ITO 17(3)(5), MUMBAI vs. VARSHA PRITAM REWARI, MUMBAI

This appeal by Revenue is directed against the order of the CIT(A)-23, Mumbai dated 12.11.2014 for A.Y. 2011-12. The assessee has also preferred a cross objection (‘CO’) in support of the impugned order of the CIT(A).

1. On the facts and circumstances of the case and in law the Learned Commissioner of Income Tax (Appeals) has erred in nullifying the notice u/s. 148 of the Income Tax Act which is issued after recording valid reasons that the assessee has not truly and correctly declared here income.

2. On the facts and circumstances of the case and in law the Learned Commissioner of Income Tax (Appeals) has erred in deleting the addition of Rs.4,61,89,320/- which has been made by the Assessing Officer on account of Long Term Capital Gains calculated by the Assessing Officer taking into consideration the facts and documents submitted by the assessee for the detailed reasons mentioned in the assessment order.

3. The appellant prays that the order of the Ld. CIT(A) on the above ground(s) be set aside and that of the Assessing Officer restored.

4. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

4. Ground No. 1 – Assumption of jurisdiction under section 147 of the Act 4.1 In this ground, Revenue assails the impugned order of the learned CIT(A) in holding that the assumption of jurisdiction under section 147 of the Act was bad in law as it was based on belief that was factually CO 130/M/16 Smt. Varsha Pritam Rewari incorrect and consequently that the notice issued under section 148 of the Act was also bad in law. It is contended that the notice under section 148 of the Act was issued only after recording of valid reasons by the AO that the assessee had not truly and correctly declared her income. The learned D.R. for Revenue was heard in support of the ground and placed reliance on the order of the AO. 4.2 Per contra, the learned A.R. of the assessee supported the impugned order of the learned CIT(A) in holding that the proceedings initiated under section 147 of the Act to be bad in law as the basis for assumption of jurisdiction under section 147 of the Act i.e. the reasons recorded by the AO on the basis of which he formed the belief that income of the assessee for A.Y. 2011-12 is not tenable as it is factually not correct and not based on any tangible material. It is contended that it was in view of the above finding that the learned CIT(A) held that the notice issued under section 148 of the Act was also bad in law and consequently that the order of assessment for A.Y. 2011-12 was framed on the basis of incorrect assumption of jurisdiction. It was prayed that in view of the above, the finding of the learned CIT(A) in the impugned order on the issue that the AO’s assumption of jurisdiction under section 147 of the Act is bad in law is to be upheld. 4.3.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that the learned CIT(A), after considering the submissions of the assessee, the reasons recorded by the AO for initiation of proceedings under section 147 of the Act and the material on record, has held the assumption of jurisdiction of the AO under section 147 of the Act to be bad in law and consequently held the notice issued under section 148 of the Act and the resultant order of assessment under section 143(3) r.w.s 147 of the Act dated 31.1.2014 to be bad in law; holding as under at paras 2.1.2 to 2.1.14 of the impugned order: - 2.1.2 I have considered the facts of the case and the submissions made by the assessee. I have also perused the reasons recorded by the Assessing Officer for forming the belief that income of the CO 130/M/16 Smt. Varsha Pritam Rewari assessee has escaped assessment u/s 147 of the I.T. Act, 1961. The same is reproduced hereinbelow:- "The assessee, Smt. Varsha Rewari, filed return for Asst. Year 2011-12 by e-filing, acknowledgement No.296006771280911, on 28.09.2011 declaring total income of Rs.72,4901- On verification of the return of income and computation of the income for the above year revealed that the assessee has claimed set off of carry forward Long Term Capital Loss on sale of equity shares on which STT was paid. The assessee has claimed set off of brought forward Long Term Capital Loss of A.Y.2010-11 of Rs.11,95,3601- against the Long Term Capital Gain on sale of immovable property being land at village: Bakum. Long Term Capital Gain Loss on sale of equity shares where STT has been paid is except income/loss under section 10 of the Income Tax Act. Therefore The assessee was not entitled to set off loss of Rs. 11,95,360/- against the Long Term Capital Gain on sale of land which is not an exempt income. Further the assessee has not offered the Long Term Capital Gain from sale of land at village Bakum (16512+16513). In the working of Long Term Gain on sale of land at village Dhokali the assessee has shown long term capital gain of Rs.8,69,20,652/- and claimed set off brought forward Long Term Capital Loss of Rs. 11,95,360/-. No Long term Capital gain on sale of land in her own name at village Bakum has shown in the working of Long Term Capital Gain". In view of the above, I have reasons to belief that income of more than Rs. one lakh has escaped assessment within the meaning of clause (b) to Explanation 2 to section 147 of the Income Tax Act." 2.1.3 From the above reasons recorded, it can be observed that the two issues on which the assessment has been re-opened are as follows:- i) The assessee has claimed set off of carry forward long term capital loss on sale of equity shares on which SIT was paid against the long term capital gain of Rs.8,69,20,652/-. This, in the opinion of the Assessing Officer, could not be done as the long term capital loss on the sale of equity shares which is exempt could not be set-off against the long term capital gains earned during the year. ii) The assessee had not offered the long term capital gain from sale of land at village Bakum. 2.1.4 As regards the first reason for re-opening the assessment, the assessee has pointed out that the said reason is contrary to the facts and evidence on record. It has been pointed out by her that in the e- filed return of income, in column 3 of Part B of schedule CG to the ITR- CO 130/M/16 Smt. Varsha Pritam Rewari 4 relating to capital gains, full value of consideration has been shown at Rs.9,80,75,100/- from which the cost of acquisition after indexation of Rs.1,04,54,448/- and expenditure on transfer has been deducted leading to the balance of Rs.8,69,20,652/-. On this, deduction u/s 54 F of the Act has been claimed at Rs.9,74,00,000/-. As a result the net balance of long term capital gains has been disclosed at zero in column 3e of Part B of schedule CG relating to long term capital gains. This figure of zero in-respect of long term capital gains has been taken in Part B - TI Computation of Total Income in column 4b. It has been further pointed out that in schedule CFL - details of losses to be carried forward to future years, the long term capital loss of Rs.11,95,360/- for the A.Y. 2010-11 is shown to be carried forward. Hence, the finding of the Assessing Officer that the assessee has set off long term capital loss relating to shares of Rs.11,95,360/- against the long term capital gains on the sale of the property in the A.Y. 2011-12 on the basis of which he has formed the belief that the income of the assessee has for the year has escaped assessment is factually not correct. Therefore, the reason given by him for forming the belief is not tenable. 2.1.5 I have perused the above submissions of the assessee as well as the return for the A.Y. 2011-12 filed by her which has been furnished by her in the course of the appellate proceedings and which is placed at page numbers 22 to 41 of the paper book. On perusal of the same, the contention of the assessee is found to be correct. It is seen that the long term capital loss of Rs.11,95,360/- of the A.Y. 2010-11 has not been set off by the assessee in the return of income filed by her. Rather, the said loss of Rs.11,95,360/- has been carried forward to future years. Hence, the foundation for forming the belief by the Assessing Officer that the income of the assessee has escaped assessment for the reason that the assessee has wrongly claimed set off of brought forward long term capital loss against the current year's long term capital gain is non-existent. The reason given by the A.O. for forming the belief that income of the assessee has escaped assessment being factually incorrect, the re-opening of the assessment on this reason cannot be held to be as per law or valid. 2.1.6 Even otherwise, even if the assessee had wrongly claimed the set off of Rs.11,95,360/- from the long term capital gains disclosed in the return of income, and if this set off was not to be allowed, the mistake or error of setting off the loss would be tax neutral since, in that case also, the amount deposited in Capital Gains Deposit Scheme of Rs.9,74,00,000/- would have covered the increase in the long term capital gains. No re-opening is permissible by way of taking shelter of any reason recorded by the Assessing Officer if the tax effect of that particular reason is Nil. It has been held by the Hon'ble Mumbai Tribunal in the case of Givaudan Flavours India Pvt. Ltd. vs. Dy.C1T in 1TA No.2672/mum/09 dated 07.03.2011 that where there is a mistake which is tax neutral while computing the income, no reassessment can be initiated as the basic condition of income escaping assessment is not satisfied. The ITAT held that the finding CO 130/M/16 Smt. Varsha Pritam Rewari of income having escaped assessment is a precondition for reopening the assessment. 2.1.7 As regards the second reason given by the Assessing Officer for re-opening the assessment, all that the Assessing Officer has recorded is that the assessee has not offered the long term capital gain from sale of land at Village Balkum (16512 and 16513). It has been recorded by the Assessing Officer that in the- working of long term capital gain at Village Dhokali, the assessee had long term capital gain of Rs.8,69,20,652/- and claimed set off of brought forward long term capital toss of Rs.11,95,360/- and that no long term capital gains on sale of land in her own name at Village Balkum was shown in the working of long term capital gain. 2.1.8 The above observation of the Assessing Officer is not based on any tangible material in as much as the reason for reaching the above conclusion and source for the 'above conclusion has not been spelt out. It has also not been spelt out by him as to what was the information in his possession which gave him the reason to believe that long term capital gain on sale of land in her own name in Village Balkum was not shown by the assessee in the working of long term capital gains. In fact, in the second para of the reasons recorded, the Assessing Officer has himself stated that "The assessee has claimed set off of brought forward Long Term Capital Loss of A.Y. 2010-11 of Rs.11,95,360/- against Long Term Gain on sale of immoveable property being land at Village Balkum." Hence, the above recording by the A.O. clearly shows that the Assessing Officer was aware of the fact that long term capital gain on sale of immovable property in Village Balkum had been declared by assessee. There is, therefore, contradiction in the statements of the Assessing Officer in the reasons recorded by him for entertaining the belief that income of the assessee has escaped assessment. There is no material brought on record in the reasons recorded to even suggest that the assessee had not shown long term capital gain on sale of any land in her own name at Village Balkum in the return of income filed by her for the A.Y. 2011- 12. Rather, there is admission on part of the Assessing Officer in the reasons recorded itself that long term capital gains on sale of immovable property in Village Balkum has been disclosed by the assessee in the return of income. In fact, in the disposal of objections dated 25/10/2013, the Assessing Officer has clearly recorded in Para 5 that in course of the assessment proceedings for the A.Y. 2010-11, the assessee had furnished computation of income and working of long term capital gains for A.Y. 2011-12. The working of capital gains has been reproduced in the letter of the A.O. dated 25/10/2013 disposing the objections of the assessee which shows that the working of capital gains is only with respect to land at Village Balkum. From this, it is clear that the A.O. was aware that capital gains has been offered by the assessee on sale of land at Village Balkum. Hence, to entertain the belief that the assessee had not disclosed capital gains on sale of land at Balkum would not be correct in the absence of the A.O. bringing on record any material which CO 130/M/16 Smt. Varsha Pritam Rewari would show that the assessee had sold any other land in Village Balkum which had not been disclosed in her return. From the Deed of Conveyance of the impugned property, it is seen from clause 23 that vide Mutation Entry No. 3 dated 04.12.1999 and pursuant to the letter dated 09.11.1990 issued by Revenue and Forest Department bearing No.1069/32810, the Survey No.165 of Village Balktim (where the immovable property in question was located) were transferred to village Dhokali and given new Survey Numbers, viz, New Survey Numbers 29/1A, 29/18, 29/2 and 29/3 of Village Dhokali, Taluka Thane. Hence, the property which was sold continued to be the same and the assessee did not sell separate properties in Village Dhokali and village Balkum. From the letter or the A.O. disposing the objections of the assessee, it can be seen that the objection of the A.O. on perusal of the return filed by the assessee was that the details of sate of land and certain other details which he would have liked to be in the return of income were not mentioned. 2.1.9 From the above facts, it is clear that the reasons recorded by the Assessing Officer were not based on any tangible material and these were based only on his suspicion. The reasons for forming the belief that income of the assessee had escaped assessment were based on incorrect facts and not on any tangible material. The Assessing Officer has not established the link between the reasons and formations of belief. From the facts on record, it is apparent that the re-opening is based on "reason to suspect" rather than on "reason to believe". In this case no scrutiny assessment u/s 143(3) of the I.T. Act, 1961 was made. However, even then, there must be "reason to believe", i.e., "cause or justification" that income had escaped assessment as held by the Hon'ble Supreme Court in the case of Asst.CIT vs. Rajesh Jhaveri Stock Brokers (P.) Ltd 291 ITR 500 (SC). The Hon'ble Court further held that the Assessing Officer is free to initiate proceedings u/s 147 so long as the ingredients of the said section are fulfilled. 2.1.10 In the case of The Commissioner Of Income Tax-V vs Orient Craft Ltd. on 12 December, 2012 the Hon'ble Delhi High Court, while deciding on the issue of validity of re-opening of an assessment earlier completed u/s 143(1) of the IT Act, 1961, has examined a number of judgements of the Hon'ble Supreme Court on this issue. Some of the observations in these judgements have been incorporated by the Hon'ble Delhi High Court in their judgement as follows:- "9. It would be appropriate at this juncture to take a brief survey of a few decisions of the Supreme Court which have infused meaning and content to the expression 'reason to believe" appearing in Section 147.

10. A constitution bench of the Supreme Court in A.N. Lakshman Shenoy v. ITO (1958) 34 ITR 275, speaking through S.K. Dos, J held that an assessment cannot be reopened on the basis of a mere guess, gossip or rumour. This was in the context of the pre- 1948 law relating to reassessment under which the Assessing CO 130/M/16 Smt. Varsha Pritam Rewari Officer was empowered to reopen the assessment on the basis of "definite information". Though this judgment is based on the phraseology of Section 34 of the 1922 Act as it existed before 1948 which did not contain the expression "reason to believe", that principle was adopted by the Supreme Court while dealing with Section 34 of the Act after the amendment made in 1948. In that year the words 'definite information' were replaced by the words "reason to believe". While expatiating on the new words, a three-Judge Bench of the Supreme Court speaking 'through V. Ramaswami, J., in CIT vs S. Narayanappa (1965) 63 1TR 219 opined as under : - “Again the expression "reason to believe" in section 34 of the Income-tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith: it cannot be merely a pretence. To put it different, it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings under section 34 of the Act is open to challenge in a court of law (see Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies Di-strict 1, Calcutta)." In Sheo Nath Singh vs. Appellate Assistant Commissioner of Income-tax (1971) 82 I7-R 147 the Supreme Court (Hegde J) observed as under:- 'There can be no manner of doubt that the words "reason to believe suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstances evidence but not on mere suspicion, gossip or rumour. The Income- tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court." It was further observed that the reasons themselves cannot be stated to be beliefs, which would be an obvious self- contradiction.

CO 130/M/16 Smt. Varsha Pritam Rewari (c) The reopening of an assessment after the lapse of many years is a serious matter. Since the finality of a judicial or quasi- judicial proceedings are sought to be disturbed, it is essential that before taking action to reopen the assessment, the requirements of the law should be satisfied. (d) The reasons to believe must have a material bearing on the question on escapement of income. It does not mean a purely subjective satisfaction of the assessing authority; the reason be held in good faith and cannot merely be a pretence. (e) The reasons to believe must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Assessing Officer and the formation is belief regarding escapement of income. (f) The fact that the words "definite information" which were there in section 34 of the Act of 1922 before 1948, are not there in section 147 of the 1961 Act would not lead to the conclusion that action can now be taken for reopening an assessment even if the information is wholly vague, indefinite, farfetched or remote." 2.1.11 The Hon'ble High Court referring to the judgement of the Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Kelvinator of Income-tax & Anr. (supra) observed that in the said judgement, it has been held that after 1.4.1989 the Assessing Officer has power to reopen provided there is "tangible material" to come to the conclusion that there is escapement of income. This judgment has laid emphasis on two more aspects: that there can be no review of an assessment in the guise of reopening and that a bare review without any tangible material would amount to abuse of the power. 2.1.12 In the case of Prashant S. Joshi Writ Petition No.2287 of 2009 dated 22.02.2010, the Hon'ble Jurisdictional Bombay High Court has held that the basic postulate which underlines s. 147 is the formation of the belief by the AO that income chargeable to tax has escaped assessment. The AO must have reason to believe that such is the case before he proceeds to issue a notice u/s 147. The reasons which are recorded by the AO for reopening an assessment are the only reasons which can be considered when the formation of the belief is impugned. The recording of reasons distinguishes an objective from a subjective exercise of power. The requirement of recording reasons is a check against arbitrary exercise of power. The validity of the reopening has to be decided on the basis of the ' reasons recorded and on those reasons alone. The reasons recorded while reopening the assessment cannot be allowed to grow with age and ingenuity, by devising new grounds in replies and affidavits not envisaged when the reasons for reopening an assessment were recorded. It has further been held that though in Rajesh Jhaveri 291 ITR 500 (SC) the Supreme Court held that the passing of an intimation u/s 143 (1)

CO 130/M/16 Smt. Varsha Pritam Rewari does not amount to an "assessment" and in the absence of an assessment, there was no question of a "change of opinion", the Court also held that there must be "reason to believe" i.e. "cause or justification" that income .had escaped assessment. There must be relevant material on which a reasonable person could have formed a requisite belief even though the material need not conclusively prove the escapement. Though Explanation (2) (b) to s. 147 creates a deeming fiction of income having escaped assessment in cases where an assessment has not been made, the act of taking notice cannot be at the arbitrary whim or caprice of the AO but must be based on a reasonable foundation. Though the sufficiency of the evidence or material is not open to scrutiny by the Court, the existence of the belief is the sine qua non for a valid exercise of power. 2.1.13 As found hereinabove, the reasons recorded by the A.O. for entertaining "the belief that income for the year had escaped assessment were factually incorrect. Since the formation of belief u/s 147 was on incorrect facts, the assumption of jurisdiction on the basis of such belief was incorrect assumption of jurisdiction. Consequently, the notice issued u/s 148 was also bad in law. Hence, the assessment framed u/s 143(3)/147 on the basis of incorrect assumption of jurisdiction was invalid. 2.1.14 In view of the aforesaid reasons, the assumption of jurisdiction by the Assessing Officer u/s 147 is held to be bad in law. The first effective ground of appeal filed by the assessee is allowed.” 4.3.2 On an appreciation of the facts/details on record, we concur with the finding rendered by the learned CIT(A). Firstly, we find that the basis of the AO for forming the reason to believe that income of the assessee had escaped assessment for initiation of proceedings under section 147 of the Act; i.e. for the reason that the assessee has wrongly claimed set off of brought forward long term capital loss (‘LTCG’) against the current year’s capital gain (‘LTCG’) is non-existent and factually incorrect. Therefore, the initiation of proceedings under section 147 of the Act for reopening the assessment by the AO on this factually incorrect reason is bad in law and cannot be held to be valid. Further, in respect of the other reason given by the AO for initiation of reassessment proceedings under section 147 of the Act; i.e. that the assessee has not offered LTCG from sale of land at village Balkum, we find, was not based on any material evidence or information in his possession to this effect, not has any reason been cited for reaching the above conclusion. In this factual matrix of the case, we are of the considered opinion that there was no tangible evidence in the possession of .111 CO 130/M/16 Smt. Varsha Pritam Rewari the AO to form the basis for initiation of re-assessment proceedings under section 147 of the Act. Rather, it appears to us that the reasons recorded by the AO were based on suspicion and incorrect facts, rather than on any tangible material evidence. In this view of the matter, since the basis for formation of reason to believe were based on incorrect facts and no tangible material, we uphold the decision of the learned CIT(A) in holding that the assumption of jurisdiction by the AO in the case on hand under section 147 of the Act to be bad in law and that the notice under section 148 of the Act issued consequently and the resultant order of assessment concluded under section 143 r.w.s. 147 of the Act based on incorrect assumption of jurisdiction was invalid. Accordingly, ground No. 1 of the Revenue’s appeal is dismissed.

5. Ground No. 2 – Long Term Capital Gains 5.1 In this ground, Revenue challenges the impugned order of the learned CIT(A) in deleting the addition of `4,61,89,320/- made by the AO on account of LTCG made by the AO. We have heard both the parties in the matter. In view of our finding at paras 4.3.1 & 4.3.2 of this order (supra) upholding the learned CIT(A)’s finding that the AO’s assumption of jurisdiction under section 147 of the Act in the case on hand was invalid and consequently the notice issued under section 148 of the Act and resultant order of assessment passed under section 143(3) r.w.s. 147 of the Act dated 31.01.2014 based on wrong assumption of jurisdiction were also bad in law and invalid, this ground No. 2 of Revenue’s appeal becomes academic in nature and therefore no adjudication thereon is required at this juncture.

6. Ground No. 3 & 4 being general in nature, no adjudication is called for thereon.