IMPORTANT POINT
The main legal point established in the judgment is that the Assessing Officer must have 'tangible material' to form a reason to believe that income has escaped assessment, especially when issuing a notice for reopening the assessment after the original assessment stage.

JUDGMENT :

BHARGAV D. KARIA, J.

1. Heard learned Senior Advocate Mr. Tushar Hemani with learned advocate Ms. Vaibhavi Parikh for the petitioner and learned Senior Standing Counsel Mr. Nikunt Raval with Mrs. Kalpana Raval for the respondents.

2. By this petition under Article 226 of the Constitution of India, the petitioner has prayed for quashing and setting aside the notice dated 30th March 2021 for the Assessment Year 2014-15 issued under Section 148 of the Income Tax Act, 1961 (for the short “the Act”).

3. The petitioner, who is an individual, was engaged in the business of providing financial services and was also acting as a commission agent.

4. The petitioner filed return of income for the Assessment Year 2014-15 on 28th November 2014 declaring total income at Rs. 20,76,35,110/-.

5. The case of the petitioner was selected for scrutiny. The Assessing Officer issued notice dated 18th August 2016 and the petitioner was called upon to furnish various details including working of disallowance under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962.

6. The petitioner, vide reply dated 15th September 2016, submitted that he had invested in unlisted shares of companies and has not earned any dividend income under Section 10(34) of the Act on such investments and no disallowance under Section 14A of the Act is made in the return of income.

7. The petitioner received another notice dated 3rd October 2016 requiring him to show cause as to why the provisions of Section 14A of the Act read with Rule 8D of the I.T. Rules should not be invoked for making necessary disallowance. The petitioner again replied by letter dated 24th October 2016 reiterating that no new investment was made during the year consideration and therefore, no disallowance is required to be made.

8. The Assessing Officer, by framing the assessment, passed order dated 26th December 2016 under Section 143(3) of the Act and did not make any disallowance under Section 14A of the Act read with Rule 8D of the I.T. Rules.

9. The petitioner received impugned notice dated 30th March 2021 under section 148 of the Act and received copy of reasons recorded for reopening on 11th November 2021. On perusal of reasons for reopening, it reveals that the case was reopened broadly for the disallowance under Section 14A of the Act on the basis of the verification of the case record. The reasons recorded by the Assessing Officer are as under:

“2. On verification of case record, It is found that the assessee had claimed exempt Income of Rs. 3,93,472 on account of on dividend. Further as per schedule 13 of Profit & Loss a/c, the assessee company had claimed interest expenses of Rs. 30,26,19,331. It was further noticed that the assessee had investment of sum of Rs. 26,71,00,000 in unquoted shares of Spring Valley Organizers Pvt. Ltd. and Satyaprbhu infrastructures Pvt. Ltd. as on 31/03/2013 and as on 31/03/2014. Moreover, assesses had also claimed various administrative expenses. Managing of investment requires time and energy. Therefore, some of these expenses must be attributable to the Investment in managing of unquoted equity shares. Provisions of section 144 are found to be applicable…

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3. In view of the above, even if no exempt income was earned by the assessee from the investment in unquoted shares of Spring Valley Organizers Pvt. Ltd. provisions of section 14A are applicable and disallowance according to Rule 8D was required to be made. It is however noticed that the assessee had not made any disallowance u/s 14A r.w.r. 8D in the computation of income/return of income. Expenditure disallowance in view of sec. 14A r.w.r. 8D is calculated as under: