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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: SHRI PRADIP KUMAR KEDIA & SHRI MAHAVIR PRASAD, JUDICIAL MEMEBR
PER PRADIP KUMAR KEDIA - AM:
The captioned appeal has been filed at the instance of the assessee against the order of the Commissioner of Income Tax (Appeals)-II, Baroda (‘CIT(A)’ in short), dated 06.12.2013 arising in the assessment order dated 25.06.2010 passed by the Assessing Officer (AO) under s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 (the Act) concerning assessment year 2005-06.
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As per its grounds of appeal, the assessee has challenged the action of the AO in exercising powers under s. 147 of the Act alleging non-fulfillment of conditions stipulated to invoke jurisdiction under s.147 of the Act. The assessee has also challenged the additions /disallowances on merits.
When the matter was called for hearing, the learned AR for the assessee submitted that he does not intend to challenge the order of the authorities below on merits and seeks to primarily restrict its plea on invalid exercise of powers by AO vested under s.147 of the Act.
Adverting to the reasons recorded under s.148(2) of the Act, the learned AR submitted that regular assessment was completed earlier on 10.12.2007 under s.143(3) of the Act assessing the total income at Rs.11,26,430/-. Thereafter, the completed assessment was reopened by issuing notice dated 04.08.2009 under s.148 of the Act i.e. within four years from the end of relevant assessment year 2005-06. As per the reasons recorded, the AO has alleged escapement of income on two grounds: (i) the loss arising from switching over from one plan of mutual funds to another is of capital nature and therefore, the assessee is not entitled to deduct the aforesaid loss from profits of business activity & (ii) the loss arising from derivative contracts amounting to Rs.13,08,578/- are speculative in nature for the relevant AY 2005-06 and therefore the assessee is not entitled to adjust the same against the non- speculative business income.
As regards the first objection narrated above, the learned AR for the assessee pointed out that the assessee is an investor in mutual funds. The gains/loss arising from sale of mutual funds have
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also been treated by the assessee as revenue income chargeable to tax under the head ‘business income’ instead of capital gains/loss chargeable under the head ‘capital gains’ in all instances. In the process, the assessee has earned income to the tune of Rs.11,92,648/- and also incurred losses amounting to Rs.4,43,934/-. The assessee has disclosed the profit as well as the loss from sale of mutual funds under the head ‘business income’ and the relevant facts in this regard were disclosed before the AO by way of return of income as well as in the course of the scrutiny assessment. It was contended that the AO has subjectively picked up the loss from sale of mutual funds for differential treatment as capital loss whereas the income arising from sale of mutual funds have been readily accepted as ‘business income’ as offered by the assessee. The AO as per the reasons recorded thus seeks to change the character of income without any sound basis and on a mere change of opinion which is not permissible in law.
As regards the second objection, the learned AR submitted that the derivative transactions were treated as business loss and were not recorded as speculative loss as per some decisions of the co- ordinate bench prevailing at relevant time. A reference was made in this regard to the decision of the co-ordinate bench in the case of R.B.K. Securities (P.) Ltd. Vs. ITO [2008] 118 TTJ 465 (Mum) notwithstanding its reversal at a later stage by Special Bench in Shree Capitals case. The learned AR accordingly submitted that the AO after raising specific question in this regard and after considering the specific reply of the assessee dated 18th September, 2007 has decided the issue in favour of the assessee. Therefore, the issue when decided in this background cannot be toppled by
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invoking provisions of Section 147 of the Act on a different opinion at a later stage.
The learned AR accordingly submitted in conclusion that the action of the AO under s.147 of the Act suffers from lack of jurisdiction and therefore, the entire re-assessment proceedings consequences of such untenable action under s.147 of the Act is bad in law and thus a nullity. The learned AR also pointed out that both loans on sale of mutual fund as well as derivative loss was duly examined in the regular assessment proceedings and therefore, re- assessment proceedings on the same, is not permissible in law without bringing any fresh material on record.
We have carefully considered the rival submissions. The assessee has challenged the premise of action taken by the AO. The AO, in essence, has alleged that notice issued under s.148 of the Act is without jurisdiction and thus re-assessment proceedings are vitiated in law. As the issue hinges around the validity of action under s.147 of the Act, it will be apt to reproduce the reasons recorded under s.148(2) of the Act for invoking jurisdiction under s.147 of the Act:
“In this case, the assessee filed return of income on 31.08.2005 declaring total income at Rs.9,32,692/-. Assessment u/s. 143(3) of the I.T.Act was completed on 10.12.2007 assessing the total income at Rs.11,26,430/-. As per Section 29 of the I.T.Act, 1961, the income under section 28 of the I.T.Act shall be computed by allowing deduction of expenses as provided in Section 30 to Section 43D of the Act. Expenditure of a capital nature is not admissible as deduction. Further, under section 73 of the Act, speculation loss can be set off in the same year only against the speculation profits. 2. The assessee firm is engaged in the business of dealing and investing in shares and stocks of various companies, trading in derivatives, futures and options, investing and dealing in mutual funds, etc. The profit and loss account has been charged with loss on future contracts and investments of Rs.8,64,644/- and loss on investments of Rs.4,43,934/-. From the ledger account of loss on investment, it is
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observed that the said expenditure is incurred for switching over from one plan of Mutual Funds to another in respect of investments in Mutual Funds. Since the loss incurred in investments did not relate to assessee’s business and was, in fact, capital in nature, its deduction was not allowable. Similarly, from the ledger account pertaining to loss on future contracts and investment, it is observed that the said expenditure have been incurred on payments to three companies and the payments include component of service-tax and transaction tax, indicating that these payments were incurred on transactions of speculative nature. As per the provisions of section 73 of the Act, speculation loss cannot be set off against any other income except from speculation income. In view of the above facts and provisions of the Act, the loss of Rs. 13,08,578/- charged to the profit and loss account was required to be disallowed and added to the total income. This resulted into under assessment of Rs. 13,08,578/- with short levy of tax at Rs.6,36,859/-. I have, therefore, reason to believe that income chargeable to tax has escaped assessment for the Assessment Year 2005-06. Issued notice u/s.148 of the I.T.Act, 1961 for the Asstt. Year 2005-06.”
Two allegations are borne out from the reasons recorded towards alleged escapement of income; firstly, the AO has alleged that loss arising from switch over / sale of mutual funds ought to be regarded as ‘capital loss’ instead of ‘business loss’ and therefore is not entitled to be set off against the business income of the assessee. The action of the AO in formation of such belief after the completion of the assessment appears entirely untenable in the facts and the context of the case. As pointed out on behalf of the assessee, we notice that the assessee has both earned income as well loss on sale of mutual funds. The loss transaction from sale of mutual funds thus cannot be given a differential treatment and singled out from other transactions similarly placed. The AO has not assigned and reasons for do so. It is clearly an unjust act in the circumstances. The belief for escapement of income is thus a pretense and is not sustainable in law.
We now advert to the second ground for alleged escapement of income i.e. the future contracts of derivative nature in stock market are alleged to be of speculative nature. The allegation has been
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made after the completion of the assessment based on appreciation of material already available on record. It is the case of the assessee that all the relevant facts were placed on record while claiming the loss arising from derivative transactions to be business loss. The AO after taking note of the relevant fact has admitted such loss as business loss and granted set off of such loss against business income. It is the case of the assessee that the admission of claim of assessee by AO at the time of the original assessment was not without any basis. The decision of the co-ordinate bench of Tribunal in R.B.K. Securities (supra) supports the action of the AO in holding the derivative loss to be a business loss. The AO while recording reasons under s.148(2) of the Act has not pointed out the circumstances for the change in the stand originally taken at the time of original assessment. Needless to say, the AO is not entitled to exercise power under s.147 of the Act to reopen the completed assessment in a cursory manner. The objectivity in the foundation for formation of belief towards escapement of income must exist. The AO is expected to spell the process by which he entertained the belief for alleged escapement of income. In the present case, the reasons recorded are ostensibly abstract without reference to any material. The assessee in the instant case having disclosed the relevant facts at the time of the original assessment has thus discharged its primary onus. Consequently, the onus was shifted on the AO to draw inference thereon. Having regard to the facts available on record, the plausible inference would be that the AO has applied his mind to the facts and concluded that the loss in derivative transactions to be ordinary business loss. The AO could have displaced the original action only upon showing the fallacy therein. As noted earlier, the AO has not recorded anything to suggest as to what change in circumstances prompted him to invoke
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Section 147 of the Act subsequent to completion of assessment. Needless to say, the wide power to reopen is circumscribed and does not give permission to the AO to reopen the completed assessment on a mere change of opinion on the same facts. We thus see no semblance in the action of the AO under s.147 of the Act. A bare glance of the reasons recorded gives an impression that the reopening has been carried out on shallow reasonings which is not sustainable in law. The action under s.147 of the Act is thus void ab initio and consequent re-assessment order framed thereunder is bad in law as a corollary thereto. In the result, the re-assessment notice and consequent re-assessment order under s.143(3) r.w.s. 147 of the Act is quashed and set aside.
In the result, the appeal of the assessee is allowed.
This Order pronounced in Open Court on 15/01/2019
Sd/- Sd/- (MAHAVIR PRASAD) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad: Dated 15/01/2019 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।