SRl. C v. NARASIMHAM

Order

fi>er the Hon'blc Srl .ftzstlce IiIarETng Rao No,ndikonda) The present writ petition is filed challenging reopening of the assessment of the petitioner for the Assessment Year 1996- 1997 and also to quash the notice dated 28.03.2003 issued by the respondent under Section 148 of the Income Tax Act, 1961 (briefly 'the Act' hereinafter) on the ground that the same is without jurisdiction and time barred.

2. Heard Sri C.V. Narasimham, learned counsel for the petitioner, and Sri P. Murali Krishna, learned cor-rnsel for the respondent. Perused the entire material on record.

3. The brief facts of the case, are that, tJle petitioner is engaged in the business of investment in shares and trading and had hled its return of income for tlle Assessment Year 1996- 1997 on 27.11.1996 showing loss of Rs.54,75,96O/- and the said return rvas scrutinized by the Assessing Officer under Section 1a3(1)(a) of the Act on 14.03.1997 without making any !: Page 2 ot 15 w_2222t 2(h3 PSK,J,J&NNR,J further adjustment and later a notice dated 07.O4. 1998, under Section 148 of the Act, was issued to the petitioner for reopening the assessment on the ground that the income chargeable to tax for the year L996-1997 has escaped assessment within the meaning of Section L47 of the Act. Pursuant to the reopening of the assessment, the petitioner fiIed the sane rettlrn on

14.05.1998 with t.Ile purchase and sale transactions of the shares done on 31.03.1995 and considered during the assessment year 1996-1997 and the said assessment was cornpleted and an order was passed by the respondent.

4. Thereafter, the petitioner fited an application under Section 154 the Act seeking rectifrcation of the assessment order for setting-off tJle carry forward loss. But the Assessing Officer rejected the said application. Against the said rejection order, an appeal was preferred before the Commissioner of Income Tax (Appeals) under Section 154 of the Act, dated O2.12.1999. Th.e Assessing Offrcer / Joint Commissioner of Income Tax Frled his report on 02.06.2000 before ttre Commissioner of Income Tax (Appeals) against ttre order of Joint Commissioner under Section 4 :al *p:22221-2OO3 PSK,J,J&NNR,J 154 of the Act. In the said report, the Assessing C)fficer observed that the petitioner's business is speculative in nature and loss from speculation cannot be set-off. The Commissioner of Income Tax (Appeals) frnally held that the Assessing Offrcer was not competent to review the decision of his predecessor regarding set-off of the loss of earlier year against the profits of the current year.

5. Challenging the same, tJre Department filed al appeal in ITA No.55O/Hyd/2OOO before t}re Income Tax Appellate Tribunal (for short, the ITATJ against the order of Commissioner of Income Tax (Appeals). The same was dismissed by ITAT vide its order dated 28. 1O.20O5. Meanwhile, another notice dated 28-03.2003 under Section 148 of the Act was issued to reopen the assessment for second time on the gror:nd that there were certain reasons for the respondent to believe that the income chargeable to tax has escaped assessment'

6. According to the petitioner there was a lirnitation of 4 years' tirne under Sectio n 147 of the Act to issue notice under Section 148 of the Act which expired on 31'3'2001' For which 1 W_22221 2@3 PSK,J,J&NNR,J the petitioner frled a reply to consider the return filed earLier on

27.11.1996. The petitioner also sor.rght for tlre reasons to be furnished for reopening the assessment and issualce of notice under Section 148 of tJle Act, for which tJ:e Assessing Oflicer refused to provide the reasons for reopening of assessment and further intimated that the reasons recorded for re-opening of assessment need not te communicated to the petitioner and asked for certain information to be furnished on 26.09.2003. The petitioner frled reply on 1O.10.2OO3 stating the facts of hling return of income and the rectification petition and the consequential orders and asked for reasons for issuance of notice once again.

7. It is argued by the learned counsel for the petitioner that having reopened the assessment first time in the year 1998 and having examined sale and purchase of the shares and value thereof in depth, the respondent cannot validly clairn that since he did not examine the issue of deemed speculative loss in the Iight of explanation to Section 73 of the Act, the respondent now 4 (a wp_22221 _2OO3 PSK,J ,J&NNR,J cannot consider the same after expiry of the time lirnit of four years under Section 147 of the Act to re-open tJle assessment.

8. It is further argued that the petitioners case cannot be treated as speculative loss since there is no actual sale of shares and the decrease in value of the stock is only on account of valrring stock in trade at cost or market price which is lower and that the said principle was accepted by various High Courts and the Hon'ble Supreme Court in also in the case of CIT vs. British Paints Limitedr and Chainrup Sampatram vs. CIT2.

9. It is also argued that the said issue is also covered in the case of Mahala:rmi Motors Ltd. vs. Deputy Commissioner of lncome-tax and Anothers. He further contended t]rat mere failure of the Assessing Offrcer to draw necessarv inference from the primary facts disclosed by the assessee cannot be a ground to reopen assessment as per the limitation of four years prescribed under Section 147 of the Act. The Assessing Offrcer could have, if so, advised invoked Section 147 of the Act only ' 188 tm aa '24 trn 181 ! 2oo3 scc onLine AP 1376 l I I t I I I ! i i I t 1 i i I l I i{l fage 6 of 15 W_22221_2C/J3 F6K,J,J&NNR,J within the period of 4 years limita.tion which he failed to do so. The entire exercise of the respondent to reopen the assessment beyond 4 years limitation period is an illegal exercise of power under Section 147 and, it is w+lolly without jurisdiction.

10. It is the case of the petitioner that t.I'e assessment was reopened for the frrst time in t}re year 199E and having examined sa-le and purchase of shares and value thereof in depth, the respondent cannot validly claim that since he did not examine the issue of deemed spectrlative loss in the light of the explanation to Section 73 of the Act. Further, the respondent a-lso now cannot consider the same after orpiry of tlie tirrre limit of four years prescribed under Section .147. to reopen the assessment. The learned counsel further contended ttrat facts of the petitioner's case cannot be treated as a speculative loss since there is no actual sale of shares and the decrease in value of stock is only on account of valuing stock in trade at cost or market price whichever is lower.

11. Lastly, it is argued by the learned counsel for the petitioner that this is a mere chaqdn opinion of the Assessing 'n wp_2222L-2OO3 PSK,J,J&NNR,J Offrcer which is sought to be justifred by illegally invoking tJre power under Section L47 of the Act. It is further argued tlat the contention of the respondent that the reopening 1s not barred by lirnitation since the escapement of income is more than Rs. 1,OO,OO0/- and assessment can be reopened within 6 years is wholly misplaced, since beyond the 4 years limit, the Assessing OIIicer does not have power to reopen assessment except on speciflc allegation and hnding that there was failure to disclose true and full material facts by the petrtioner which is clearly absent in the present case.

12. The learned counsel for the petitioner in support of his contentions, relied upon the following decisions: 1) Malikarjuna Rlce Industries vs. Income Tax Oflicer+ 2) Commissioner of Income Tax, Delhi vs. Kelwinator of Iadia Limited.s 3) Ilufi Chand Singhania vs. Assistant Commissioner of Income-TaxF 4) Mahalaxmi Motors Ltd. vs. Deputy Commissioner of Income-tax and AnotherT o t 6 1zozs1 asa rm sse lzoro; z scc zz: 2oo3 sCC OnLine P&H 1818 wp-22221_2OO3 PSK,J,J&NNR,J 5) Phoolchand Lalith Kumar & Co. vs. Income Tax Oflicere 6) Commissioner of Income-tax vs. AlDanalai Finance Ltd.e 7) Sita World Travels (India) Ltd. vs. Commissioner of fncome Tax and Anr.lo 8) Raj Kumar Bapna vs. Union of Indiarr

13. Per contra, it is argued by the counsel for the respondent that since the loss derived by the assessee is speculation business in nature, the same cannot be allowed to be set-off against the other income of the assessee. As per the provision of the Section 73(l) of the Act the loss arising from the speculation business cannot be set_off except against tJre profrts and when the assessee has put in a petition the poirrt that the claim of the petitioner was not alowed in the order under Section 154 dared 02.L2.lggg, in view of the provision of Section 73 (1) ofthe Act.

14. Having considered the rival consid.erations of both the counsel, the points which arise for consideration are: 7 3 2OO3 scc Online Ap 1i76 1991 SCC Online AP 480 '1zoos1 zzs rrn asr 'o1zms;zza rR rse l2oot; 251 rtR aoz __-.".." _/' 1l wp 2222L_2OO3 PSK,J,J&NNR,J

1. Whetler the notice issued under Sedion 148 of the Ac't bg tle respondent is barred bg limitation presc'ribed under kction 147 and 149 of the Ad?

2. Whetler the reqnadent i.s conpetent to reoPen tle ossessment on the crtonge of opinion qnd to reuieu tltE sorZ o.ssessment made bg his predeessor? and 3- Whdtar the reopening of the assessnEnt is ill.egal on tle grannd of non-rearding of ang reax,ts regarding ang incotne chargeable to tqx lld's escnlBd as ses s ment?

15. PIOIIITS: Before going further, for convenience' we would like to extract tJle provisions under Section I 47 of Act ald Section 73(1) of the Act, which reads thus: 'Carry forunrd and set ofJ ol losses bg qeclJTed Du.slness.- 7eA, 0) Ang loss, computed in respect of a speculotion business referred lo in section 35AD shqll not be sei olr except ogainst profits ond gains, rf ang, of qnA other specified busine.ss. (2) Where for ang assessment gear any loss contptled in resped. of the specified business rekred to in sub sectiort ('t) ll.r.-s ttot been uhollg set off under sub-secton (1), so ,nucll of loss as is no, so set off or the uhole loss uhere the ,h€ assessee has no income from ang other speclfied btrsiness, shall. subjed to the other prouisions of fhis Chapter, be catied lorward to the follouing assessmerlt Aear, qnd l\t- w_22221_20p3 PSK,J,J&NNR,J (i) it shojt be set ofl agajnst the profits o.nd. gabrc, if atry, of ang specified. busjness carried on bg him assrl.isable for that assessment geqr; and (ii) { the loss cannot be r loss not so set off a.ssessment Aear and so on.,, "ho, so set oln tE amount of I carried. fonl'ard to tlrc Jollotuing b:'-ug "u'n Income esca,,lng cssiessmena _ 747. If ang income chargeable to tox, in the case of an asisessee, hrls escaped asses theAssessinsof ft cermas,"";:;':';:::";XT;X: 148 to 153, qssess o/ /easses iname or re@nputed tte ross or the depreciation ouout tance or anA othet allouanpz or also ang other ellouctnce or deduction for such qssassme4[ gear ftrereafier in this section and in this sections 146 to 153 refened to a.s the releuant assessment aear) Explanation.-For the purposes of assessment or reassessmen, or reconq)ulation under this section, the Assessing Oficer mag ctssess or recssess the income t,,sescapedossessmenr,""":::::::;':::"?::rm subsequentlg in the course of the proceedings und.er this sectbn, inespectiue of the fact that the provisions of sectbn 148A haue not been complied with."

16. We would also like to quote herein below the relevant portion of Circular No.549 dated 31st October, 1989, which reads as follows "7.2 Anendmcut nad.e bg the Amendtng Act, tgE9., to ,:el'trt T,d,4ce the e4rression . to klteue, la Sectlon 747.-A numbq of representations were recetued qgainst tte "ed.son d w 22221 2OO3 PSK,J,J&NNR,J omission of the unrds 'reason to belieue'from *ction 147 and tleir substidttion bg tte 'opinion' of tle Assdssing OJficer. It uas pointed out tlmt the Commnr. Of lncome Tc4 Delhi us M/ S- Keluinator Of India. Ltd on 18 Januaty, 2010 meafli<t of the eryressio4. 'reoson to believe' had been explained in a number of coun rulings in the past qnd was well setTled and its omission from kdion 147 txould giue orbitrary pouer.s to the Assessing Ofrer to reopen Pa-st assessrEnas on mere change of opinion. To ollq tlese feots, the Amending Act, 1989, hqs again amend.ed *ction 747 to reintrcduce the exPress@n 'has reason to beliew' in place of the uwds 'for reosons to be recorded bg him in utiting, is of the opinion' . Other prousions of the neu Sectinn 147, tanoever, remai\ tle same-"

17. On going through the changes made to Section 147 of the Act, we frnd tJrat, prior to Direct Tax Larvs (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfrllment of the said conditions alone conferred jurisdiction on the Assessing Offrber to make aback assessment. However, Section 147 of the Act [with effect from 1"' April 1 989] , they are given a go-by and only one condition has remained, viz-, that where the Assessing OIIicer has reason to believe that income has escaped assessment, confers jurisdiction to re-open the assessment. Therefore, post lst April, 1989, po\vel to re-open is much wider. However, one needs to glve a schematic interpretation to the words "reason to believe" failing which, we Pace 12 of 15 wp-22221 20o3 PSK,J,J&NNR,J are afraid Section 147 wor.rld give arbitrary powers to tlrc Assessing Oflicer to re-open assessments on the basis of "mere change of opinion", which cannot be per se reason to re-open.

18. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Olfrcer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre- conditions and if the concept of "change of opinion" is removed, as contended on behalf of the Depa-rtment, then, in the garb of re-opening tlte assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Offrcer. Hence, after l"t April, 1989, Assessing Ofircer has power to re-open, provided there is 'tangible material" to come to the conclusion that there is escapetnent of income from assessment. Reasons must have a live link with the formation of the belief.

19. Our view gets suPport from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Arnendment) Act, 1987, Parliament not only deleted wp 22221 2OO3 PSK,J,J&NNR,J the words "reason to believe" but also inserted the word "opinion" in Section t47 of the Act. However, on receipt of representations from tJle Comparries against omission of the words "reason to believe", the law makers reintrod uced the said expression and deleted the word "opinion" on the ground that it would vest arbitrar5z powers in the Assessing Officer'

20.. The petitioner has filed the returns for the year 1996-

1997. Pursuant to the same, ttle Dy. Commissioner of Income Tax issued notice under Section 148 of the .Act that he has reasons to believe that the income chargeable to tax for the assessment year 1996 -1997 has escaped assessment within the meaning of Section 147 of the Act. An order r'r-as passed on 2O.O5. 1998 under Section 143(3) of the Acl making re- assessment and at page 2 of the order it is speciltcally stated that in response to the notice issued under Section 143 (2) of the Act, Smt. Srilatha Ramchandran, C,A, authorized representative of the assessee's company and Sri J.V. Ramaiah, Accounts Manager of the assessee's company appeared and liled the information and details called for. The case was discussed with Pa€e 14 of 15 w_2222t 2@3 PSK,J,J&NNR,J them and examined. This itself shows that the re-assessment was made after considering the information and details that were submitted.

21. Against the order passed above, an appeal was preferred before the Cornmissioner of Income Tax (Appeals) wherein it was directed that the Assessing Oflicer is directed to allow the set-off of business loss of earlier year against the proht of tlre assessment year 1996-1997.

22. Considering the entire material on record, this Bench is of the view that re-opening of the assessment is clearly evident from the record that tl.e notice issued under Section 148 of the Act dated 29.O3.2OO3 is within recording the reasons and that it is clearly barred by limitation as the period for the assessment for the relevant assessment year is 4 years and the period prescribed under Section 149(1)(a) of the Act for issuance of a notice trnder Section 148 of the Act would expire by 31.O3.2OO1. Hence tl"e notice is liable to be set aside on this ground also. Besides, the Assessing Oflicer is having no power or jurisdiction to re-open or review the assessment for the second time. For the ." ;- +..,.1 ! I i \Np 22221-2003 PSK,J,J&NNR,J reasons stated above, the points are answered in favour of the petitioner. Thus, this Bench is of the opinion that the very notice is liable to be set aside / quashed accordingll,.

23. Accordingly, the Writ petition is allowed quashing the notice dated 28.03 .2OO3, issued by ttre respondent under Section 148 of the Income Tax Act, 1961. There shall be no order as to costs. Miscellaneous petitions, if any, pending shall stand closed. //TRUE COPY// - SD/.N. SRIHARI pEPUWREGTSTRAR .., SECTTON OFFICER 'tt \ I To, Hyderabad. 1 . The f ncome{ax Officer, Ward 2(1), Aayakar Bhavan, Basheerbagh, 2. Ooe CC to SRl. C. V. NARASTMHAM, Advocate tOpUCl 3. One CC to SRl p. MURALT KR|SHNA, AdvocateiOeUC; 4. Two CD Copies B L o. *r. HIGH COURT DATED:1910612025 ORDER WP.No.22221 ot 2003 -- -'- _::. --- /.--,:',.,.- .,\l " "'1a6 , 03 SEP Xtr s(' \\ .,J J \ \ ALLOWING THE WRIT PETITION WITHOUT COSTS 6 ,)r{ \bu