Income Tax Appellate Tribunal - Ahmedabad
Gujarat Credit Corp. Ltd. vs Acit on 9 May, 2008
Equivalent citations: [2008]113ITD133(AHD), [2008]302ITR250(AHD), (2008)116TTJ(AHD)619
ORDER
R.P. Garg, Vice President (AZ)
1. The President, Income Tax Appellate Tribunal, has constituted this Special Bench to decide these two appeals-one quantum and the other concealment penalty and to resolve, in particular, the dispute between the parties with regard to the reassessment Under Section 147 of the Income Tax Act, 1961 (for short "the Act") by the Assessing Officer on the following issue of law:
Whether the proviso to Section 147 has the effect of curtailing the limitation period for passing the order Under Section 147 as prescribed Under Section 153(2).
2. The brief facts of the case are that, the assessee is engaged in the business of finance and investment. The original assessment order Under Section 143(3) of the Act for assessment year under consideration, was made on 10.2.1999, determining a total loss at Rs. 87,35,134/- allowing unabsorbed business loss of Rs. 86,14,332 and unabsorbed depreciation of Rs. 1,20,802 to be carried forward. The assessment was reopened and the Assessing Officer on entertaining a belief that the assessee had sold securities held as investments during the relevant year and the loss suffered on account of the sale was debited to the P&L A/c as business loss, as the assessee was holding securities as investments and had shown them as asset in the balance sheet and transfer of such assets attract the provisions of Section 45 of the Act and, therefore, any loss on account of transfer of such asset are required to be treated as capital loss under the head capital gain which requires to be added back to the total income of the assessee company. Penalty proceedings Under Section 271(1)(c) of the Act was also initiated for furnishing inaccurate particulars of income and concealment of income.
3. Before the CIT(A), a grievance was raised by the assessee that, the assessment order passed by the Assessing Officer was bad-in-law and the contention was that, as the original assessment was made Under Section 143(3) of the Act, Assessing Officer was not justified in taking action Under Section 147 of the Act. It was submitted by the assessee that during the original assessment proceedings, the complete details and information were furnished before the Assessing Officer and the reopening of the assessment has been made merely by having a second look on the same set of facts.
4. During the course of hearing before the Division Bench, the assessee, relying upon the decision of the Supreme Court in the case of National Thermal Power Corp., 229 ITR 383, raised an additional legal ground as under:
Ld. CIT(A) has seriously erred in law upholding the action of the ld. AO in reopening and reassessing the assessment of the Appellant without appreciating that the entire action of re-assessment was barred by limitation and completely without jurisdiction and therefore ex-facie illegal. Ld. CIT(A) has erred in not appreciating that the re-assessment proceedings were barred by limitation. The clear language of Section 147 of the Act and its proviso in no uncertain terms says that no action against the assessee can be taken for re-assessment after expiry of four years from the end of the assessment year, if there was no omission or failure on the part of the assessee in disclosing fully and truly all the material facts necessary for framing the original assessment. This prohibition Under Section 147 of the Act is total and complete and applies to both initiation as well as completion of the re-assessment proceedings. Ld. CIT(A) has seriously erred in not appreciating that the outer limit of four years prescribed in proviso to Section 147 of the Act not only applies to the initiation of the re-assessment proceedings but also to the completion of the re-assessment proceedings.
This additional ground was admitted by the Bench and thereafter the Special Bench was constituted to dispose of the appeal.
5. The leaned counsel of the assessee Shri S N Soparkar pointed out that in this case, the Assessment year involved is 1996-97. The original assessment was completed under Section 143(3) on 10-2-1999. A notice under Section 147 was issued on 14-6-2000. It was within four years from the end of the assessment year. Assessment under Section 143(3), read with Section 147 was made on 26-2-2002. It was beyond four years from the end of the assessment year. Learned Counsel of the assessee also pointed out that it is not the case where there was failure on the part of the assessee, either to file return as required under Section, 139 or 142(1) or 148 or even to disclose fully and truly all material facts necessary for the assessment. He, therefore, contended that as per the Proviso to Section 147 no action (which included making of reassessment) could be taken under this section after expiry of four years from the end of relevant assessment year. He submitted that under the scheme of the Act, barring special assessments, an assessment is made either under Section 143(3) or under Section 144 or under Section 147 of the Act. The last category of assessment is made when the income has escaped assessment and it has to be ordinarily made within four years from the assessment year. It can be after four years in a situation where:
i) Assessee failed to file return under Section 139;
ii) Assessee failed to file return under Section 142(1) or under Section 148;
iii) Assessee failed to disclose fully and truly all material facts necessary for this assessment.
6. As per the scheme of the Act, an order under Section 143(3) is to be passed where return is filed and notice is issued under Section 143(2). An order under Section 144 is passed where return is not filed or the assessee did not comply with the provisions of Section 142(1) or 142(2A) or 143(2) of the Act. Section 147 provides for assessment of the escapement of income as provided in Explanation-2, viz., a. where no return of income has been furnished by the assessee even though income was chargeable to tax;
b. where return of income has been furnished, but no assessment has been made, and c. where an assessment has been made, but:
i. income chargeable to tax has been under assessed, or;
ii. such income has been assessed at too low a rate; or iii. such income has been made the subject of excessive relief under this Act, or;
iv. excessive loss or depreciation allowance or any other allowance under this Act has been computed.
7. For making an assessment for escaped income, there are various stages. Initially, a notice for reopening the assessment is to be issued. That notice is provided for in Sections 148 and 149. The words "No action is to be taken" as appear in Section 147 are not related to initiation of proceedings, because that is provided under Sections 148 and 149. Such an eventuality of action up to 2005 was provided in the Proviso to Section 148, But thereafter, on amendment of provisions "no action shall be initiated" are incorporated in the Proviso to Section 147 which is not a section under which notice for reopening is issued and therefore, legislature has misfired in not taking it in Sections 148/149 and retaining it only in Section 147. He further submitted that though the time limit for completion of assessment is provided under Section 153(2), but that is outer limit, for the assessment to be completed after expiry of one year, from the end of financial year, in which notice was issued. He also submitted that Section 153(2) is a general provision and Section 147 is a specific provision, and therefore, specific provision should prevail over the general provision. That being so the assessment in this case, was to be completed on or before 31-3-2002 or from one year from the making the return, whichever is earlier. A heavy reliance is placed on the decision of Bangalore Bench of the Tribunal in Amitronics Pvt. Ltd. ITA No. 299-302/Bang/2003 dated 7/4/2006.
8. He then referred to Supreme Court decisions in the case of Padmasundara Rao (Deed) and Ors. v. State of Tamil Nadu 255 ITR 147, 154 stating that re-writing of statute is not permitted; in the case of Vikrant Tyres Ltd. v. ITO 247 ITR 821, 826 prohibiting reconstruction of language; in the case of Mohammad Ali Khan and Ors. v. CWT 224 ITR 672, 675 and Punjab & Haryanna High Court decision in the case of Dalmia Biscuits Ltd. v. CIT 194 ITR 749, 751 regarding importance of each word in the statute; Supreme Court decision in the case of Orissa State Warehousing Corporation Ltd. v. CIT 237 ITR 589, 604-5 stating that natural meaning is to be given to the statute; decision of Supreme Court in CWT v. Smt. Hasmahunnisa Begam 176 ITR 98 (SC), stating that generally natural meaning should be given and the other meaning can be given only when there are two possible meanings. He then referred to Nani Palkiwala's Book, wherein it is stated that Proviso to Section 147 is an exception. In this connection, decisions of Supreme Court in the case of CIT v. Indo Merchant Bank Ltd. 36 ITR 1, H.E.H. Nizam's Religions Endowment Trust v. CIT 59 ITR 582 and CIT v. Madurai Mills Co. Ltd. 89 ITR 45 (SC) were relied on.
9. Learned DR, on the other hand, submitted that matter, on additional ground raised by the assessee stands covered by the decision of the Gujarat High Court in the case of Praful Chunilal Patel v. ACIT 236 ITR 832 (Guj) wherein, it is held that Explanation to Section 147 of the said Act has bearing on the disclosure aspects and it applies to the provision to the extent it allows initiation of the proceedings under Section 147 on account of non-disclosure of material facts by the assessee. He submitted that terms "no action shall be taken" under this section apply to the initiation of proceedings and the decision of Bangalore Bench of the Tribunal in the case of M/s. Amitronics Pvt. Ltd. (supra) holding otherwise is not correct. It is contended that aforementioned decision does not lay down the correct interpretation of the provisions of law. While considering the Proviso to Section 147, one also has to consider the provisions of Section 153(2), which clearly state and provide that "No order of assessment, reassessment or recomputation shall be made Under Section 147 after the expiry of one year from the end of the financial year in which the notice Under Section 148 was served."
10. Reference is made to the Supreme Court of India in the case of R. Dalmia and Anr. v. CIT wherein it is held that in making assessment and re-assessment Under Section 147, the procedure laid down in sections subsequent to Section 139 including that laid down by Section 144B has to be followed. As per the fiction of law, the return filed pursuant to notice Under Section 148 is deemed to be a return Under Section 139 of the Act. Reliance in this regard is placed on the judgment in the case of CIT v. Tejasingh . Further, there is no inconsistency between Section 143(2) and 148, the same procedure has to be followed in an assessment or reassessment Under Section 147 as held by Andhra Pradesh High Court decision in the case of CIT v. Supreme Construction Co. .
11. Reliance is also placed on the Special Bench decision of the Tribunal in the case of Rajkumar Chawla and Ors. v. ITO (2005) 92 TTJ (Del) (SB) 1245 wherein it is observed that Section 148 confers jurisdiction merely to issue notice, calling for a return, in cases where income has escaped assessment, for making assessment or reassessment as provided Under Section 147. This section however does not make the assessment or reassessment mandatory but leaves it to the discretion of the A.O.
12. Reference is also made to the Punjab & Haryana High Court, in the case of Rama Sinha v. CIT (2002) 256 ITR 481 (P&H), which held that once a notice Under Section 148 is issued, the assessment has to be completed Under Section 147 read with Section 143(3). The High Court also observed that the position was the same even prior to the amendment of Section 148 w.e.f. 01/04/1989 and as the return filed Under Section 139, the procedural provision for making an assessment Under Section 143(3) of the Act also comes into play.
13. The Special Bench Delhi in the case of Shri Rajkumar Chawla and Ors. (supra) further observed (in para 35/page 1266) that "Proviso nowhere comes in conflict with the provisions of Section 147. Had the proviso curtailed the limitation period as prescribed Under Section 153(2), then certainly it will not apply."
14. The I.T.A.T., Hyderabad, in Solid State Devices India Ltd. v. I.T.O. 19 ITD 169 was also referred to, which also had decided similar issue regarding reopening of assessment Under Section 147 (a) and applicability of Section 153(2)(a) of the Act, by holding that "We do not find any force in the contention that the assessment is time barred. Since the non-resident did not file a return, notice under Section 148 of the Act was issued. The assessment is reopened under Section 147(a) and not under Section 147(b). As per Section 153(2)(a) the assessment could be made within four years from the end of the assessment year in which 148 notice was served. In the instant case notice under Section 148 was served on 6-3-1979 during the year ending 31-3-1979 and assessment could be made on or before 31-3-1983. The assessment order was passed on 26-3-1983. Hence, it is within the time limit. Thus, the reassessment order is valid. Thus, we uphold the order of the Commissioner (Appeals)."
15. It is contended that if we Keep in view the above legal position and overall statutory provisions of Section 147 and 153 and other related sections of the IT Act, the view expressed by the Bangalore Bench in the case of M/s Amitronics Pvt. Ltd. is not correct. The additional ground raised by the appellant is therefore covered by the I.T.A.T. Special Bench, Delhi, decision in the case of Raj Kumar Chawla and Others.
16. He lastly referred to the Gujarat High Court in the case of Praful Chunilal Patel - 236 ITR 832 (Guj.) wherein the High Court in para 6 of the order held - "finding no dispute about the fact that the impugned notice under Section 148 of the Act, has been issued within four years from the end of the relevant assessment year 1991-92 and under Section 147 of the said Act, within four years from the end of the relevant assessment year, the A.O., where he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, may assess or reassess such income held that after four years, the proviso would be attracted and no action can be taken under the section unless such income has escaped assessment by reason of failure on the part of the assessee to make return under Section 139 or in response to a notice under Section 142(1) or Section 148 of the said Act, to disclose fully and truly all material facts for his assessment for that assessment year. Therefore, it is only when the case falls under the proviso that the question of non-disclosure of material facts would become relevant and that the Explanation 1 to Section 147 of the Act has a bearing on disclosure aspect and it applies to the Proviso to the extent it allows initiation of the proceedings under Section 147 on account of non -disclosure of material facts by the assessee."
17. He also referred to Circular No. 549 dated 31/10/1989 explaining this amendment of the provisions of Section 147 by the Finance Act, 1987 w.e.f. 01/04/1989 stating that the Amending Act, 1987, has rationalized the provisions of Section 147 and other connected sections to simplify the procedure for bringing to tax the income which escaped assessment, especially in non-scrutiny cases. Thus, the Amending Act, 1987, has substituted a new Section 147 which contains simplified provisions as follows: (i) Separate provisions contained in Clause (a) and (b) of the old section have been merged into a single new section, which provides that if the Assessing Officer is of the opinion that income chargeable to tax for any assessment year has escaped assessment, he can assess or reassess the same after recording in writing the reasons for doing so; (ii) The requirements in the old provisions that the Income-tax Officer should have "reason to believe" or "information in possession" before taking action to assess or reassess the income escaping assessment, have been dispensed with; (iii) The existing legal interpretation that once an assessment has been reopened, any other income that has escaped assessment and come to the notice of the Assessing Officer subsequently during the course of proceedings under this section can also be included in the assessment has been incorporated in the new section itself; and (iv) A proviso to the new section provides that an assessment which has been completed under Section 143(3) or 147 of the Act, i.e., a scrutiny assessment, can be reopened after the expiry of four years from the end of the relevant assessment year only if income has escaped assessment due to the failure on the part of the assessee to file a return of income or to disclose fully and truly all material facts necessary for his assessment.
18. On the basis of abovementioned facts and legal position, the ld. DR submitted that the expression used in the Proviso namely "no action shall be taken in this section after expiry of four years from the end of the relevant assessment Year" refers to only issue of notice and not completion of the assessment. For different purposes different sections are provided in the Act. For example income escaping assessment is dealt by Section 147 of the Act, issue of notice where income has escaped assessment is dealt by Section 148, time limit for issue of notice Under Section 148 of the Act is prescribed in Section 149, Section 150 deals with "provisions for cases where assessment is in pursuance of an order of the appeals etc.", Section 151 deals with "sanction for issue of notice", Section 152 deals with other specific provisions and Section 153 deals with "time limit for completion of assessment and reassessment".
19. He submitted that on plain reading of Section 147 of the Act, it is clear that this section is subject to the provisions of Section 148 to Section 153 of the Act. Section 153 deals with the time limit for completion of assessment and reassessment. Section 153(2) reading as: "No order of assessment, reassessment or recomputation shall be made under Section 147 after the expiry of two years from the end of the financial year in which the notice Under Section 148 was served."
20. It is contended that, thus, if the order of Bangalore Bench of I.T.A.T. is considered to be good decision then the following absurd situation would arise- a) Suppose notice is issued and served on the assessee on 31/03/2001 i.e. exactly on the expiry of four years period from the end of the relevant assessment Year then the issue and service of the notice is valid as per this decision. In response to this notice the assessee is supposed to file return of income within the time period of about 30 days and then the assessing officer is supposed to pass an order Under Section 143(3) r.w.s. 147 of the Act, after giving adequate opportunity of being heard to the assessee. In view of the decision of the Bangalore I.T.A.T., A.O. would have no alternative but to pass order in such cases on 31/03/2001 itself irrespective of the fact whether assessee has filed return of income on 31/03/2001 or not and irrespective of the fact whether any opportunity of being heard is given to the assessee. This would be in total violation of principle of natural justice. In other words, the A.O. would have to pass assessment order by 31/03/2001 whether or not assessee files the R.O.I, or opportunity of hearing is allowed to him or not; b) As mentioned above there is specific provision of the Act for completion of various functions under the Act. Section 147 deals with the initiation of the reassessment proceedings as held by the Gujarat High Court in the case of Praful Chunilal Patel - 236 ITR 832 (Guj.) and Section 153 deals with the time limit for completion of assessment and reassessment. Section 147 is subject to the provisions of Section 148 to 153. In the present case, the provision of Section 153(2) would apply as per which the re-assessment order can be completed within two years from the end of the financial year in which the notice Under Section 148 was served to the assessee. Since notice was served on the assessee on 14/06/2000 and the financial year ended on 31/03/2001, reassessment Under Section 153(2) can be made on or before 31/03/2003, whereas in the present case, the assessment has been completed on 26/02/2002 which is well within the time limit. The above mentioned order of Bangalore Tribunal is therefore not good decision for the reasons that: 1) It is against the Circular No. 549, dated 31/10/1989 which is issued by the Board clarifying the provisions of amendments of Section 147 to 153 by the Finance Act, 1987. 2) It is against the view taken by jurisdictional High Court of Gujarat in Praful Chunilal Patel - 236 ITR 832 (Guj.). 3) If this is any special provision in statute then that special provision always overrides the general provision. Section 147 is general provision and Section 153 is specific provision. Therefore, the provision of Section 147 will be subject to the provision of Section 153(2). 4) The judgment of Bangalore I.T.A.T. gives absurd interpretation as mentioned above. 5) If this judgment is held to be correct decision then it would amount to the interpretation as if the provision of Section 147 overrides the provisions of Section 153 which is incorrect because in the opening sentence of Section 147, it has been clearly mentioned that the provision of Section 147 are subject to the provisions of Section 148 to 153.
21. In view of the above, it is submitted that the correct interpretation of the words "no action shall be taken in this section after expiry of four years from the end of the relevant assessment Year" means no proceedings of reopening would be initiated after the expiry of four years from the end of the relevant Assessment Year and not the completion of assessment itself as held by the I.T.A.T., Bangalore.
22. We have heard the parties and considered the rival submissions. In this case, original return declaring loss of Rs. 88,53,947/- was filed on 30/11/1996. Assessment order Under Section 143(3) computing total loss of Rs. 87,35,130/- was passed on 10/02/1999. A notice Under Section 148 was issued to the assessee on 14/06/2000 and assessment order Under Section 143(3) r.w.s. 147 was passed on 26/02/2000. The assessee has taken an additional ground after relying on the judgment of I.T.A.T., Bangalore that the assessment in this case has become time barred because of the provisions of the proviso to Section 147 of the Act. As may be seen, the notice Under Section 148 for A.Y. 1996-97 was issued on 14/06/2000 i.e. well before the expiry of four years from the end of the relevant assessment year (in this case the time of four years would expire on 31/03/2001.
23. We shall first discuss the issue raised by way of an additional ground, challenging the completion of assessment after 4 years from the end of the assessment year in question. For the sake of understanding it is necessary to reproduce Section 147 of the Act. It reads:
If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153 assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the curse of the proceedings under this section, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be for the assessment year concerned (hereafter in this section and in Section 148 to 153 referred to as the relevant assessment year):
Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year.
24. Section 147 provides that an assessment can be reopened to assess or reassess such income and also any other income chargeable to tax which has escaped assessment if the Assessing Officer had reason to believe that any income chargeable to tax has escaped assessment for any assessment year. It is however subject to the provisions of Sections 148 to 153. it also authorizes him to assess or reassess income which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be. The Proviso puts up a time limit for taking any action where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, after the expiry of four years from the end of relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year.
25. The controversy in this case is as to what is that action which is prohibited to be taken under this section by using the words "No action under this section shall be taken after four years from the end of the assessment year". What is that action that is contemplated under Section 147 of the Act? This section, as we understand, grants an authority to the Assessing Officer to reopen an assessment, if income had escaped assessment, to assess, reassess or recomputed such income. Separate provisions are made as to the conditions and the time limit within which the notice to be issued for reopening and the assessment or reassessment or recomputation to be made. These are contained in Sections 148 to 153, i.e., issue of notice is dealt by Section 148, time limit for issue of notice is prescribed in Section 149, Section 150 deals with "provisions for cases where assessment is in pursuance of an order of the appeals etc.", Section 151 deals with "sanction for issue of notice", Section 152 deals with rates at which escaped income is to be charged and other specific provisions and Section 153 deals with "time limit for completion of assessment and reassessment".
26. The procedure for assessment is provided under Section 143 for assessments Under Section 147 as well, as held by decision of the Supreme Court in the case of R Dalmia and the Special Bench decision in Raj Kumar Chawla. Action under this section has, therefore, to be taken to mean and reference to the procedure and that is the issue of notice under Section 148 etc. Consequently, the provisions of Section 143 would be applicable. This Section 147 only gives authority to the Assessing Officer to initiate proceedings on satisfaction of certain conditions as held by the Supreme Court in the case of R. Dalmia and also by the Special Bench to assess/reassess or recompute the income of the assessee.
27. Gujarat High Court in the case of Praful Chunilal Patel v. ACConstitution Act IT 236 ITR 832 (Guj) held that Explanation to Section 147 of the said Act has bearing on the disclosure aspects and it applies to the provision to the extent it allows initiation of the proceedings under Section 147 on account of non-disclosure of material facts by the assessee. It held:
There is no dispute about the fact that the impugned notice under Section 148 of the Act, has been issued within four years from the end of the relevant asstt. year 1991-92. Under Section 147 of the said Act, within four years from the end of the relevant assessment year, the A.O., where he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, may assess or reassess such income. However, after four years, the proviso would be attracted and no action can be taken under the section unless such income has escaped assessment by reason of failure on the part of the assessee to make return under Section 139 or in response to a notice under Section 142(1) or Section 148 of the said Act, to disclose fully and truly all material facts for his assessment for that assessment year. Therefore, it is only when the case falls under the proviso that the question of non-disclosure of material facts would become relevant In such cases, if the assessee has made full disclosure on record, then even if such income has escaped assessment, no action can be initiated by the A.O. under this section. Where, however, the said period of four years has not expired, the conduct of the assessee regarding disclosure of material facts a need not be the basis for initiating the proceedings and they can be commenced if the A.O. has reason to believe that the income has escaped assessment notwithstanding that there was full disclosure of material facts on record. The assessee in such cases cannot defend the initiation of action on the ground that the facts were already placed on record and that the A.O. must have or ought to have considered them. Explanation 1 to Section 147 of the said Act has a bearing on disclosure aspect and it applies to the proviso to the extent if allows initiation of the proceedings under Section 147 on account of non-disclosure of material facts by the assessee.
28. A heavy reliance is on behalf of the assessee on the decision of the I.T.A.T. Bangalore in the case of M/s Amitronics Pvt. Ltd. (supra) which has taken a view that even reassessment cannot be completed after 4 years if there is no failure on the part of the assessee. The said decision decided the matter by observing: The decision held as under:
7. As far as asst. years 1992-93 and 1993-94 are concerned, under proviso to Section 147 "no action shall be taken" after the expiry of four years from the end of relevant asst. year. In the present case, the notice Under Section 148 is issued within four years but reassessment has been completed beyond the period of four years from the end of the relevant asst. years.
7.1 It is the contention of Shri George Mathan that the assessments are barred by limitation whereas it is contended by learned DR that "no action" shall mean only initiation of proceedings and the reassessment order Under Section 147 r.w.s. 143(3) can be passed within the time limit prescribed Under Section 153(2).
7.2 We are in agreement with the submission by learned Counsel for assessee. Section 147 and proviso thereto as applicable from 1-4-1989 is reproduced herewith:
147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the asst. year concerned (hereinafter in this section and in Sections 148 to 153 referred to as the relevant asst. year).:
Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant asst. year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return Under Section 139 or in response to a notice issued under Sub-section (1 of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.
Section 147 is not merely an enabling section to initiate reassessment but even to complete the reassessment. Section 147 provides that if the AO has reason to believe that any income chargeable to tax has escaped assessment, he may subject to the provision of Section 148 to 153 "assess or reassessed such income". Section 148(1) provides that before "making assessment or reassessment Under Section 147", the AO shall serve on the assessee a notice requiring him to furnish a return of income. Section 149 provides for time limit for issue of notice Under Section 148. Section 153(2) provides that "no order of assessment, reassessment or re-computation shall be made Under Section 147" after the expiry of two years from the end of financial year in which the notice Under Section 148 was served. Thus, it is clear that even Section 147 is the provision for assessment. As per definition of word "assessment in Section 2(8) 'assessment includes reassessment'. Thus it is incorrect to say that Section 147 is merely to assume jurisdiction for reassessment and assessments are made only Under Section 143. Section 147 also postulates actual assessment. Thus, the provision of Section 148 regarding issue of notice, Section 149 prescribing time limit for issuing of notice or Section 153(2) for prescribing time limit for completion of reassessment applies to all the situations for reassessment Under Section 147. However, under the proviso where an assessment is earlier made Under Section 143(3), "no action" shall be taken Under Section 147 after the expiry of four years from the end of relevant asst. year. This means not merely issue of notice but also includes completion of reassessment Under Section 147. The words "no action" are wide enough to include in its sweep "assuming jurisdiction by formation of belief as well as to complete the reassessment. It is settled rule of interpretation that a 'proviso' carves out an exception to the provision of main section. Thus, though the provision of Section 147 may apply in many situations, yet under the proviso, which carves out an exception, prohibits any action on the part of AO beyond the period of four years from the end of relevant asst. year.
29. The Bangalore Bench view that Section 147 is not merely enabling section to initiate reassessment but even to complete the reassessment may not be wholly correct in as much as the time limit for issuing the notice is provided in Section 148/149 and for completion of assessment under Section 153(2). The Bench itself had observed so when it stated "Section 148(1) provides that before "making assessment or reassessment Under Section 147", the AO shall serve on the assessee a notice requiring him to furnish a return of income. Section 149 provides for time limit for issue of notice Under Section 148. Section 153(2) provides that "no order of assessment, reassessment or re-computation shall be made Under Section 147" after the expiry of two years from the end of financial year in which the notice Under Section 148 was served. Thus, it is clear that even Section 147 is the provision for assessment. As per definition of word "assessment in Section 2(8) 'assessment' includes 'reassessment'. Thus it is incorrect to say that Section 147 is merely to assume jurisdiction for reassessment and assessments are made only Under Section 143. Section 147 also postulates actual assessment." It observed that "Thus, the provision of Section 148 regarding issue of notice, Section 149 prescribing time limit for issuing of notice or Section 153(2) for prescribing time limit for completion of reassessment applies to all the situations for reassessment Under Section 147" but held that "However, under the proviso where an assessment is earlier made Under Section 143(3), "no action" shall be taken Under Section 147 after the expiry of four years from the end of relevant asst. year. This means not merely issue of notice but also includes completion of reassessment Under Section 147."
30. We are unable to agree with that view because even though, as the Bench observed, the words "no action" are wide enough to include in its sweep "assuming jurisdiction by formation of belief as well as to complete the reassessment, it has to have the reference of the first action and that is that for initiating the jurisdiction under Section 147. In our opinion Section 147 is only an enabling provision empowering the AO to reopen the assessment of income that had escaped assessment and rest of things are provided in the following Sections 148 to 153 of the Act.
31. Even assessment is to be framed as per the procedure laid down in Section 143 and 144 as held in Dalmia's case (supra) by the Supreme court when it held that "in making assessment and re-assessment Under Section 147, the procedure laid down in section subsequent to Section 139 including that laid down by Section 144B has to be followed." Further, stating that there is no inconsistency between Section 143(2) and 148, it is held by Andhra Pradesh High Court decision in the case of CIT v. Supreme Construction Co. (supra) that the same procedure has to be followed in an assessment or re-assessment Under Section 147.
32. Special Bench in the case of Rajkumar Chawla & Other(supra) also observes:
In contrast, Section 148 does not provide any methodology for computing the income on reassessment or assessment. On the contrary, it creates a legal fiction that such return shall be treated as one made Under Section 139. By the creation of such legal fiction, all the procedures prescribed in and subsequent to Section 139 automatically apply it toto. It is a settled principle that a legal fiction has to be taken to its logical conclusion and, therefore, what is valid for a return Under Section 139 will be valid equal force to a return filed under Section 148. Therefore, the proviso will apply to return filed in response to notice Under Section 148.
33. The Special Bench further observed that "Proviso nowhere comes in conflict with the provisions of Section 147. Had the proviso curtailed the limitation period as prescribed Under Section 153(2), then certainly it will not apply."
34. Punjab & Haryana High Court, in the case of Rama Sinha (supra) held that once a notice Under Section 148 is issued, the assessment has to be completed Under Section 147 read with Section 143(3) and that the position was the same even prior to the amendment of Section 148 w.e.f. 01/04/1989 and as the return filed Under Section 139, the procedural provision for making an assessment Under Section 143(3) of the Act also comes into play. The court observed:
It has been pointed out by the Tribunal that once a return in pursuance to notice under Section 148 is filed, the "provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under Section 139." The position was the same even prior to the amendment of Section 148 with effect from April 1, 1989. The unamended provision also provided that on issue of a notice under Section 148 "the provisions of this Act shall, so far as may be, apply accordingly as if a notice were a notice issued under Sub-section (2) of Section 139". Thus, it is evident that the return filed in response to a notice under Section 148 has to be treated as if it has been filed under Section 139. That being so, the procedural provisions for making an assessment under Section 143(3} of the Act also come into play. A perusal of Section 143 shows that the procedure prescribed therein applies to a return which "has been made under Section 139...." In view of the clear provisions of law as discussed above, the findings of the Tribunal on this issue are in accordance with law and warrant no interference.
35. While explaining the provisions of Section 147 as amended by the Finance Act, 1987 w.e.f. 01/04/1989 the Circular No. 549 dated 31/10/1989 stated as under:
(iv) A proviso to the new section provides that an assessment which has been completed under Section 143(3) or 147, i.e., a scrutiny assessment, can be reopened after the expiry of four years from the end of the relevant assessment year only if income has escaped assessment due to the failure on the part of the assessee to file a return of income or to disclose fully and truly all material facts necessary for his assessment.
36. The underlined provisions make it clear that the expression used in the proviso namely "no action shall be taken in this section after expiry of four years from the end of the relevant assessment Year" refers to action for reopening the assessment. On a plain reading of Section 147 and the Proviso, it is, in our opinion, clear that this section is only for reopening power of the AO and for other actions, it is subject to the provisions of Section 148 to Section 153 of the Act.
37. Though we agree with what the learned Counsel of the assessee Shri S N Soparkar says that it is not the case where there was failure on the part of the assessee, either to file return as required under Section, 139 or 142(1) or 148 or even to disclose fully and truly all material facts necessary for the assessment and therefore the time limit of 4 years would apply, but we do not any merit in his contention that as per the Proviso to Section 147, no action of making of reassessment could be taken under this section after expiry of four years from the end of relevant assessment year. His submission that under the scheme of the Act an assessment made under Section 147 of the Act is a separate code has no force in view of the decision of Dalmia's case of Supreme court and other cases of Punjab & Haryana, Special bench decision in Raj Kumar Chawla.
38. Section 147 provides for assessment of the escapement of income and the enumerations as provided in Explanation-2 are items of deemed escapement. These are not part of procedure for assessment. For making an assessment for escaped income, there are various stages. Initially an opinion is to be formed vis a vis Explanation 2, then a notice for reopening the assessment is to be issued Under Section 148, and a time limit is to be seen as provided in Section 149 for issuing the notice, Section 150 deals with "provisions for cases where assessment is in pursuance of an order of the appeals etc.", Section 151 deals with "sanction for issue of notice", Section 152 deals with rates of tax to be charged on escaped the assessment and certain other specific provisions and lastly, the assessment is to be made within time limit provided under Section 153 for completion of assessment or reassessment".
39. The words "No action is to be taken" as appear in Explanation to Section 147 are stated to be not only related to initiation of proceedings, because that is provided under Sections 148 and 149, but also for computation of assessment. However, such an eventuality is for completion of assessment which is also provided in Section 153(2) of the Act. The contention that such a position for action was provided in the Proviso to Section 148 up to 2005 and thereafter, on amendment of provisions its incorporation, it is in the Proviso to Section 147, which is claimed to be not a section under which notice for reopening is issued and therefore, legislature has misfired, has no force. It is because Section 147 is an enabling section authorizing AO to reopen the case. It provides that if there is no fault of the assessee no action (of reopening to assess or reassess) shall be taken after 4 years from the end of the relevant assessment year. Further, the submission that the time limit for completion of assessment is provided under Section 153(2) is an outer limit has also no force. It would amount to restricting the scope of Section 153(2) of the Act. Similarly the submission that Section 153(2) is a general provision and Section 147 is a specific provision, and therefore, specific provision should prevail over the general provision has also no force and amounts to reading something which is not there in the statute. Both sections operate in different field-section 147 for reopening and Section 153(2) for completion of such an reopened assessment.
40. Reference to Supreme Court decisions in the case of Padmasundara Rao (Deed) and Ors. (supra) holding that rewriting of statute is not permitted; to Vikrant Tyres Ltd.(supra) prohibiting reconstruction of language; to Mohammad Ali Khan and Ors.(supra) and to Punjab & Haryanna High Court decision in the case of Dalmia Biscuits Ltd. (supra) regarding importance of each word in the statute; to Supreme Court decision in the case of Orissa State Warehousing Corporation Ltd. (supra) stating that natural meaning is to be given to the statute; and to the decision of Supreme Court in Smt. Hasmahunnisa Begam (supra) stating that generally natural meaning should be given and the other meaning can be given only when there are two possible meanings, no doubt depict true principles of law, but they apply not in advancing the case of the assessee but in a converse case, as advanced by the Revenue, i.e., the Proviso does not deal with the limit of completion of assessment or reassessment or recomputation Under Section 147 but only to reopen the case by the AO.
41. Similarly reference to Kanga & Palkiwala Book, stating that Proviso to Section 147 is an exception and reliance to the decisions of Supreme Court in the case of Indo Merchant Bank Ltd. (supra), to H.E.H. Nizam's Religions Endowment Trust (supra) and CIT v. Madurai Mills Co. Ltd. (supra), is not of much help to the assessee, though we agree that the Proviso acts as an exception to the main Section 147, but the question is, how does this solve our problem? The exception, as we have held above, apply to time limit within which a reopening can be resorted to in a case, where there is no failure on the part of the assessee in escaping the assessment of income in normal circumstances.
42. In our opinion therefore there is no merits in the case of the assessee on the additional ground raised and is accordingly rejected. We accordingly hold that the Proviso to Section 147 does not have the effect of curtailing the limitation period for passing the order Under Section 147 as prescribed Under Section 153(2).
43. On the other aspect of the challenging the initiation of proceedings of reopening as raised in original ground, the CIT(A), considering the submissions and various decisions relied upon by the assessee, observed as under:
6. The contentions raised have been considered. The provisions regarding reopening of assessment have been amended w.e.f. 1.4.89. Under the amended provisions, the pre-requisite conditions for reopening, namely, failure on the part of the assessee to disclose fully and truly all material facts and (ii) there was information in the possession of the A.O, have been done away with and under the amended provisions, the only condition which is now required to be met in reopening is that the A.O. should have reason to believe that income has escaped assessment. The judicial decisions which have been referred to by the Ld. Counsel and as discussed above are in connection with the old provisions and therefore would not apply to the action taken by the A.O. in the appellant's case. Under the new provisions, within four years of the end of the relevant assessment year, the A.O. has wide powers to reopen the assessment. In the appellant's case, the notice Under Section 147 was issued on 14.6.2000 which is well within the period of four years from the end of the relevant assessment year. As such in the appellant's case the only condition to be satisfied by the A.O. for reopening the assessment was that there should be a reason to believe that income has escaped assessment As mentioned above, the A.O. found that the appellant company had sold securities which were declared as investments in the return and the loss incurred on such sale had been claimed as business loss. As per provisions of the Act, the sale of investments which had been treated as assets in the balance sheet were required to be treated as capital loss which could not have been allowed as deduction in computing the total income. These facts provided a prima facie basis to the A.O. for believing that income had escaped assessment.
7. The scope of operation of the amended provisions of reopening have been discussed by the Hon'ble Gujarat High Court in the case of Praful Chunilal Patel v. DCIT 236 ITR 832. The Hon'ble Court has held that if the material placed on record, which would show existence of income chargeable to tax, but such income has not been included in the assessed income, that itself would provide a belief to the A.O. that such income had escaped assessment. The Hon'ble High Court has held that the case of non-assessment of an item of income chargeable to tax would warrant formation of the requisite belief to initiate the reassessment proceedings within the four years from the end of the relevant assessment year, even where full disclosure has been made by the assessee. The Hon'ble Court has held that the words "reason to believe" would mean that the A.O. should have initially ascertained the facts and that his conclusion if it constitutes sufficient reason, cannot be overridden. While delivering the judgment, the Hon'ble Court has also considered the decision given in the cases of VXL India Ltd. v. ACIT 251 ITR 295 and Garden Silk Mills Ltd. v. DCIT 135 CTR 405.
8. The principle laid down by the Hon'ble Gujarat High Court in the above referred case applies totally to the facts of the appellant's case. On examination of material available on record, the A.O. was of the belief that income had escaped assessment as capital loss claimed by the appellant company had been allowed as deduction against the business income. The A.O was therefore justified in issuing notice Under Section 147. This ground is therefore rejected.
44. The learned Counsel of the assessee submitted that the CIT(A) is not justified in upholding the validity of reopening which was invalid on facts and circumstances. The assessment framed on misconception that the loss had occurred on capital account was also invalid. It was a change of opinion on the same facts. The reason to believe that income escaped assessment was on a wrong premises and therefore invalid. The CIT-DR on the other hand submitted that a wrong claim was made by he assessee and that was sufficient for reopening of the case.
45. We have heard the parties and considered the rival submissions. The provisions regarding reopening of assessment have been amended wit effect from 1.4.89. In the case of the assessee, the notice Under Section 147 was issued on 14.6.2000 which is, as aforesaid, well within the period of four years from the end of the relevant assessment year. Therefore, the only condition to be satisfied for reopening the assessment is that there should be a reason to believe that income has escaped assessment. The A.O. noticed that the assessee company had sold securities which were declared as investments but the loss incurred on such sale had been claimed as business loss and that the sale of investments which had been treated as assets in the balance sheet were required to be treated as capital assets and the loss on sale thereof could not have been allowed as deduction in computing the total income. These facts provided a prima facie basis to the A.O. to believe that income had escaped assessment. Even though the loss is held subsequently by CIT(A), to be on account of revenue account, the fact remains that it was not an allowable deduction in computing the income and therefore in so far as the AO was concerned it was a wrong claim not allowable as deduction entitling him to reopen the assessment. The Gujarat High Court in the case of Praful Chunilal Patel(supra) held that if the material placed on record, which would show existence of income chargeable to tax, but such income has not been included in the assessed income, that itself would provide a belief to the A.O. that such income had escaped assessment and that the case of non-assessment of an item of income chargeable to tax would warrant formation of the requisite belief to initiate the reassessment proceedings within the four years from the end of the relevant assessment year, even where full disclosure has been made by the assessee. In this case a loss not allowable was claimed as allowable, that constituted the "reason to believe" that income had escaped assessment. The words 'reason to believe' would mean that the A.O. should have initially ascertained the fact of the wrong claim and his that conclusion, if it constituted sufficient reason, cannot be overridden by the subsequent decision of the CIT(A) upholding the disallowance on a different ground. On material available on record, the Assessing Officer was of the belief that income had escaped assessment as capital loss claimed by the assessee company had been allowed as deduction against the business income. The Assessing Officer was therefore justified in issuing notice Under Section 147. This ground is therefore rejected.
46. The next ground is on merits of the disallowance. The Assessing Officer disallowed the loss by holding it on capital account by observing that the securities sold were held as investment during the year. He has also noted that the said investments were shown as asset in the balance sheet. As the transfer of such assets attracted provisions of Section 45, he held that the loss arising on transfer of such assets was required to be treated as capita! Loss. He therefore disallowed the claim of loss of Rs. 1,06,66.818. The Assessing Officer did not accept the contention of the assessee that the shares/securities were not purchased for the purpose of making investment of surplus funds but with the object of trading regularly in purchase and sale of shares and therefore the resultant profit/loss was a business loss.
47. Before the CIT(A) the assessee reiterated that it was in the business of purchase and sale of shares, stocks, debentures, investments, etc; that in the earlier assessment years the said activity was treated as business activity, specifically in A.Y. 95-96; and that in the original assessment order, the business loss has been allowed. Therefore, there was no reason to take a reverse. The details of the scripts along with sale and purchase amounts on which loss of Rs. 1,06,66,817 was claimed and copies of relevant ledger accounts were submitted along with supporting details.
48. The CIT(A) issued a letter dated 26.08.2003 to the assessee pointing out that it had been claimed that its principal business had been to give loans and advances and therefore it was outside the purview of explanation to Section 73 but that the main activity has been trading in shares and that the major investment has been in shares. Moreover, from the details of sundry creditors for expenses, it appeared that the outstanding amounts were only on account of amount payable on purchase of shares and thus, the principal business did not look to be that of giving loans and advances and hence the case appears to have been covered by explanation to Section 73, the loss arising from trading in shares was therefore required to be treated as speculation loss. It is stated that from the transactions in the shares of Spil it had incurred loss of Rs. 52,11,500 which shares were purchased in January, 1996 but sold in December, 1995 (Incorrectly mentioned as 1996 in the letter). Thus, it was obvious that the shares were sold without taking possession of the scrip which amounted to speculation transaction. The assessee was asked to explain as to why, even if the case is not covered by explanation to Section 73, the loss of Rs. 52,11,500 in the scrip of Spil should not be disallowed as a speculation loss.
49. The assessee's reply was that it was engaged in the business of giving loans and advances; that on 9th March, 1994 i.e.; immediately after the incorporation of the Company, it applied for registration to Reserve Bank of India as a Non Banking Finance Corporation which was necessary to carry out the business of loans and advances; that one of the main object of the company was to carry out investment activity and therefore purchases and sale of shares were treated as stock in trade and loss or profit in respect of such dealing in shares was treated as business income and not capital gain Under Section 45 of the Income Tax Act, 1961; that the Explanation to Section 73 is not applicable, it being a company whose principle business was granting of loans and advances and it being also in business of granting loans and advances, Explanation to Section 73 was not applicable; that the assessee is carrying on the activities like dealing in shares as well as financier and both these business were so interconnected to be considered as a single business; that therefore the income of both these businesses will be computed together as per the provision of Section 28 to 44 of the Act; that a statement showing income from operation for 5 years revealed that except for financial year 1994-95 relevant to Assessment Year 1995-96 and Financial Year 1995-96 relevant to Assessment Year 1990-97, the company has not earned any income on dealing in investment; that in fact, the company has not carried out such activity; and that therefore, the Explanation to Section 73 would not be applicable and loss incurred on dealing of shares was to be held as "Business Loss". Apart from the above, the assessee also challenged the authority of CIT(A) to make addition with reference to the new source of income not considered in the assessment order pointing out that the Assessing Officer had disallowed business loss by treating it as capital loss and therefore the CIT (A) was not empowered to apply the Explanation to Section 73. To support its contention, it relied upon the cases of: (i) Addl. CIT v. Gurjar Gravurs 111 ITR 1 (SC); (ii) Prabhudas Ramji v. CIT 62 ITR 621; (iii) CIT v. Jagdish Mills Limited 51 ITR 266; and (iv) Bhagvanclas Chhaganlal v. CIT ITR No. 15163 dt. 2.9.64
50. The CIT(A) though agreed with the assessee that the loss was on trading account but held the same to speculative by observing as under:
14. The contentions raised by the Ld. Counsel have been considered. The Ld. Counsel has not given any convincing reply to point No. H mentioned in this n. office letter No. CIT(A)-VIH/AC-4/l 16/01-02 dated 26.08.2003. As pointed out in above letter, the date of purchase of the scrip was after the date of its sale. The transaction was clearly in the nature of speculative transaction and the loss of Rs. 52,11,500=00 is therefore required to be disallowed as speculative loss.
15. Explanation to Section 73 reads as under:
[Where any part of the business of a company [other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capita! Gains" and "Income from other sources"], or a company the principal business of which is the business of banking or the granting of loans and advances] consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.]
16. It is clear from the above explanation that if a company, the principal business of which is not of banking or granting of loans or advances, does business of share trading, such a company is deemed to be carrying on speculation business to the extent to which the business consists of the purchase and sale of shares. It is therefore to be examined whether the principal business of the appellant company is that of granting of loans and advances. 1 find from the accounts, a copy of which has been placed on record by the Ld. Counsel that the investment in loans and advances is only Rs. 202.48 lacs as compared to the investment in shares which amounts to Rs. 409.04 lacs. Apparently, the major investment of the appellant company is in shares -and not in loans and advances. Moreover from the details of sundry creditors for expenses it appears that the outstandings are only on account of amounts payable on purchase of shares. This fact has not been disputed by the appellant company. The extent of transactions in granting of loans and advances and sale of shares far exceeds the extent of transactions in granting of loans and advances. Therefore, it is apparent that the principal business of the appellant company is not that of granting of loans and advances. The loss arising from the business of purchase and sale of shares is therefore deemed to be speculation loss. The contention of the Ld. counsel that in the other assessment years the appellant company has not earned any income by way of investments proves that the main business is that of loans and advances, is not acceptable. Even if no income has been earned, the amount of transactions in dealing in shares and the investment in shares is much higher as compared to transactions of loans and advances. Specifically in the assessment year under consideration, the investment and the extent of transactions in shares is far in excess of transaction in loans and advances. The explanation to Section 73 is therefore consequently applicable to the case of the appellant company: Consequently, as the loss in trading of shares declared by the appellant company is treated as speculative loss, the disallowance made by the A.O. is upheld.
51. As to the challenge to the jurisdiction of the CIT(A) to consider the loss as speculation he observed that the disallowance made by the A.O. and the disallowance made in this appellate order pertain to the same amount and nature of income/loss. The A.O. has considered the net loss on sale and purchase of shares as capital loss and has disallowed the same and the very same loss has been treated as speculative loss. The source of item of income/loss for consideration is the same i.e. as a result of trading of shares. He held that it could not be treated as a new source of income which was being considered by him. Only the nomenclature or the nature of the loss has been changed in view of the provisions of the Act. He held that there is no bar on the appellate authority in bringing to tax the amount of income under its proper head with reference to the provisions of the Act. On the case laws referred to the Ld. Counsel, he observed, the facts were entirely different in the sense that the appellate authority had considered a totally new item of income which was not considered by the A.O. at the assessment stage and that was not so in the case of the assessee company.
52. The ld. Counsel of the assessee contended that the disallowance of loss as speculation loss was on the ground that it was dealer in shares and shares were held as stock-in-trade and sold at a loss. In this connection he referred to the decision of Special Bench in the case of ACIT v. Concord Commercials Pvt. Ltd. 95 ITD 117. He also carried up to the composition of income i.e. Rs. 18.95 lacs and loss at 1.06 crores; net loss at Rs. 87 lac. He contended that it was on wrong assumption that assessee was holding shares on capital account and it was a capital loss as also held by the CIT(A) that it was a trading loss, though a speculation loss. The CIT-DR relied upon the order of the CIT(A) and submitted that it was a clear case of speculation loss particularly in view of the fact that the assessee had sold the shares even before they were purchased without delivery thereof. The decision of the Special Bench in Concord does not help the assessee as the advancing of loans was not its principal business.
53. We have heard the parties and considered the rival submissions. The assessee had not explained either before the CIT(A) and also before us as to the position of the date of purchase of the scrip being after the date of its sale. This is a clear indication of the fact the transaction was settled without delivery and was in the nature of speculation. The loss of Rs. 52,11,500 incurred thereon was therefore as speculative loss and was required to be disallowed, in any case.
54. The assessee being a company its loss as relates to purchase and sale of shares would be on speculation account because of the specific provision of Expl. To Section 73 of the Act unless it falls in the exception provided in the Explanation to Section 73 of the Act. Explanation to Section 73 for sake of convenience is reproduced hereunder:
Where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capita! Gains" and "Income from other sources, or a company the principal business of which is the business of banking or the granting of loans and advances] consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
55. On a perusal of this Explanation it is clear that if - i) the assessee is a company, ii) it does business of share trading iii) its gross total income does not consist mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capita! Gains" and "Income from other sources", iv) its principal business is not of banking or granting of loans or advances, then such a company is deemed to be carrying on speculation business to the extent to which the business consists of the purchase and sale of shares.
56. The assessee complies with the first and second conditions, namely, it is a company, ii) it was engaged in the business of share trading. It is not the claim of the assessee that its income consisted mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capita! Gains" and "Income from other sources". Its claim is that its principal business was granting of loans and advances and therefore the Explanation would not hit the transaction to be held as speculative. The CIT(A) found from the accounts, that the investment in loans and advances was only Rs. 202.48 lacs as compared to the investment in shares which amounts to Rs. 409.04 lacs. This is indicative of the fact that the major investment of the assessee was in shares and not in loans and advances. The outstanding amount as appear in the details of sundry creditors for expenses show that these were only on account of amounts payable on purchase of shares. This fact has not been disputed by the assessee either before the CIT(A) or even before us. It would thus be not difficult to hold that the extent of transactions in granting of loans and advances and sale of shares far exceeded the transactions in granting of loans and advances. In these circumstances we hold that the principal business of the assessee company was not that of granting of loans and advances. The decision of the Special Bench in the Concord does not advance the case of the assessee any further. The loss arising from the purchase and sale of shares was therefore rightly held to be speculation loss.
57. The contention of the assessee that in the other assessment years the appellant company has not earned any income by way of investments proves that the main business is that of loans and advances, has rightly been rejected by the CIT(A) by stating "Even if no income has been earned, the amount of transactions in dealing in shares and the investment in shares is much higher as compared to transactions of loans and advances. Specifically in the assessment year under consideration, the investment and the extent of transactions in shares is far in excess of transaction in loans and advances." The assessee's case, therefore, does not fall in any of the exceptions in the Explanation to Section 73 of the Act. Loss in trading of the shares therefore has rightly been treated as speculative loss. We accordingly reject assessee's appeal on this issue.
58. The second appeal is with regard to levy of penalty for concealment. It was levied for and on account of the disallowance of the loss discussed aforesaid. In the penalty order the Assessing Officer noted that the assessee debited the capital loss of Rs. 1,06,66,818 to the P & L Account; that during the course of assessment proceedings, it has been confirmed that the assessee company had investment in loans and advances at Rs. 202.48 lacs as compared to the investment in shares of Rs. 409.04 lacs; that the extent of transactions of purchase and sale of shares far exceeded the extent of transactions in granting of loans and advances; that the principal business of the assessee was not of granting of loans and advances and therefore, the loss arisen from the business of purchase and sale of shares is clearly a speculation loss; that the claim of capital loss was nothing but a colourful device adopted by the assessee to avoid the payment of taxes; that the decision of the Supreme Court in the case of McDowell & Co. v. CIT 154 ITR 148 (SC) was squarely applicable to the facts of the case of the assessee company. The Assessing Officer therefore concluded that the assessee had deliberately and willfully committed the default of concealment of its income and also furnished inaccurate particulars of income and levied a minimum penalty of Rs. 49,06,736/ - Under Section 271(1)(c) of the Act being equivalent to the tax sought to be evaded.
59. The CIT(A) dismissed the appeal by noting that the assessee has not filed any reply to the show cause notice which led the Assessing Officer to levy the penalty on the basis of facts on records and in the order of CIT(A); that in the order of CIT(A) in quantum appeal, the issue has been duly considered while confirming the addition; that the assessee company has sold shares of Spil in December 1995 while the same were purchased later or in January 1996, which resulted in loss of Rs. 52,11,500 and therefore it was held by him that the loss to this extent on shares of Spil was clearly speculative in nature that the objection to the action of CIT(A) in confirming disallowance on a different ground was also rejected as the disallowance of trade loss in the appellate order pertained to the same amount and nature of income/loss; that the AO has considered the net loss on sale and purchase of shares as capital loss and has disallowed the same and in the appellate order, the very same loss has been treated as speculative loss; that the source of item of income/loss for consideration was the same i.e. as a result of trading of shares, that, therefore it was not a new source of income which has been considered by the CIT(A); that only the nomenclature or the nature of the loss had been changed in view of the provisions of the Act; that the assessee claimed wrong deduction of Rs. 1,06,66,817/- which has been upheld by the CIT(A) in quantum appeal; that the assessee has not been able to substantiate the said wrong claim by any documentary evidence and it has also failed to prove that explanation offered was bonafide; that by claiming wrong deduction, the assessee has concealed the particulars of correct income; that as per the Explanation 1 to Section 271(1)(c), wherein respect of any facts material to the computation of the total income of any person under this Act.... Such person offers an explanation which he is not able to 'substantiate and fails to prove that such explanation is bonafide...then, the amount added or disallowed in computing the total income of such person...be deemed to represent the income in respect of which particulars have been concealed. He referred to Rajasthan High Court in case of CIT v. Mohd. Mohtran Farooqui 259 STR 132 (Jaipur); that the onus was on the assessee to prove that it had not furnished inaccurate particulars of income as has been held by the Delhi High Court in the case of CIT v. Gurbachan Lal 250 ITR 157 by following the judgment of Supreme Court in the case of CIT v. Jeevan Lal Sah ; DDIT v. Suresh Kumar ; K.P. Madhusudan v. CIT 251 ITR 199 (SC); and CIT v. Sree Krishna Trading Co. 253 ITR 645 (Ker.); that as per explanation to Section 271(1)(c), the assessee should give an explanation which should not be vague or fanciful and without any foundation and basis; that it has been held by the Supreme Court in the case of Shadilal Sugar & General Mills Ltd. v. CIT 168 ITR 705 that if explanation is vague or fanciful "and without any foundation and basis, it is certainly open to Revenue authority to impose penalty; that therefore, it would depend upon the acceptability of the explanation offered by the appellant in the background of the statutory provisions as prevailing at the relevant time CIT v. Jugal Kishore Hargopai Das ; that it was also held by the Madras High Court in the case of A.V. Thomas & Co. v. CIT (1996) 59 ITR 499, that penalty proceedings were not criminal proceedings and that the onus of proof of non-concealment lay on the assessee; that it was also pointed out by the Supreme Court in the case of CIT v. Mussadi Lal Ram Bharose (1987) 165 ITR 14, that the burden placed upon the assessee is not discharged by any fantastic Explanation; and that it must be an explanation acceptable to the fact finding body 242 ITR 29 (Ker) and Rajasthan High Court in the case of Raghuvir Soni v. ACIT 258 ITR 239. He therefore, considering the above facts, circumstances and judicial decisions, held that the assessee had concealed the particulars of its income. The CIT(A) did not accept the contention of the assessee and held that it was without any basis and foundation and, therefore, not bona fide.
60. The learned Counsel of the assessee submitted that all the material necessary for assessment have been submitted by the assessee in the original assessment as well in the reassessment proceedings and therefore there is no question of concealment of any particulars of income of furnishing of any wrong particulars thereof. It was nothing but a rejection of assessee's claim not amounting to concealment. He invited our attention to decision of Gujarat High Court in the cases of -i) CIT v. Lakhdir Lal Ji 85 ITR 77; ii) Sarabhai Chemicals Pvt. Ltd. CIT, 257 ITR 355; iii) CIT v. Baroda Tin Works 221 ITR 661; and National Textile v. CIT 249 ITR 125 and submitted that the penalty initiated on a particular ground cannot be levied or upheld on a different ground. The penalty in this case was initiated on the ground that the assessee claimed a capital loss. It was levied on a ground that it was a speculation loss. The CIT(A) accepted that the disallowance cannot be made on capital account as according to him the loss was on trading account as claimed by the assessee. He, however, upheld the disallowance on different ground that it was a speculation loss. He, therefore, submitted that levy of penalty is not justified. The CIT-DR, on the other hand, supported the levy by submitting that it was a wrong claim made by the assessee and therefore penalty was rightly levied and confirmed for the reasons stated in order of the CIT(A).
61. We have heard the parties and considered the rival submissions. Penalty is levied under Section 271(1)(c) which reads as under:
271. (1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person:
* * * *
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income' he may direct that such person shall pay by way of penalty,:
(i)
(ii)
(iii) in the cases referred to in Clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income.
Explanation 1 - Where in respect of any facts material to the computation of the total income of any person under this Act,:
(A) such person fails to offer an/explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purpose of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars CL- have been concealed.
62. It is a trite law that concealment proceedings are penal in character and under the substantive provisions of Section 271(1)(c), it is for the department to prove that the assessee had concealed the particulars of his income or furnished inaccurate particulars thereof to bring the case of the assessee within the mischief of the main provisions of Section 271(1)(c) of the Act. Mere rejection of assessee's claim would not be sufficient to hold the assessee to be guilty of concealment. If there is no evidence on record except the explanation of the assessee which explanation is either found to be false or is unacceptable, it does not follow that concealment has been established. Anwar Ali 76 ITR 696 (SC), Khodey Eswaria & Sons 83 ITR 369 (SC), Mussadilal Ram Bharose 165 ITR 14 (SC).
63. It is by virtue of Explanation only, that the AO has been given a right to raise a presumption to deem certain sum added to income or disallowed in computing the income of a person, to represent the income in respect of which particulars have been concealed, if the assessee did not furnish an explanation or when explanation furnished was found false; and also when such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him. In other words in a later case, the Explanation exonerate an assessee, if that was bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by an assessee. We may refer to in this connection the following observations of the Gujarat High court in the case of Sarabhai Chemical 257 ITR 355 (Guj):
The deeming fiction that the added/disallowed amounts represent the income in respect of which particulars have been concealed contained in Expln.1 will not apply if the explanation that was given by the assessee in the quantum proceedings which he could not substantiate in those proceedings was (i) bona fide and (ii) if he had disclosed all the facts relating to the same and material to the computation of his total income. In cases where explanation was offered, but was rejected as it could not be substantiated by the assessee, there would arise no presumption of concealment of the particulars of income that was added or disallowed and such assessee can show that the said explanation offered by him was a bona fide one and that he had disclosed all facts relating to such explanation and material to the computation of his total income during the quantum proceedings.
64. In the present case it is not the case of the revenue that the assessee had failed to offer an explanation or that its explanation was found false, therefore, Part 'A' of the Explanation does not hit the assessee.
65. The case of the Revenue against the assessee is that it furnished inaccurate particulars of its income by making a wrong claim and that its explanation and the claim of expenditure was not bona fide and therefore it was liable to penalty by virtue Part B of the Explanation. This Part of the Explanation starts with the words "such person offers an explanation which he is not able to substantiate". "Not able to substantiate" does not mean not accepted by the authority concerned but not showing a substance in the claim made by the assessee. The word "Substantiate" is opposite to the words vague or fanciful, or without any foundation or basis. It cannot be equated with the expenditure/loss disallowed. The assessee stated that it was a business loss and that is with what the CIT(A) agreed. At the time of initiation of proceedings the charge was that it made a claim of capital loss as a business loss and that was explained to be, and accepted by the CIT(A) also, that it was a business loss. Therefore the assessee cannot, in our opinion, be accused of not to have substantiated the explanation.
66. The next following sentence of part B of the Explanation states "and fails to prove that such explanation is bona fide" The assessee claimed the loss on sale of shares on trading account and as aforesaid it was found accepted by the CIT(A) and therefore it cannot be said that assessee failed to prove that explanation was bona fide. On the contrary he proved that explanation was correct. It is different matter that the CIT(A) found another ground to uphold the disallowance, not even contemplated by the Assessing Officer at the time assessment or reassessment in the course of which the penalty proceedings were initiated and the assessee was required to show cause and give explanation for making a claim of loss at that stage.
67. The third sentence of Part B of the Explanation is "and that all the facts relating to the same and material to the computation of his total income have been disclosed by him". The assessee had disclosed all material facts that are relevant for computing the income of the assessee not only during the assessment proceedings but at the threshold in the return of income itself, i.e., by furnishing the details of share dealing and by disclosure in the annexed Balance sheet and profit and loss account. It would be relevant to note that on the basis of these very materials, and not more, the Assessing Officer has reopened the assessment under the main provisions of Section 147 without invoking the Proviso thereto, meaning thereby was not alleging any failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. We may also usefully refer to the case of Shiv Lal Tak (2001) 166 CTR (Raj.) 534, wherein the Rajasthan High Court has observed as under:
The statute has clearly drawn distinction between furnishing a deliberate false explanation by the assessee and an explanation, which may not be false but is not accepted because assessee was not able to substantiate it. While there is no relaxation in the rigour of explanation in raising presumption against the assessee in the former case, in the latter class of cases, the statute itself relaxes its rigour by directing that where in respect of any amount, added or disallowed and any explanation is offered by such person (assessee) which is not accepted because the assessee has failed to substantiate the same, but which explanation is bona fide and all the facts relating to same and material to the computation of total income has been disclosed by cases under Clause (A) of the Explanation 1 are those where explanation furnished by the assessee falls in the category of a fact 'disproved' whereas cases where an explanation so furnished falls in the category of fact 'not proved'. The expressions "proved', "disproved' and "not proved' have well known distinct connotation in legal terminology, as may be apparent from the provisions of Indian Evidence Act. On finding an explanation as was not existent or disproved a reasonable inference of lack of bona fide can be drawn, mere failure to substantiate the explanation as a fact not proved, cannot raise a presumption about deliberate concealment and lack of bona fide. In such events question of bona fide has to be proved as a fact like any other fact on preponderance of probability uninfluenced with any presumption.
68. Therefore, part B of the Explanation 1 to Section 271(1)(c) would instead exonerates the assessee from levy of penalty as the assessee has offered an explanation which though he is not only able to substantiate but proved that his explanation was bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him.
69. On the facts and circumstances of the case, it is, in our opinion, a mere rejection of assessee's claim for loss that too on a different ground by the appellate authority and, therefore, cannot, in any case, be equated with concealment. The Delhi Cloth and General Mills 157 ITR 822 in similar circumstances deleted the penalty observing that the mere fact that a claim for expenditure stands disallowed does not, by itself lead to the inference that the assessee had furnished inaccurate particulars in regard to that item. Similarly, Madhya Pradesh High Court in the case of J.K. Jajoo 181 ITR 410 observed that : "But from the mere fact that a claim for certain expenditure is rejected, it cannot be held that the claim for expenditure made by the assessee was false or inaccurate to his knowledge or was as a result of gross negligence."
70. We may examine the issue from a different angel also. A claim of loss was made by the assessee, which was not found admissible against the income of the year under consideration. It is not that there was no loss as such or that it was a bogus loss or that a loss the claim was not allowable at all. It was, either a business loss as claimed by the assessee, or a loss under the head Capital gains as held by the Assessing Officer, or a speculative loss as held by the CIT(A). It was an admissible loss but only thing is that instead of the allowance in the year under consideration in absence of income, it was to be carried forward and allowed to be set off against income of subsequent year(s) in all the three situations, namely.- i) If it were a loss under the head business it was to be set off under Section 72 against income from business of this year as well as of subsequent years as the business income of the assessee was not sufficient to absorb it fully and even as per Assessing Officer in the original assessment order it was not set of fully against the business income of this year and a substantial part of it to the extent of Rs. 87,35,134 (out of Rs. 1,06,66,817) was shown as carried forward; ii) If it were a claim of loss under the head capital gain as held by the Assessing Officer in the reassessment order, it would have been allowable against the income under the head capital gain either of this year and in absence thereof against the capital gain of the subsequent year Under Section 74; and iii) lastly, if it were a speculative loss as held by CIT(A) and upheld by us aforesaid, it would be allowable against income from speculation business of this year or carried forward and set of against income from speculation of subsequent year(s) Under Section 73 of the Act. It was thus not a case of absolute wrong claim, though a case of wrong set off of a small part thereof in the year under consideration. A loss was incurred; it was allowable as well, though instead of loss under the head "business" or "capital gains", against income of speculation business.
71. The scope of explanation is discussed by the Rajasthan High Court in case of CIT v. Mohd. Montran Farooqui (supra) by observing that "After the insertion of the Explanation to Section 271(1)(c) of the Income Tax Act, 1961, the requirement that the Department should establish that there has been a conscious concealment of particulars of income or a deliberate failure to furnish accurate particulars, is no longer necessary. In case additions are made and the explanation submitted by the assessee is not satisfactory, the income added should be treated as deemed concealment." In the present case the assessee has made a claim for which the necessary particulars have been furnished and as aforesaid, that is evident by the fact that the assessment was reopened not because of the failure of the assessee but because of allowance of a wrong claim allowed in the original assessment completed Under Section 143(3) of the Act. The assessee has given an explanation that the loss was on trading account and not on account of sale of investment and that explanation was found to be correct and upheld by the CIT(A) as well. Thus the assessee had been able to substantiate the said claim on the basis of which the penalty was initiated by the AO and it has also proved that explanation offered was bonafide. The loss which has been claimed as a trading loss but disallowed by Assessing Officer as on capital account and as speculative loss by the CIT(A) and for claiming the deduction thereof, the assessee cannot be held to have concealed the particulars of income or furnished in accurate particular thereof.
72. We do not find any force in the finding of the CIT(A) that the onus was on the assessee to prove that it had not furnished inaccurate particulars of income. In our opinion, it was on the Revenue earlier by the dint of substantive provisions of Section 271(1)(c) and is not taken away by the Explanation 1 thereto which is only a rule of evidence and still requires the revenue to bring the case of the assessee in the ken of the Explanation. The Delhi High Court in the case of Gurbachan Lal (supra) referred to by the CIT(A) was a case where the Tribunal had proceeded to place the onus on the revenue to prove by some positive material or positive circumstances that the assessee had concealed his income and that positive state of affairs was held to be not required to be proved by the Revenue in view of the Explanation to Section 271(1)(c). Since the effect of the Explanation added to Section 271(1)(c) has been lost sight of, the Tribunal was held not justified in canceling the penalty. The Delhi High Court followed the judgment of Supreme Court in the case of Jeevan Lal Sah which was a case under the old provisions of the law as they stood before introduction of the Explanation to Section 271 with effect from 1-4-1976. The CIT(A) is also not correct to say that the same view was also taken in the cases of DDIT v. Suresh Kumar (Ker); K.P. Madhusudan (SC) and Sree Krishna Trading Company(Ker.). The Supreme Court in the case of Shadilal Sugar & General Mills Ltd. is also under the old provisions.
73. It is true that it would depend upon the acceptability of the explanation offered by the assessee in the background of the statutory provisions as prevailing at the relevant time. But as held above, the assessee has given an acceptable explanation to be out of the deemed concealment as provided in the Explanation 1 to Section 271(1)(c) no penalty can be levied upon it.
74. We should also keep in mind that penalty proceedings Under Section 271 are to be initiated in the course of any proceedings under the Act, either by Assessing Officer or CIT(A) or the CIT. Here in the present case they were initiated by the Assessing Officer and were initiated in the cause of reassessment proceedings for the disallowance of loss as capital loss. That ground of disallowance was not accepted by the CIT(A) as correct and therefore the entire edifice crumbles and falls down. The penalty initiated on that ground cannot fructify and, therefore, cannot also be levied. The CIT(A) upheld the disallowance on a different ground but penalty cannot be levied or justified on this new ground, as for that, the initiation has to be on that ground and that too by the CIT(A) who made the order of disallowance by upholding the disallowance on a different ground.
75. Therefore, considering the above facts and circumstances, we hold that in this case no penalty can be levied. In our opinion the assessee had not concealed the particulars of income nor furnished inaccurate particulars of its income. The explanation offered by the appellant is not without any basis and foundation and was substantiated and can be considered as bona fide and accordingly acceptable. The penalty of Rs. 49,06,736/- levied Under Section 271(1)(c) is therefore deleted,
76. In the result, the quantum appeal is dismissed and the penalty appeal is allowed.
Pronounced in the open Court on 09/5/2008.