Telangana High Court
Melvillie Finvest Ltd., 63666/B, ... vs Incometax Officer, Ward 21, Aayakar ... on 19 June, 2025
Author: P.Sam Koshy
Bench: P.Sam Koshy
THE HON'BLE SRI JUSTICE P.SAM KOSHY
AND
THE HON'BLE SRI JUSTICE NARSING RAO NANDIKONDA
WRIT PETITION No.22221 of 2003
ORDER:(per the Hon'ble Sri Justice Narsing Rao Nandikonda) The present writ petition is filed challenging reopening of the assessment of the petitioner for the Assessment Year 1996- 1997 and also to quash the notice dated 28.03.2003 issued by the respondent under Section 148 of the Income Tax Act, 1961 (briefly 'the Act' hereinafter) on the ground that the same is without jurisdiction and time barred.
2. Heard Sri C.V. Narasimham, learned counsel for the petitioner, and Sri P. Murali Krishna, learned counsel for the respondent. Perused the entire material on record.
3. The brief facts of the case, are that, the petitioner is engaged in the business of investment in shares and trading and had filed its return of income for the Assessment Year 1996- 1997 on 27.11.1996 showing loss of Rs.54,75,960/- and the said return was scrutinized by the Assessing Officer under Section 143(1)(a) of the Act on 14.03.1997 without making any Page 2 of 16 wp_22221_2003 PSK,J,J&NNR,J further adjustment and later a notice dated 07.04.1998, under Section 148 of the Act, was issued to the petitioner for reopening the assessment on the ground that the income chargeable to tax for the year 1996-1997 has escaped assessment within the meaning of Section 147 of the Act. Pursuant to the reopening of the assessment, the petitioner filed the same return on 14.05.1998 with the purchase and sale transactions of the shares done on 31.03.1995 and considered during the assessment year 1996-1997 and the said assessment was completed and an order was passed by the respondent.
4. Thereafter, the petitioner filed an application under Section 154 the Act seeking rectification of the assessment order for setting-off the carry forward loss. But the Assessing Officer rejected the said application. Against the said rejection order, an appeal was preferred before the Commissioner of Income Tax (Appeals) under Section 154 of the Act, dated 02.12.1999. The Assessing Officer / Joint Commissioner of Income Tax filed his report on 02.06.2000 before the Commissioner of Income Tax (Appeals) against the order of Joint Commissioner under Section Page 3 of 16 wp_22221_2003 PSK,J,J&NNR,J 154 of the Act. In the said report, the Assessing Officer observed that the petitioner's business is speculative in nature and loss from speculation cannot be set-off. The Commissioner of Income Tax (Appeals) finally held that the Assessing Officer was not competent to review the decision of his predecessor regarding set-off of the loss of earlier year against the profits of the current year.
5. Challenging the same, the Department filed an appeal in ITA No.550/Hyd/2000 before the Income Tax Appellate Tribunal (for short, the 'ITAT') against the order of Commissioner of Income Tax (Appeals). The same was dismissed by ITAT vide its order dated 28.10.2005. Meanwhile, another notice dated 28.03.2003 under Section 148 of the Act was issued to reopen the assessment for second time on the ground that there were certain reasons for the respondent to believe that the income chargeable to tax has escaped assessment.
6. According to the petitioner there was a limitation of 4 years' time under Section 147 of the Act to issue notice under Section 148 of the Act which expired on 31.3.2001. For which Page 4 of 16 wp_22221_2003 PSK,J,J&NNR,J the petitioner filed a reply to consider the return filed earlier on 27.11.1996. The petitioner also sought for the reasons to be furnished for reopening the assessment and issuance of notice under Section 148 of the Act, for which the Assessing Officer refused to provide the reasons for reopening of assessment and further intimated that the reasons recorded for re-opening of assessment need not be communicated to the petitioner and asked for certain information to be furnished on 26.09.2003. The petitioner filed reply on 10.10.2003 stating the facts of filing return of income and the rectification petition and the consequential orders and asked for reasons for issuance of notice once again.
7. It is argued by the learned counsel for the petitioner that having reopened the assessment first time in the year 1998 and having examined sale and purchase of the shares and value thereof in depth, the respondent cannot validly claim that since he did not examine the issue of deemed speculative loss in the light of explanation to Section 73 of the Act, the respondent now Page 5 of 16 wp_22221_2003 PSK,J,J&NNR,J cannot consider the same after expiry of the time limit of four years under Section 147 of the Act to re-open the assessment.
8. It is further argued that the petitioners case cannot be treated as speculative loss since there is no actual sale of shares and the decrease in value of the stock is only on account of valuing stock in trade at cost or market price which is lower and that the said principle was accepted by various High Courts and the Hon'ble Supreme Court in also in the case of CIT vs. British Paints Limited 1 and Chainrup Sampatram vs. CIT 2.
9. It is also argued that the said issue is also covered in the case of Mahalaxmi Motors Ltd. vs. Deputy Commissioner of Income-tax and Another 3. He further contended that mere failure of the Assessing Officer to draw necessary inference from the primary facts disclosed by the assessee cannot be a ground to reopen assessment as per the limitation of four years prescribed under Section 147 of the Act. The Assessing Officer could have, if so, advised invoked Section 147 of the Act only 1 188 ITR 44 2 24 ITR 481 3 2003 SCC OnLine AP 1376 Page 6 of 16 wp_22221_2003 PSK,J,J&NNR,J within the period of 4 years limitation which he failed to do so. The entire exercise of the respondent to reopen the assessment beyond 4 years limitation period is an illegal exercise of power under Section 147 and it is wholly without jurisdiction.
10. It is the case of the petitioner that the assessment was reopened for the first time in the year 1998 and having examined sale and purchase of shares and value thereof in depth, the respondent cannot validly claim that since he did not examine the issue of deemed speculative loss in the light of the explanation to Section 73 of the Act. Further, the respondent also now cannot consider the same after expiry of the time limit of four years prescribed under Section 147 to reopen the assessment. The learned counsel further contended that facts of the petitioner's case cannot be treated as a speculative loss since there is no actual sale of shares and the decrease in value of stock is only on account of valuing stock in trade at cost or market price whichever is lower.
11. Lastly, it is argued by the learned counsel for the petitioner that this is a mere change in opinion of the Assessing Page 7 of 16 wp_22221_2003 PSK,J,J&NNR,J Officer which is sought to be justified by illegally invoking the power under Section 147 of the Act. It is further argued that the contention of the respondent that the reopening is not barred by limitation since the escapement of income is more than Rs.1,00,000/- and assessment can be reopened within 6 years is wholly misplaced, since beyond the 4 years limit, the Assessing Officer does not have power to reopen assessment except on specific allegation and finding that there was failure to disclose true and full material facts by the petitioner which is clearly absent in the present case.
12. The learned counsel for the petitioner in support of his contentions, relied upon the following decisions:
1) Mallikarjuna Rice Industries vs. Income Tax Officer4
2) Commissioner of Income Tax, Delhi vs. Kelvinator of India Limited. 5
3) Duli Chand Singhania vs. Assistant Commissioner of Income-Tax 6
4) Mahalaxmi Motors Ltd. vs. Deputy Commissioner of Income-tax and Another 7 4 (2023) 458 ITR 566 5 (2010) 2 SCC 723 6 2003 SCC OnLine P&H 1818 Page 8 of 16 wp_22221_2003 PSK,J,J&NNR,J
5) Phoolchand Lalith Kumar & Co. vs. Income Tax Officer 8
6) Commissioner of Income-tax vs. Annamalai Finance Ltd. 9
7) Sita World Travels (India) Ltd. vs. Commissioner of Income Tax and Anr. 10
8) Raj Kumar Bapna vs. Union of India 11
13. Per contra, it is argued by the counsel for the respondent that since the loss derived by the assessee is speculation business in nature, the same cannot be allowed to be set-off against the other income of the assessee. As per the provision of the Section 73(1) of the Act the loss arising from the speculation business cannot be set-off except against the profits and when the assessee has put in a petition the point that the claim of the petitioner was not allowed in the order under Section 154 dated 02.12.1999, in view of the provision of Section 73 (1) of the Act.
7 2003 SCC OnLine AP 1376 8 1991 SCC OnLine AP 480 9 (2005) 275 ITR 451 10 (2005) 274 ITR 186 11 (2001) 251 ITR 802 Page 9 of 16 wp_22221_2003 PSK,J,J&NNR,J
14. Having considered the rival considerations of both the counsel, the points which arise for consideration are:
1. Whether the notice issued under Section 148 of the Act by the respondent is barred by limitation prescribed under Section 147 and 149 of the Act?
2. Whether the respondent is competent to reopen the assessment on the change of opinion and to review the said assessment made by his predecessor? and
3. Whether the reopening of the assessment is illegal on the ground of non-recording of any reasons regarding any income chargeable to tax has escaped assessment?
15. POINTS: Before going further, for convenience, we would like to extract the provisions under Section 147 of Act and Section 73(1) of the Act, which reads thus:
"Carry forward and set off of losses by specified business.--
73A. (1) Any loss, computed in respect of a speculation business referred to in section 35AD shall not be set off except against profits and gains, if any, of any other specified business.
(2) Where for any assessment year any loss computed in respect of the specified business referred to in sub-section (1) has not been wholly set off under sub-section (1), so much of Page 10 of 16 wp_22221_2003 PSK,J,J&NNR,J the loss as is not so set off or the whole loss where the assessee has no income from any other specified business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and--
(i) it shall be set off against the profits and gains, if any, of any specified business carried on by him assessable for that assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on."
Income escaping assessment.--
147. If any income chargeable to tax, in the case of an assessee, has escaped assessment for any assessment year, the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income or recomputed the loss or the depreciation allowance or any other allowance or also any other allowance or deduction for such assessment year (hereafter in this section and in this sections 148 to 153 referred to as the relevant assessment year) Explanation.--For the purposes of assessment or reassessment or recomputation under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, irrespective of the fact that the provisions of section 148A have not been complied with."
16. We would also like to quote herein below the relevant portion of Circular No.549 dated 31st October, 1989, which reads as follows:
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wp_22221_2003 PSK,J,J&NNR,J "7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression `reason to believe' in Section
147.-A number of representations were received against the omission of the words `reason to believe' from Section 147 and their substitution by the `opinion' of the Assessing Officer. It was pointed out that the Commnr. Of Income Tax, Delhi vs M/S. Kelvinator Of India Ltd on 18 January, 2010 meaning of the expression, `reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from Section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended Section 147 to reintroduce the expression `has reason to believe' in place of the words `for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new Section 147, however, remain the same."
17. On going through the changes made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make aback assessment. However, Section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re-open the assessment. Therefore, post 1st April, 1989, power to re-open is Page 12 of 16 wp_22221_2003 PSK,J,J&NNR,J much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere change of opinion", which cannot be per se reason to re-open.
18. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre- conditions and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Page 13 of 16
wp_22221_2003 PSK,J,J&NNR,J
19. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words "reason to believe", the law makers reintroduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer.
20. The petitioner has filed the returns for the year 1996- 1997. Pursuant to the same, the Dy. Commissioner of Income Tax issued notice under Section 148 of the Act that he has reasons to believe that the income chargeable to tax for the assessment year 1996 -1997 has escaped assessment within the meaning of Section 147 of the Act. An order was passed on 20.05.1998 under Section 143(3) of the Act making re- assessment and at page 2 of the order it is specifically stated that in response to the notice issued under Section 143 (2) of the Act, Smt. Srilatha Ramchandran, C,A, authorized representative Page 14 of 16 wp_22221_2003 PSK,J,J&NNR,J of the assessee's company and Sri J.V. Ramaiah, Accounts Manager of the assessee's company appeared and filed the information and details called for. The case was discussed with them and examined. This itself shows that the re-assessment was made after considering the information and details that were submitted.
21. Against the order passed above, an appeal was preferred before the Commissioner of Income Tax (Appeals) wherein it was directed that the Assessing Officer is directed to allow the set-off of business loss of earlier year against the profit of the assessment year 1996-1997.
22. Considering the entire material on record, this Bench is of the view that re-opening of the assessment is clearly evident from the record that the notice issued under Section 148 of the Act dated 29.03.2003 is within recording the reasons and that it is clearly barred by limitation as the period for the assessment for the relevant assessment year is 4 years and the period prescribed under Section 149(1)(a) of the Act for issuance of a notice under Section 148 of the Act would expire by 31.03.2001. Page 15 of 16
wp_22221_2003 PSK,J,J&NNR,J Hence the notice is liable to be set aside on this ground also. Besides, the Assessing Officer is having no power or jurisdiction to re-open or review the assessment for the second time. For the reasons stated above, the points are answered in favour of the petitioner. Thus, this Bench is of the opinion that the very notice is liable to be set aside / quashed accordingly.
23. Accordingly, the Writ Petition is allowed quashing the notice dated 28.03.2003, issued by the respondent under Section 148 of the Income Tax Act, 1961. There shall be no order as to costs.
Miscellaneous petitions, if any, pending shall stand closed.
____________________________ JUSTICE P.SAM KOSHY _________________________________________ JUSTICE NARSING RAO NANDIKONDA Date:19.06.2025 YVL Page 16 of 16 wp_22221_2003 PSK,J,J&NNR,J