Gauhati High Court Quashes Income Tax Reassessment After AO Cites 'Paucity of Time' For Not Verifying Transactions

The Gauhati High Court has quashed reassessment proceedings initiated under Income Tax Act, holding that the Assessing Officer (AO) reopened the assessment without first verifying the petitioner's transactions.

Referring to the AO's own recorded reasons that beneficiary-wise transactions could not be identified "due to paucity of time", Justice N. Unni Krishnan Nair held, "The recording of reason by the Assessing Officer in paragraph 5 of being unable to carry out investigation for identifying the transactions for each of the beneficiaries involved, due to paucity of time, would go to reveal that the notices were being issued only to carry out such verification. This court also holds that such reopening of assessment would not be permitted for a fishing or roving enquiry."

The judgment came in a writ petition filed by Biswajit Deb challenging a notice issued under Section 148 for the Assessment Year 2014-15 and all consequential proceedings.

Deb had declared the Long-Term Capital Gain (LTCG) of ₹35.69 lakh in his return, which was processed under Section 143(1). The Income Tax Department later reopened the assessment based on information available on the departmental Insight Portal, generated from an investigation conducted by the Directorate of Income Tax (Investigation), alleging that he was a beneficiary of bogus LTCG/STCL transactions.

The petitioner argued that the AO had relied on general allegations without examining his individual transactions. He also contended that the reasons initially supplied to him did not pertain to his case and were later replaced with the recorded reasons. According to him, the LTCG had already been disclosed in his original return and the approval granted under Section 151 was mechanical.

The Revenue argued that the information available on the departmental Insight Portal showed the petitioner to be a beneficiary of alleged bogus LTCG/STCL transactions and constituted sufficient material to form a "reason to believe" that income had escaped assessment. It also defended the approval granted under Section 151.

After examining the recorded reasons, the court found that the AO had himself acknowledged that beneficiary-wise transactions could not be identified because of a lack of time.

That admission, the court said, showed that the petitioner's transactions had not been verified before the notice was issued.

The court held that the expression "reason to believe" requires a rational connection between the material available with the AO and the belief that income has escaped assessment. It cannot rest on mere suspicion or be used to reopen an assessment for a fishing or roving enquiry.

The court also held that the Principal Commissioner had mechanically granted approval under Section 151 without independently applying its mind. It observed that a proper examination of the record would have shown that the petitioner had already disclosed the LTCG in his return, defeating the very safeguard built into Section 151.

Holding that both the reassessment notice and the sanction suffered from a lack of application of mind, the court set aside the notice issued under Section 148 and all consequential proceedings.

For Petitioner: Senior Advocate A.K. Saraf, assisted by P.K. Bora, S.J. Saikia, N.N. Dutta,  Z. Islam and P. Baruah.

For Respondents: S. Chetia, Senior Standing Counsel, Income Tax Department, along with the Assistant Solicitor General of India