Sterlite Ltd. v. ACIT, 107 taxmann.com 388 (Bom), and PCIT v. Shodiman Investments (P) Ltd., 93 taxmann.com 153 (Bom).

The Court also applied the principle that reassessment cannot be founded on vague, remote or unconnected information, nor used as a fishing enquiry.

For employees’ contributions, the Court applied the law prevailing on 30 March 2021, as stated in CIT v. Ghatge Patil Transports Ltd., 368 ITR 749 (Bom), that payment before the due date for filing the return under Section 139 could not justify disallowance.

The later decision in Checkmate Services (P) Ltd. v. CIT, 143 taxmann.com 178 (SC), delivered on 12 October 2022, could not retrospectively supply the Assessing Officer with a reason to believe existing on the date of the notice.

The Court found that the statements of Sanjay Bavishi merely alleged that Manoj Jain was involved in illegal cash transactions and non-genuine jewellery businesses.

They did not refer to Royal Chains, Viren Jewellers LLC’s investment in the petitioner, or the specific share transaction under review.

Consequently, the alleged information did not establish a direct nexus between the material and the belief that the petitioner’s income had escaped assessment.

The Assessing Officer had effectively inferred that the petitioner’s transaction was non-genuine merely because of the alleged dubious background of a person associated with the investor, which amounted to suspicion and conjecture rather than a legally sustainable reason to believe.

The survey report did not cure this defect.

Its conclusion that the investment represented the petitioner’s own unaccounted money routed through the FDI route was unsupported by material demonstrating any such cash movement or connection with the petitioner.

The Court also noted that the share issue had already been examined during the original scrutiny assessment and that the petitioner had furnished extensive supporting material, including valuation and regulatory documents.

Further, the survey report and Bavishi’s statements, though relied upon in the recorded reasons, had not been supplied to the petitioner, reinforcing the procedural unfairness of the reopening.

Regarding PF and ESIC contributions, the Court held that the contributions had been deposited by the due date for filing the return.

Under the law prevailing when the notice was issued, namely the rule in Ghatge Patil, no income had escaped assessment on that account.

The subsequent ruling in Checkmate Services could not retrospectively validate the Assessing Officer’s belief as of 30 March 2021.

Thus, neither of the two grounds recorded by the Assessing Officer constituted a valid jurisdictional basis for reopening.

The material relied upon regarding the share investment had no direct nexus or live link with the alleged escapement of the petitioner’s income, and the PF/ESIC ground was contrary to the law prevailing on the date of issuance of the notice.

The Court therefore allowed the writ petition, quashed and set aside the notice dated 30 March 2021 issued under Section 148, made the Rule absolute and disposed of the petition without an order as to costs.