KAY POWER AND PAPER LIMITED,SATARA vs. INCOME TAX OFFICER, WARD-2, SATARA

Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing and sale of Kraft Paper and Co-generation of Power. It filed its return of income u/s 139 of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟) on 26.09.2015 declaring Nil income. The return was processed u/s 143(1) of the Act. Subsequently, on the basis of information received from the Insight portal that the assessee had entered into trading in options derivative through Trade Reversal which was unexplained and which had resulted in non- genuine profit for the year under consideration, the Assessing Officer issued a notice u/s 148A(b) of the Act to the assessee, the details of which are as under: ―GOVERNMENT OF INDIA MINISTRY OF FINANCE INCOME TAX DEPARTMENT OFFICE OF THE INCOME TAX OFFICER WARD 2, SATARA To, KAY POWER AND PAPER LIMITED GAT NO 454/457, GAT NO 454/457, At Post BORGAON, TAL SATARA TAL SATARA 415002, Maharashtra, India

Kindly note that in case no response is received from your end within the time provided, it shall be presumed that you have nothing to say in the matter and accordingly, further proceedings as envisaged in Sec. 148A(d) and 148 of the Income Tax Act, 1961 shall be initiated, without affording you any further opportunity of being heard. PUTHENPARAMBIL MUKUNDAN BINU WARD 2, SATARA‖

Information and material shared with the assessee:- Following the directions of the Hon'ble Supreme Court of India as mentioned above and considering the CBDT Instruction No.01/2022 dated 11/05/2022 and ITBA step-by step document No.1 dated 12-05-2022 related to implantation of the decision of Hon'ble Supreme Court of India, the information and the material was provided to the assessee on 24/05/2022 and time of two weeks was provided to the assessee for submitting the response/reply. The time was given upto 08/06/2022 for filing the response/reply. The notice was duly served on assessee.

Reply of the assessee:- The assessee vide his letter dated 11/06/2022 requested 15 days adjournment to submit reply. As already 29 days has been given to assessee to submit his response his request for adjournment was not granted and letter dated 23/06/2022 was sent to assessee for submission of his response on or before 24/06/2022. The assessee furnished its reply in this office on 28/06/2022. The assessee has submitted Annual Report for the F.Y 2014-15, Ledger A/c of SunStar Securities from 01/04/2014 to 31/03/2015, Profit on Trading in Derivative and computation of total income. ―05. Finding of the AO:- The submission of the assessee is duly considered. From the material on record, it emerges that the assessee, M/s Kay Power and Paper Ltd has traded in options derivative through Trade Reversal. The assessee has bought scrips and sold same scrips immediately within few seconds at higher rate and huge profit has been booked on such transaction. On going through the transaction details, it is seen that, the sale time is earlier than time of buying As per details, it is also seen that, the assessee has purchased and sold scripts at a price which are very less as compared to the market price on that particular day. During the FY 2014-15, M/s Kay Power and Paper Ltd. has made the transactions and booked the profit of Rs. 2,67,66,250/-. During the F.Y 2014-15, M/s Kay Power and Paper Ltd has made such transactions of options derivative reversal trades making non-genuine profit of Rs. 2,67,66,250/-, It is seen from the return filed by the assessee for the A.Y 2015-16 that assessee has set off losses of Rs. 52,91,606/- against the capital gains of Rs. 52,91,606/ The non-genuine profit of Rs. 2,67,66,250/- remains unexplained as the assessee has not submitted any satisfactory explanation regarding options derivative reversal trades transactions by which assessee gained non-genuine profit of Rs. 2,67,66,250/- for the year under consideration. The assessee has filed return of income for A.Y. 2015-16 on 26/09/2015 by declaring total income at Rs. Nil/-. The return of income filed does not commensurate with the non-genuine profit of Rs.2,67,66,250/-gained by the assessee during the year under consideration. Therefore, the options derivative reversal trades transactions by which assessee gained non-genuine profit of Rs.2,67,66,250/- remain unexplained. Therefore, I am satisfied that it is a fit case for initiating the proceedings u/s 147 of the IT Act, 1961 to assess the above-escaped income and assess any other income that may come to the notice during the assessment proceedings u/s 147 of the IT Act. 1961.

Moreover, for initiating proceedings u/s 147, the AO is not required to reach final conclusion with regards to the escapement of income. The AO at this stage only needs to possess such information which prima- facie suggests that some income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year. Final conclusion can be drawn only after completion of re- assessment proceedings and by giving the assessee due opportunities of being heard during the re-assessment proceedings 07. In view of the above facts, the information in my possession as mentioned above suggests that the income chargeable to tax of Rs.2,67,66,250/-, which is more than Rs.50 lakhs, and represented in the form of asset has escaped the assessment. Therefore this is a fit case for issue of notice u/s 148.

Aggrieved with such order of the Ld. CIT(A) / NFAC, the assessee is in appeal before the Tribunal by raising the following grounds: 1. That the order dated 15.05.2024 passed u/s 250 of the Act, 1961 ("Act") by the National Faceless Appeal Centre is against law and facts on the file in as much as he was not justified to uphold the action of the Learned Assessing Officer, Income Tax Department in issuing notice under section 148 of the Act in as much as (i)there are no circumstances suggesting that any "income chargeable to tax" has escaped assessment since the income alleged to have escaped assessment, already stands credited to the Profit and Loss Account; (ii) there is no failure to disclose fully and truly all material facts necessary for assessment of income for the relevant assessment year nor has the Ld. Assessing Officer brought any material on record to prove such failure. (iii) there is no information within the meaning of Explanation to section 148 which suggests that income chargeable to tax has escaped assessment; (iv) notice u/s 148 has been issued by the jurisdictional AO and assessment framed by NFAC.

The Ld. Counsel for the assessee referring to the provisions of section 149 of the Act as stood at that time submitted that the notice in question is barred by limitation. Referring to the provisions of section 149(b) of the Act, he submitted that the basic condition for issue of notice u/s 148 of the Act is that it can be issued within ten years provided that income chargeable to tax represented, among other things, “in the form of an asset” or an “entry or entries in the books of account” exceeds and is likely to exceed Rs.50 lakhs. He submitted that if the above provisions are extrapolated to the given case, it reveals that while the alleged income i.e. income from derivates is not represented by any asset, the income in respect of the same has been disclosed by the assessee company as income in the Profit and Loss Account, therefore, the mandatory conditions prescribed in section 149 of the Act are not fulfilled. Thus, the proceedings in question are barred by limitation. He submitted that the basic condition for the limitation for issue of notice u/s 148 of the Act to be extended beyond three years till ten years is that the Assessing Officer should have in his possession “books of account or other documents or evidence”, which reveal that income represented in the form of “an asset” or “an entry or entries in the books of account” has escaped assessment. In the instant case, there is no evidence in possession of the Assessing Officer of any asset which could and did represent that income has escaped assessment. The income earned from trading in derivatives was duly reflected in the accounts received in its bank account maintained with IDBI Bank and credited to the Profit and Loss Account. Therefore, such re-assessment proceedings being barred by limitation has to be quashed.

The Ld. Counsel for the assessee in his another plank of argument submitted that the notice dated 24.05.2022 issued u/s 148A(b) of the Act is in contravention with the provisions of section 151A of the Act. He submitted that the notice u/s 148 of the Act has been issued by the jurisdictional Assessing Officer whereas the assessment has been framed by the National Faceless Assessment Centre. Referring to the decision of the Hon‟ble Bombay High Court in the case of Hexaware Technologies Ltd. vs. ACIT (2024) 464 ITR 430 (Bom), he submitted that the Hon‟ble jurisdictional High Court has extensively dealt with the issue of jurisdiction of jurisdictional Assessing Officer u/s 151A of the Act. It has categorically been held that the scheme is clear and unambiguous to provide that the notice u/s 148 of the Act shall be issued through automated allocation and in a faceless manner by the National Faceless Assessment Centre and not by the jurisdictional Assessing Officer. The Ld. Counsel for the assessee referring to the above decision of Hon‟ble Bombay High Court in the case of Hexaware Technologies Ltd. drew the attention of the Bench to the following sub-clauses of para 38 of the order, which read as under:

Referring to the following decisions, he submitted that similar view has been taken where it has been held that where the notice u/s 148 of the Act was issued by the jurisdictional Assessing Officer and the assessment framed by the NFAC, in that situation, such proceedings are to be quashed: i) Jasjit Singh vs. Union of India (2024) 467 ITR 52 (P&H) ii) Jatinder Singh Bhangu vs. Union of India (2024) 466 ITR 474 (P&H) iii) Kankanala Ravindra Reddy vs. ITO (2023) 156 taxmann.com 178 (Telangana) iv) Ram Narayan Sah vs. Union of India (2024) 163 taxmann.com 478 (Gau) v) Royal Bitumen (P.) Ltd. vs. ACIT (2024) 164 taxmann.com 606 (Bom) vi) Pravina Jagdish Patel vs. ITO (20240 164 taxmann.com 659 (Bom) vii) Venus Jewel vs. ACIT (2024) 164 taxmann.com 414 (Bom) viii) Paras Mahendra Shah vs. Union of India (2024) 165 taxmann.com 546 (Bom) ix) L & T Finance Ltd. vs. ACIT (2024) 165 taxmann.com 331 (Bom) x) Swarn singh vs. ITO (2024) 163 taxmann.com 745 (Amritsar – Trib.)

In his third plank of argument, the Ld. Counsel for the assessee referring to paras 61 to 66 of the paper book submitted that the profit earned from trading in derivatives (options) has been disclosed in Note 19 of Notes to Financial Statements as part of „other income‟. He submitted that the assessee has entered into the transactions through M/s. Sun Star Securities, a broker registered in the Bombay Stock Exchange and are duly supported by contract notes and are fully compliant with the regulatory and other applicable regulations / procedures. All the transactions were entered into through its account maintained with the IDBI Bank. Therefore, once the income, which is alleged to have escaped from being assessed to tax, has been duly recorded in the books of account and has been disclosed in the return of income filed u/s 139 of the I.T. Act, 1961, it cannot be said that the income has escaped assessment or even that there are circumstances that income has escaped assessment. He submitted that the Ld. CIT(A) / NFAC and the Assessing Officer have also not controverted / dealt with the issue of how income can be said to have escaped assessment particularly when the same has already been disclosed in the income tax return and offered for tax.

So far as the applicability of section 68 r.w.s. 115BBE of the Act is concerned, he submitted that the said amount is not a „cash credit‟ since it reflects income in the ordinary course of its business activities although from a new / different source i.e. trading in options and derivatives in addition to its activities carried out earlier. He submitted that since the provisions of section 68 are not applicable, the provisions of section 115BBE are not attracted. Referring to the following decisions, he submitted that the amendment brought in sub-section (2) of section 115BBE by the Finance Act, 2016 would be applicable from 01.04.2017 i.e. A.Y. 2017-18 only: i) Shree Karthik Papers Ltd. vs. DCIT (2020) 118 taxmann.com 467 (Mad) ii) Vijaya Hospitality and Resorts Ltd. vs. CIT (2020) 114 taxmann.com 91 (Ker)

He submitted that in absence of information suggesting that any income chargeable to tax has escaped assessment and since there is no failure on the part of the assessee to disclose fully and truly all the material facts necessary for assessment of income for the relevant assessment year and since the Assessing Officer has not brought any material on record to prove such failure, therefore, such re-assessment proceedings are not in accordance with law.

So far as the various decisions relied on by the Ld. CIT(A) / NFAC are concerned, the Ld. Counsel for the assessee filed the following table and submitted that all those decisions are distinguishable and not applicable to the facts of the present case.

So far as the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. relied on by the Ld. CIT(A) / NFAC is concerned, the Ld. Counsel for the assessee submitted that the Hon'ble Supreme Court in a subsequent judgment in the case of Union of India vs. Azadi Bachao Andolan (2003) 132 Taxmann 373 (SC) has observed as under: (i) If the Court finds that notwithstanding a series of legal steps taken by an Appellant, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be permissible for the court to treat the intervening legal steps as non-est based upon some hypothetical assessment of the 'real motive' of the Appellant. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o'-the wisp. (ii) We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic determent or prejudice to the national interest, as perceived by the respondents.

He also relied on the decision of the Hon'ble Supreme Court in the case of Vodafone International Holding B.V. vs. Union of India (2012) 341 ITR 1 (SC), where it has been held that the transactions must be looked at as a whole and not dissected.

He submitted that while dealing with the ground challenging the absence of information / circumstances that income has, allegedly, escaped assessment, the Ld. CIT(A) / NFAC has referred to the availability of certain information with the department as regards specific transaction carried out by the assessee company in various scrips. He submitted that while the department may have information relating to certain transactions carried out by the assessee company available with it, however, it is not clear as to how the said details by themselves can be termed as „information‟ or „circumstances‟ as to income having escaped assessment in the case of the assessee company.

The Ld. Counsel for the assessee in his yet another plank of argument submitted that the complete reasons for initiation of re-assessment proceedings have not been provided to the assessee company. Referring to the notice issued u/s 148A(b) of the Act dated 24.05.2022 which is the basis for arriving at „reason to believe‟ that the income has escaped assessment is concerned, he drew the attention of the Bench to the contents of the notice and submitted that a mere generalized information without demonstrating the escapement of income represented in the form of assets of Rs.2,67,66,750/- for a particular year would not suffice to legally issue a notice u/s 148 of the Act. He submitted that the assessee has earned profit of Rs.3,06,33,426/- out of which the Revenue is initiating the re- assessment proceedings for escapement of income of Rs.2,67,66,750/-. The so called information / letter / intimation received from the Investigation Wing which was relied upon by the Assessing Officer, does not clearly show as to whether (i) it contained any tangible material / information to suggest that income of the assessee company had escaped assessment or (ii) merely contained information / intimation or was in the nature of a direction issued for reopening of assessment. He submitted that although in the assessment order the Assessing Officer has relied upon the findings of SEBI and statement recorded during the course of survey u/s 133(1A) of M/s. Sunstar Securities, however, there is no whisper of the same in the notice issued u/s 148. No such order of SEBI or statement of M/s. Sunstar Securities was ever provided to the assessee along with the notice u/s 148. He submitted that it is entirely in complete violation of the ratio laid down by the Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd. vs. ITO (2003) 259 ITR 19 (SC) wherein it has been held that non-providing to an assessee of complete reasons recorded (including sanction, documents relied upon, etc) is fatal to the validity of the re-assessment proceedings and that an Assessing Officer is bound to furnish reasons within a reasonable time.

So far as the merit of the case is concerned, he submitted that the assessee company has entered into reversal trades in various scrips. Such reversal trades entail reversal of sell or buy position on a contract with subsequent buy or sell positions with the same counter party during the same day. The said reversal trades were carried out off market through M/s. Sunstar Securities, a broker on the Mumbai Stock Exchanges. He submitted that there was no allegation of any manipulation in the price and volume of securities and the SEBI permits short selling. He also referred to the Guidance Note on Tax Audit u/s 44AB of the Act issued by the Institute of Chartered Accountant of India to buttress his argument that such transactions are commercially acceptable. Relying on various decisions, he submitted that the addition made by the Assessing Officer and sustained by the Ld. CIT(A) / NFAC is not justified. Even otherwise also, he submitted that once the income from option or derivatives being shown in the Profit and Loss Account, addition of the same again will amount to double addition of the same amount. He accordingly submitted that the order of the Ld. CIT(A) / NFAC be reversed and the grounds raised by the assessee be allowed.

The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC. He submitted that the Assessing Officer in the instant case, after following due process of law, has initiated re-assessment proceedings which has been upheld by the Ld. CIT(A) / NFAC. Referring to the decision of the Pune Bench of the Tribunal in the case of ITO vs. Splice Biotech Pvt. Ltd. vide relating to assessment year 2013-14, order dated 27.09.2023, he submitted that the Tribunal has allowed the appeal filed by the Revenue where the CIT(A) has deleted the addition made by the Assessing Officer by denying the claim for exemption of capital gains u/s 10(38) of the Act.

The Ld. Counsel for the assessee in his rejoinder submitted that the facts in the case of Splice Biotech Pvt. Ltd. (supra) are completely different from the facts of the present case. In that case, the assessee had claimed deduction u/s 10(38) of the Act, whereas the assessee in the instant case has not claimed any such exemption and rather has offered the income to tax.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed on behalf of both sides. We have also considered the various decisions cited before us by both sides. We find the Assessing Officer in the instant case reopened the assessment on the ground that the assessee has bought scrips and sold the same scrips immediately within few seconds at a higher rate and huge profit has been booked on such transactions which according to the Assessing Officer is non- genuine profit to the extent of Rs.2,67,66,250/- out of the profit of Rs.3,06,33,426/-. Since the assessee did not submit any satisfactory explanation during the course of assessment proceedings, the Assessing Officer made addition of the same to the total income of the assessee u/s 68 r.w.s. 115BBE of the Act. We find the Ld. CIT(A) / NFAC upheld the validity of the re-assessment proceedings as well the addition on merit. It is the submission of the Ld. Counsel for the assessee that (a) the re-assessment proceedings initiated are barred by limitation, (b) such re-assessment proceedings are invalid especially when the income has duly been disclosed in the return of income and there is no escapement of income; (c) the notice has been issued by the jurisdictional Assessing Officer whereas the assessment has been framed by the NFAC and (d) so called statement of the broker was never provided to the assessee and the assessee has come to know of the same only after the assessment was completed and (e) there is not a whisper about the statement in the reasons so recorded and therefore, the same is against the ratio laid down by the Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd. vs. ITO (supra). It is also his submission that short selling is not illegal and it is permitted by the SEBI. It is also his submission that since the assessee has already disclosed such profit in the Profit and Loss Account, therefore, the same is not undisclosed income. Further, it is not a loan and the assessee has already shown the same as income, therefore, the provisions of section 68 r.w.s. 115BBE of the Act are not applicable.

We find force in the arguments of the Ld. Counsel for the assessee that the notice issued by the Assessing Officer u/s 148 is barred by limitation. We find the provisions of section 149 of the Act as stood at that time relating to the time limit for issue of notice u/s 148 read as under: ―149. Time limit for notice. - (1) No notice under section 148 shall be issued for the relevant assessment year,— (a) if three years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b);

It is an admitted fact that in the instant case, the notice u/s 148 has been issued after a period of 3 years from the relevant assessment year. A perusal of the provisions of section 149 shows that the basic condition for the limitation for issue of notice u/s 148 of the Act to be extended beyond three years till ten years is that the Assessing Officer must have in his possession “books of account or other documents or evidence”, which reveal that income represented in the form of “an asset”, “expenditure in respect of a transaction or in relation to an event or occasion” or “an entry or entries in the books of account which has escaped assessment” amounts to or likely to amount to Rs.50 lakhs or more. In the instant case, a perusal of the assessment order shows that the Assessing Officer has no evidence in his possession of any asset which could or did represent income having escaped assessment since the profit so earned and credited to the Profit and Loss Account has already been utilized for repayment of loan. Similarly, there is no evidence on record before the Assessing Officer that any expenditure in respect of a transaction or in relation to an event or occasion has escaped assessment. Thus, the first 2 conditions are not satisfied. So far as the third clause i.e. an entry or entries revealing income chargeable to tax has escaped assessment is concerned, it is an admitted fact that the entry relating to trading in derivatives is already reflected in the books of account and the same has also been credited to the Profit and Loss Account and disclosed as income whereby the said entry does not reflect any income having allegedly escaped assessment. Thus the 3rd condition is also not satisfied. Since the notice has admittedly been issued beyond a period of three years and since the Assessing Officer does not have any evidence in his possession of any asset which represents income having escaped assessment and since the entry relating to trading in derivatives has already been disclosed in the books of account by crediting the profit to the Profit and Loss Account, therefore, the mandatory requirements of time limit for issue of notice u/s 148 of the Act has not been satisfied. Therefore, we agree with the contention of the Ld. Counsel for the assessee that the notice in question is barred by limitation keeping in view of the specific and express provisions of section 149(1)(b) of the Act. Therefore, the notice u/s 148 being not in accordance with law is liable to be quashed. We, therefore, quash the notice issued u/s 148 of the Act being barred by limitation.

Since the assessee succeeds on this legal issue, the other planks of arguments challenging the validity of re-assessment proceedings are not being adjudicated. Since the appeal of the assessee is allowed on account of validity of re-assessment proceedings, the grounds challenging the addition on merit become academic in nature and therefore are not being adjudicated.

In the result, the appeal filed by the assessee is allowed.

After hearing both the sides, we find the grounds raised in are identical to the grounds raised in . We have already decided the issue and the appeal filed by the assessee has been allowed. Following similar reasonings, grounds raised by the assessee in are also allowed.

In the result, both the appeals filed by the assessee are allowed.