Income Tax Appellate Tribunal - Mumbai
Khazana Holdings (P) Ltd. vs Asst. Cit on 7 June, 2007
Equivalent citations: [2008]301ITR312(MUM), (2008)114TTJ(MUM)755
ORDER
K.C. Singhal, Judicial Member
1. The first issue arising in this appeal relates to the validity of reassessment proceedings under Section 147 of the Income Tax Act, 1961 ('Act').
2. Briefly stated the facts are, that the assessee filed its return of income for the year under consideration on 27-11-1998, declaring nil income. The said return was processed under Section 143(1)(a) of the Act, vide intimation dated 9-9-1999 accepting the return. Subsequently, on perusal of the records, it was noticed that the company was dealing in purchase and sale of shares /debentures, etc., and had a loss of Rs. 1,12,88,130 on the sale of such shares/debentures, the assessee had also declared income from dividend and interest on debentures, etc., at Rs. 8,54,250 which was adjusted against the loss from share trading. On these facts, the assessing officer was of the view that income to the extent of Rs. 8,54,250 had escaped assessment as per the provisions of Section 147 of the Act inasmuch as the loss in shares was deemed to be speculation loss as per the Explanation to Section 73 of the Act and consequently, the same could not be set-off against the profit under other heads. Accordingly, the reassessment proceedings were initiated by issue of notice under Section 148 of the Act on 5-3-2003.
3. In the course of reassessment proceedings, the assessee did not challenge the validity of reassessment proceedings and consequently, the reassessment was concluded by determining the total income at Rs. 8,61,949 after denying the set-off of the loss from share trading:
4. However, the validity of reassessment proceedings was challenged before the learned Commissioner (Appeals) by raising two contentions namely - (i) since all the facts relating to purchase and sale of shares/debentures were available from the audited accounts, the reassessment proceedings could not be initiated in view of the judgment of the Hon'ble Bombay High Court in the case of Citibank N.A. v. S.K. Ojha and (ii) reassessment proceedings could not be initiated on mere change of opinion in view of the judgment of the Hon'ble Bombay High Court in the case of IPCA Laboratories Ltd v. Gajanand Meena, Dy. CIT .The learned Commissioner (Appeals) rejected the submissions of assessee and upheld the action of the assessing officer by observing as under:
I have gone through all the contentions of the appellant and do not find any merit in its claim. It is on determining the fact that by virtue of adjusting the speculation loss from other income the appellant's income has escaped the assessment. It is also clear from the fact that the aforesaid issue is not raised on account of change of opinion but on account of honest and genuine belief on the part of the assessing officer that the income had escaped the assessment. Considering the facts that the assessing officer had not applied the mind on this account in accepted return under Section 143(1)(a), I do not find any infirmity in the Assessing Officer's action. As such this ground of appeal is rejected.
5. The learned Counsel for the assessee has reiterated the above contentions before us and, therefore, need not be repeated. In addition, he relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Smt. Maniben Valji Shah (2006) 195 Taxation 493 in respect of the first contention that reassessment proceedings cannot be initiated if all the particulars are furnished by the assessee along with the return.
6. On the other hand, the learned D.R has heavily relied on the order of the learned Commissioner (Appeals) and also contended that reassessment proceedings can be initiated within a period of 4 years if there is an escapement of income on the basis of material or information available with the assessing officer. The question whether there is failure on the part of the assessee to disclose all relevant material facts will be relevant only where the proviso to Section 147 is applicable. Proceeding further, it was submitted by her that the original return was processed under Section 143(1) of the Act, as per the Board Circular and, therefore, the assessing officer was not required to apply his mind to the fact of the case while processing the return. Therefore, the question of forming any opinion did not arise. Consequently, the question of change of opinion also does not arise. She relied upon the decision of the Hon'ble Bombay High Court in the case of Citibank N.A. (supra). She also relied on the judgment of the Hon'ble Bombay High Court in the case of Dr. Amin's Pathology Laboratory v. P.N. Prasad, Jt. CIT , wherein it has been held that the proviso to Section 147 cannot be applied where the return has been accepted under Section 143(1)(a). She also relied on the judgment of the Hon'ble Calcutta High Court in the case of Simplex Concrete Piles India (P) Ltd. v. Dy. CIT wherein it has been held that notice of reassessment would be valid if prima facie it is shown that assessing officer had reason to believe that income had escape assessment.
7. Rival submissions of the parties have been considered carefully in the light of the facts emerging from the orders of the lower authorities and the case law cited before us. In our opinion, the legal contention raised by the learned Counsel for the assessee is without force. Perusal of the provisions of Section 147 reveals that only requirement for initiating reassessment proceedings is that the assessing officer must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year. However, proviso to Section 147 provides that after the lapse of four years from the end of assessment year, no action shall be taken under Section 147 unless escapement of income is on account of failure on the part of the assessee to make all returns 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. In the present case, admittedly, the notice has been issued within a period of four years from the end of assessment year i.e., on 5-3-2003 and, therefore, the proviso to Section 147 cannot be applied to the present case. Consequently, the contention of assessee's counsel that reassessment proceedings cannot be initiated where all necessary facts have been shown in the return cannot be accepted considering the fact that notice was issued within four years from the end of assessment year. Therefore, in our opinion, the decision of the Hon'ble Bombay High Court in the case of Citibank N.A. (supra), relied upon by the learned Counsel for the assessee cannot be applied to the present case.
8. It may be mentioned at this stage that the learned Counsel for the assessee has submitted in the course of hearing that relevant facts have not been mentioned in the above judgment and, therefore, it cannot be said that the said judgment is applicable only where period of four years from the end of assessment year has lapsed. According to him, this judgment is also applicable even where the assessment is re-opened within a period of four years. We have gone through the said judgment and find from page-665 of the report wherein the Hon'ble Judges referred to the Affidavit filed by the revenue. In that Affidavit, it was stated that the reasons were recorded and the CIT, Mumbai, had granted sanction under Section 151 of the Act. Though necessary facts were not mentioned in that judgment but the fact regarding sanction under Section 151 is relevant for our purpose. Sub-section (1) of Section 151 provides where original assessment has been made under Section 143(3), then notice under Section 148 could not be issued after the expiry of four years from the end of relevant assessment year unless the Chief Commissioner of Income-tax or the Commissioner of Income-tax is satisfied that it is a fit case for issue of such notice. Sub-section (2) of Section 151 applies where assessment is not made under Section 143(3). In such situation also, the notice could not be issued after four years unless the JCIT is satisfied that it is a fit case of issue of notice. Thus, sanction under Section 151 is required only where period of four years from the end of relevant assessment year, has expired. This inference is also fortified by the fact that Their Lordships of the Hon'ble Bombay High Court referred to certain judgments of the Hon'ble Supreme Court and the judgment of the own court which were decided with reference to Section 147(a) of the Act (prior to amendment). Section 147(a) was also applicable to those cases where reopening was made after expiry of four years from the end of assessment year. This shows that Their Lordships of the Hon'ble Bombay High Court were concerned with the reassessment proceedings with reference to the proviso to Section 147, while in the present case, we are concerned with a case where notice has been issued within a period of four years from the end of relevant assessment year. Therefore, the requirement of proviso to Section 147 is not relevant in the present case and consequently, the above decision cannot be applied to the present case.
9. The decision of the Hon'ble Bombay High Court in the case of Smt. Maniben Valji Shah (supra) relied upon by the learned Counsel for the assessee is also distinguishable for the reasons given hereafter. The only question before the Hon'ble court was whether re-opening of the assessment under Section 147 of the Act was invalid. In that case, the original assessment was made under Section 143(1) of the Act and subsequently notice under Section 148 was issued wherein it was mentioned that assessee had purchased a flat of Rs. 2.50 lakhs for which no details were filed along with return and, therefore, in the absence of such details, he proposed to re-open the assessment under Section 147 of the Act to scrutinize the investment made in the flat purchased. Learned Counsel for the assessee referred the decision of the Hon'ble Supreme Court in the case of Ganga Saran & Sons (P) Ltd. v. ITO , for the proposition that where all necessary facts are disclosed in the original proceedings, then the assessment could not be re-opened under Section 147(a) of the Act. He also referred to the decision of the Hon'ble Bombay High Court in the case of Dr. Amin's Pathology Laboratory (supra) for the said proposition. The Hon'ble High Court held as under:
Having heard Shri Desai, learned senior counsel for the appellant as well as Shri Bhujale, learned Counsel for the respondent, it is an admitted position that the assessee had invested a sum of Rs. 2,50,000 for the purpose of purchasing the flat and what was sought to be investigated was the source of income. A bare perusal of the aforesaid notice dated 10-10-1991, clearly indicates that the officer was wanting to know the details with regard to the source of funds with regard to purchase of the said flat for a sum of Rs. 2,50,000. Obviously, in the above, there is no question of the assessing officer having any basis to reasonably entertain the belief that any part of the income of the assessee had escaped assessment and that such escapement was by reason of omission or failure on the part of assessee to disclose fully and truly all material facts. Under the aforesaid facts and circumstances, we find no merit in the above appeal, hence, the same stands dismissed, however, no order as to costs.
(Emphasis supplied)
10. Perusal of the above clearly shows that the court decided the issue infavour of the assessee on the ground that there was no basis for entertaining the belief that no part of income had escaped assessment. The otherobservations that there was no escapement by reason of omission orfailure on the part of the assessee but to disclose fully and truly all materialfacts was by way of obiter inasmuch as - (i) the notice was issued within four years from the end of the assessment year and consequently the proviso to Section 147 was inapplicable and (ii) the court referred its own judgment in the case of Dr. Amin's Pathology Laboratory (supra), wherein it has been clearly held that the proviso to Section 147 applies only to the cases were reopening is sought of the assessments under Section 143(3). The condition regarding failure to disclose material facts is provided only in the proviso and not where the assessment is re-opened under the main provisions of Section 147. In view of the clear verdict of the Hon'ble Bombay High Court in its earlier judgment in Dr. Amin's Pathology Laboratory's case (supra), the observations made by the court in the later case regarding failure to disclose material facts are by way of obiter dicta and cannot be said to have precedent value in view of the speaking order passed by the Hon'ble Bombay High Court in the case of Dr. Amin's Pathology Laboratory (supra).
11. In view of the above discussion, the first contention raised by the assessee is hereby rejected.
12. The second contention of the learned Counsel for the assessee, in our opinion, is also without force. Change of opinion presupposes the formation of an opinion. In a case where a return is processed under Section 143(1)(a), the assessing officer was not required to scrutinize the facts and figures in the return filed by the assessee as he was bound to accept the return without adjustment as per the amended provisions of Section 143(1)(a) effective from 1-6-1999. Therefore, the question of forming an opinion at the stage of processing the return did not arise. In the course of hearing, the assessee's counsel was informed about the decision of the Tribunal in the case of ITO v. Honey Enterprises (2004) 89 ITD 301 (Delhi), wherein the aforesaid view was taken. The relevant portion of the decision is being reproduced as under:
There is no dispute about the legal position that the reassessment proceedings cannot be initiated on mere change of opinion and rather it is the settled legal position. Whether there is a change of opinion or not would depend on facts of each case. A change of opinion presupposes the existence of an opinion formed by the assessing officer in the earlier proceedings. The formation of opinion is a positive act on the part of the assessing officer. Thus, an opinion can be said to be formed where there is an application of mind with reference to the material on record and the, relevant provisions of the statute. Therefore, if in earlier proceedings, no such opinion is formed and there is escapement of income, then it cannot be contended that reassessment proceedings are initiated on mere change of opinion. Mere assessment in a routine manner would not lead to the interference that an opinion was formed by the assessing officer in respect of all the issues involved in the assessment.
In view of the above decision, it is held that theory of change of opinion does not apply to the present case since there was no occasion for forming an opinion under Section 143(1)(a). Consequently, the intimation of proceedings under Section 147 of the Act is up he learned
13. The next issue arising from this appeal is whether the loss of Rs. 1,12,88,130 incurred in the business of shares on account of valuation of closing stock can be set-off against the other incomes declared by the assessee.
14. Briefly stated the facts are that the assessee-company was engaged in the purchase and sale of shares and had incurred a loss of Rs. 1,12,88,130 from such business. The assessee had also declared income by way of dividend and interest amounting to Rs. 8,54,250 against which the loss in shares was set-off and thus, nil income was returned. In the course of assessment proceedings, the assessee was asked to show cause why such loss should not be treated as speculation loss and consequently, the same should not be allowed to set-off from the other incomes declared by the assessee. In reply, it was submitted by the assessee that loss was not incurred on account of speculation loss but it was incurred merely on account of diminishing in the value of investment at the end of the year. The reduction in the value of closing stock was due to following of the mandatory method of valuing of its stock at cost or market value whichever is less. This explanation was rejected by the assessing officer. He was of the view that though the assessee was not carrying on speculation business in terms of Section 43(5) of the Act, but the business carried on by the assessee was to be treated as deemed speculation business as per the provisions of Explanation to Section 73 of the Act. He also opined that it was immaterial whether the loss incurred on account of valuation of stock at the end of the year or on account of actual sale in the year. According to him, the valuation of closing stock is part and parcel of the method of computing the business income/loss and, therefore, the loss even arising on account of valuation of stock would amount to business loss and consequently, has to be treated as speculation loss in terms of Section 73 Explanation. Accordingly, he did not allow the set-off against the other incomes declared by the assessee. Consequently, the total income was determined at Rs. 8,61,949 after making certain adjustment to the income of the assessee. The matter was carried in appeal before the learned Commissioner (Appeals) who has confirmed the order of the assessment made by the assessing officer. Aggrieved by the same, the assessee is in further appeal before the Tribunal.
15. The learned Counsel for the assessee has contended before us that the assessee was entitled to value the closing stock of shares as per the recognised principles of accounting i.e., at stock or market value whichever is lower, since the market value of shares had gone down, the assessee valued the shares at market value which resulted in business loss of Rs. 1,12,88,130. He drew our attention to the statements of profit and loss account and the details of purchase and sale of shares appearing at Pages-10 and 15 to 17 to point out that loss had been incurred mainly on account of valuation of closing stock at market value. According to him, such loss cannot be said to have incurred on account of purchase and sale of shares and, therefore, the provisions of Section 73 Explanation could not be invoked. Reliance was placed on the decision of the Tribunal in the case of Nirman Holding (P) Ltd. (IT Appeal No. 529 (Mum.) of 2001), which was delivered by Single Bench. The full decision of the Bench has not been furnished before us but has referred to the catch notes given in BCA Journal. According to him, in that case, it was decided that loss on account of valuation of closing stock could not be considered as speculation loss under the provisions of Explanation to Section 73 of the Act. It was also pointed out by him that this decision has been followed by the Division Bench of the Tribunal in the case of Associated Capital Market Management (P) Ltd., copy of which is not available with the learned Counsel for the assessee. He merely pointed out Para-3.4 of the learned Commissioner (Appeals) where such plea was taken by the assessee. At this stage, the Bench also informed the assessee's counsel that this very issue has been decided by the Calcutta Bench of the Tribunal in the case of Paharpur Cooling Tower Ltd. v. Dy. CIT (2003) 85 ITD 745, wherein it has been held that loss incurred on account of valuation of closing stock will have to be treated as speculation loss in terms of the provisions of Explanation to Section 73 of the Act. The learned Counsel for the assessee expressed his ignorance about this decision. On the other hand, the learned D.R has supported the orders of the lower authorities. She also relied on the decision of the Mumbai Bench of the Tribunal in the case of Dy. CIT v. Aakrosh Investment & Leasing (P) Ltd. (2004) 90 ITD 287, for the proposition that loss from trading in shares has to be treated as speculation loss under Section 73 read with the Explanation thereto and consequently, could not be set-off against the other income.
16. After considering the rival submissions of the parties, we do not find merit in the submissions of the learned Counsel for the assessee. There is no dispute of the fact that assessee was engaged in the business of trading in shares. There is also no dispute to the legal position that assessee is entitled to value the closing stock of shares at cost or market price whichever is lower. However, the real question is, whether where any loss is incurred in such business on account of valuation of stock, such loss could be set-off against any other income. In our opinion, the answer is in negative in view of the specific language of Section 73 read with the Explanation. The provisions of the Explanation to Section 73 clearly provides that where any part of the business of a company consists in purchase and sale of shares of other companies, then such company shall, for the purpose of this Section, be deemed to be carrying on speculation business to the extent to which the business consists of purchase and sale of such shares. Section 73(1) also clearly provides that any loss computed in respect of a speculation business carried on by the assessee shall not be set-off except against profits and gains, if any, of another speculation business. So, if any loss is incurred in such business, then such loss cannot be set-off against any other income falling under any of the heads under Section 14 of the Act.
17. The contention of the assessee that the above Explanation would apply only when there is a loss on the sale of shares but would not apply where the loss has been incurred on account of valuation of shares, in our opinion, is without force. As mentioned earlier, Explanation to Section 73 of the Act clearly provides that the business of purchase and sale of shares carried on by the assessee shall be deemed to be the speculation business carried on by him. Admittedly, the assessee was carrying on the business of trading of shares and, therefore, assessee has to be treated as carrying on the speculation business in shares by virtue of such deeming provision. If a person is, undisputedly, carrying on the business of selling any goods than, the profits and loss from such business has to be computed in accordance with the settled principles - (i) that value of the stock-in-trade must be taken into consideration while computing the true profits or losses of the business carried on [CIT v. A. Krishnaswami Mudaliar , Chainrup Sampatram v. CIT , A.L.A. Firm v. CIT ], (ii) that the assessee is entitled to value the stock-in-trade at cost or market value whichever is less [Chainrup Sampatram's case (supra) and CIT v. British Paints India Ltd. (1991) 188 ITR 442 at page 51 (SC)], and (iii) value of closing stock must be the opening stock of the succeeding year [Chainrup Sampatram's case (supra)].
18. As a result of the above exercise, if there are losses in such business, then the assessee, but for the provisions of Section 73, would be entitled to set-off such losses against the other incomes by virtue of Sections 70 and 71 of the Act. Section 70 starts with the words "save as otherwise provided in this Act" and Section 71 is subject to the provisions of Chapter- VI. Section 73, falling in Chapter-VI, provides that any loss computed in respect of a speculative business shall not be set-off except against profits of any other speculation business. The Explanation to Section 73 is a deeming provision by which business of a company in purchase and sale of shares is deemed to be speculation business. There are two exceptions with which we are not concerned, in the present case. The combined reading of these provisions makes it clear that Section 73 has an overriding effect. Therefore, losses in the business of trading of shares by a company have to be treated as loss from speculation business and consequently, the assessee would not be entitled to set-off against the other incomes. Similar view is also taken by the Calcutta Bench of the Tribunal in the case of Paharpur Cooling Tower Ltd. (supra).
19. In the present case, admittedly, the assessee is a company which is carrying on business of trading in shares of other companies. It is also not the case of assessee that its case falls within any of the exceptions provided in the Explanation to Section 73 of the Act. The details furnished before us shows that the assessee had purchased and sold shares in this year also though majority of the shares remained unsolearned Even the assessee itself has considered and computed the loss as business loss under Section 28 of the Act and set off the same against other income i.e., dividend under Section 71 of the Act. In our view, the assessee cannot be permitted to blow hot and cold in the same breath by saying that it is business loss under Section 28 of the Act but is not the same for the purpose of Section 73. Therefore, in our considered opinion, the loss incurred by the assessee would have to be treated as loss from speculation business despite the fact that such loss is on account of valuation of closing stock.
20. In view of the above discussion, it is held that loss in the business of shares incurred by the assessee was loss from speculation business as per the provisions of Section 73 of the Act and consequently, the assessee was not entitled to set-off the same against the dividend income. The order of the learned Commissioner (Appeals) is, therefore, upheld on this issue.
21. In the result, assessee's appeal stands dismissed.