Case Law Details
In this case, M/s Prudential Assurance Co. Ltd , a tax resident of UK, was denied the benefit of setting off of the business loss from sale of shares against the income from other sources by the Assessing Officer (‘AO’) on the ground that the assessee had no Permanent Establishment in India as per Article 5 of the India-UK Double Taxation Avoidance Agreement . The Honourable Mumbai Tribunal observed that the assessee chose to be ruled by the provisions of the Income Tax Act, 1961 and not DTAA. Thus, the AO was not justified in directing that the business loss should be considered as per provisions of DTAA and therefore taxing the income from other sources without allowing its set off against the business loss.
INCOME TAX APPELLATE TRIBUNAL
ITA No.7353/Mum/2011 : Asst. Year 2003-2004
The Prudential Assurance Co. Limited Vs. The Asstt. Director of Income-tax
Date of Pronouncement : 26.03.2012
O R D E R
Per R.S.Syal, AM :
This appeal by the assessee arises out of the order passed by the Assistant Director of Income Tax (International Taxation) on 16.09.2011 u/s 143(3) r.w.s. 147 and 144C(13) of the Income-tax Act, 1961.
2. Ground no. 2 of the appeal is as under : –
`On the facts and in law the learned Assessing Officer erred in rejecting the Appellant’s claim of set off of business loss as per domestic laws against other income by ignoring the provisions of section 90(2) of the Act whereby an option is provided to the assessee of choosing to claim the benefit of tax treaty provisions or the provisions as per domestic tax laws, whichever is more beneficial to it and so was not justified in not allowing the appellant its claim of set off.’
3. Briefly stated the facts of the case are that the assessee is a foreign company having residential status of “non-resident”. Return of income was filed on 12.11.2003 declaring total loss of ~36,22,66,970. The assessment was completed u/s 143(3) on 28.02.2006 inter alia accepting the assessee’s contention that loss from sale of shares at ~48,80,13,166 was taxable under the head `Profits and gains of business or profession’. Here it is relevant to mention that the assessee disclosed loss from sale of shares in the return of income at ~48.80 crore falling under the head “Profits and gains of business or profession” and thereafter claimed set off of such loss against the Dividend income and Interest on income-tax refund categorized under the head `Income from other sources’ amounting to Rs. 12.57 crore, thereby declaring total loss of ~36.22 crore eligible for carry forward to subsequent years as per the provisions of the Act. The treatment of negative income from sale of shares falling under the head `Profits and gains of business or profession’ was done in conformity with the Ruling rendered by the Hon’ble Authority for Advance Rulings in assessee’s own case on 30.04.2001 holding that the profits arising from realization of portfolio investments in India will be treated as part of company’s business profits. As the Assessing Officer did not allow the carry forward of the unabsorbed business loss in the original assessment order, the assessee filed application u/s 154. During the pendency of such application for disposal, the Assessing Officer initiated reassessment proceedings by issuing notice u/s 148 recording the following reasons:-
“In the above mentioned case, the assessee filed return of income for assessment for assessment year 2003-04 on 12-11-2003 showing loss of Rs. 36,22,66,970 comprising of ~48,80,13,166 being loss from business and income of ~12,57,46,198 under the head `other sources’. The assessment was completed under Sec. 143(3) on 28-2 -2006.
2. It is the assessee ’s claim that in its own case, it had obtained the Advance ruling in AAR No.445/98 dated 30-4-2001, wherein the Authority has ruled that the profit out of the activity of purchase and sale of shares is in the nature of business profit. It is seen from records that the permission granted by the RBI and the registration granted by SEBI under SEBI (FII) Regulations, 1995 to the assessee company is to make investment is under stock markets and not to carry on business or to trade in India. Accordingly, the gain earned on investment activities is taxable under the head capital gain and not under the head business income. It is also seen that the assessee is not having permission from the RBI to trade or carry on business activities in India. In the case of Fidelity Northstar Fund, the AAR in its Ruling had said that the profits derived on account of purchase and sale of equities is capital gain and chargeable to tax accordingly. In view of the above, the subsequent ruling of the AAR which clarifies the law on the subject as to the taxability of and nature of income, is applicable to the facts of the case and therefore, the profits derived on account of purchase / sale of shares is to be chargeable as capital gains. Therefore, the subsequent ruling of the AAR which clarifies the law on the subject as to the taxability of and nature of income, is applicable to the facts of the case. Since the assessee is also earning `Capital Gains’ from its investments in India Equity market and is also earning dividends on its investments, this activity become independent of insurance business of the assessee. Thus there is a change in facts and law and provisions of Sec.245S(2) are applicable and therefore, the profits derived on account of purchase / sale of shares is chargeable to tax as capital gains.
3. Since the nature of loss derived by the assessee is not on account of business activity but under the head `Capital Gains’, such loss cannot be allowed to be set off against the income from other sources as per the provisions of Sec. 71(3) of the Act. In view of this, the set off of business loss which was quantified by the AO in the assessment order is capital loss which should be allowed to be carried over to the subsequent years and cannot be allowed to be set off against income from `other sources’. It is also noticed that complete facts related to investment activity in India and SEBI guidelines in this regard were not disclosed by the assessee. These guidelines have come to notice only through the decision of AAR in Fidility Northstar case.
4. In view of the above, I have reason to believe that the income chargeable to tax under the head `other sources’ has escaped assessment by the reason of adjusting the loss under the head `Capital Gains’ against the dividend income of ~12,54,30,185 and interest income of ~3,16,013 derived by the assessee within the meaning of section 147 of the Act for assessment year 2003-04. Therefore I am satisfied that the income chargeable to tax for the dividend income under Sec.115AD and interest on IT refund under the head `other sources’ has escaped assessment. Issue notice u/s 148 of the Act for AY 03-04. The DIT(IT) Mumbai had given administrative approval today for issue of notice u/s 148 for A. Y.03-04.”
(Emphasis supplied by us)
4. In response to such notice the assessee filed a letter stating that the earlier return filed by it on 12.11.2003 may be treated as a return having been filed in response to notice u/s 148.
5. From the reasons recorded by the Assessing Officer as extracted above, it is vivid that the Assessing Officer prima facie opined having reason to believe that the loss from the sale of shares was not taxable under the head “Profits and gains of business or profession” notwithstanding the fact that the assessee had obtained Advance Ruling in this regard. In the reasons noted above the A.O. opined that the RBI granted permission to the assessee and further SEBI granted registration under the SEBI (FII) Regulations, 1995 to make investment in stock market and not to carry on business or trade in India. He fortified his view by relying on a subsequent Ruling of the Hon’ble AAR in the case of Fidelity Northstar Fund in which it was held that the profit derived on account of purchase and sale of equities was chargeable to tax under the head `Capital gains’. In the opinion of the A.O., the subsequent Ruling of the Hon’ble AAR clarified the law on the subject as to the taxability and nature of income as applicable to the facts of the assessee as well. It is on such basis that the A.O. entertained a view that the income chargeable to tax has escaped assessment on the ground that the gain earned on its investment activity was taxable under the head “Capital gain” and not as “Business income” and once such loss was considered under the head `Capital gain’, there was no question of allowing set off of such loss against income from other sources. That is how he issued notice u/s 148.
6. At this juncture it will be relevant to note that the Director of Income Tax (IT) initiated the proceedings u/s 263 of the Act for assessment years 2004-2005 and 2005-2006 on the similar grounds on which the Assessing Officer initiated proceedings u/s 147 for the instant year. The assessee filed writ petition before the Hon’ble Bombay High Court against the initiation of proceedings u/s 263 in respect of the subsequent two assessment years. The Hon’ble Bombay High Court has held that the Ruling in Fidelity cannot displace the binding character of Advance Ruling rendered in assessee’s own case and as such. Resultantly, the initiation of action u/s 263 has been quashed by the Hon’ble Bombay High Court on the ground that the Assessing Officer had taken a possible view and hence the CIT was not justified in finding fault with the Assessing Officer’s opinion who followed a binding Ruling. These facts are borne out from the impugned assessment order.
7. During the course of assessment proceedings, the assessee made submissions in support of its case that the loss from sale of shares was liable to be considered only as `Business income’ and not as `Capital gain’. Faced with the judgment of the Hon’ble jurisdictional High Court in assesee’s own case on the very same issue for the subsequent two years, the Assessing Officer was left with no option but to hold that loss from sale of equities was correctly declared as “Business loss”. However, he held that since the assessee had no PE in India in the previous year relevant to the assessment year under consideration, such business loss which was set off against the `Income from other sources’ by applying the provisions of section 71 of the Act, was incorrect. As such, the A.O. refused to allow set off of `Business loss’ against `Income from other sources’ as per section 71 of the Act. Not only that, the A.O. also held that the assessee can claim business loss in its country of residence in the tax assessment. The assessee’s objection to the initiation of reassessment proceedings was also held by the A.O. to be inappropriate. The sum and substance of the impugned order is that the loss from sale of shares amounting to Rs. 48.80 crore is `Business loss’, which is not available for set off or carry forward in India in view of the fact that the assessee has no PE in India and further income of Rs. 12.57 crores is chargeable to tax in India. As such, the earlier application filed by the assessee u/s 154 seeking the benefit of carry forward of business loss was also held to be without any substance. The assessee also failed to convince the Dispute Resolution Panel on its point of view. The Panel vide its order dated 03.08.2011 approved the draft assessment order upholding the A.O.’s contention that the loss of Rs. 48.80 crore was not available to the assessee either for set off against the income from other sources or carry forward to subsequent years. That is how the Assessing Officer passed the impugned order on 16.09.2011 taxing dividend income and interest on income tax refund totaling Rs. 12.57 crore under the head `Income from other sources’. The assessee is aggrieved against the decision of the A.O. in this regard.
8. We have heard the rival submissions and perused the relevant material on record. It is observed that the Assessing Officer initiated reassessment proceedings for the reason that the loss from sale of shares amounting to ~48.80 crore was not liable to be considered under the head `Profits and gains of business or profession’, but `Capital gain’. However, during the course of assessment proceedings, the action taken by the learned CIT u/s 263 in the subsequent two years came to be knocked down by the Hon’ble High Court and in this view of the matter the Assessing Officer came to hold that albeit the loss from sale of shares amounting to Rs. 48.80 crore was `Business income’ but the same did not qualify to be considered in the present assessment because the assessee had no PE in India.
9. The learned Departmental Representative took us through the Ruling rendered by the Hon’ble AAR in assessee’s own case, a copy of which is available on record. He referred to page 12 of the Ruling, in which it has been held that : `Under these circumstances, it is held that the applicant’s income from business is not liable to tax in India because of the absence of any permanent establishment of the applicant in India”. In the light of above observations, the learned Departmental Representative contended that since the assessee’s income from business was not liable to tax in India, there was no question of allowing any set off of such business loss in India against income from other sources.
10. In order to appreciate the rival contentions in this regard it is relevant to have a quick look at the following questions which were raised by the assessee before the Hon’ble Authority for Advance Rulings:-
1. Whether on the facts and circumstances of the case, The Prudential Assurance Company Limited (hereinafter referred to as the “Applicant”) will be entitled to the benefits of the Convention of January 25, 1993 regarding the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains entered into between the Government of Republic of India and the Government of United Kingdom of Great Britain and Northern Ireland (hereinafter referred to as the “Treaty”)
2. Whether on the facts and circumstances of the case, the gains arising from realization of portfolio investments in India will be treated as part of the Applicant’s business profits and hence be covered within the provisions of Article 7 of the Treaty?
3. Whether on the facts and circumstances of the case, the applicant will be held as having a permanent establishment in India?
4. Whether on the facts and circumstances of the case, based on the provisions of Article 7 of the Treaty, the Applicant will not be taxable in India in respect of its business profits?
5. Whether on the facts and circumstances of the case, the Applicant will be absolved from filing a tax return in India under the provisions of Section 139(1) of the Indian Income Tax Act, 1961 (hereinafter referred to as the “ITA”) if its entire income is subject to tax only in the United Kingdom under the Treaty provisions?
11. The Hon’ble AAR has held that the assessee is entitled to the benefits of the treaty (hereinafter also referred to as the DTAA); the gains arising from the realisation of portfolio investments in India will be treated as part of Company’s business profits; and that such income from business is not liable to tax in India because of its not having any permanent establishment in India.
12. From the above Ruling of the Hon’ble AAR rendered in assessee’s own case, it is patent that the gain arising from realization of portfolio investments in India has been held to be business profits. The Assessing Officer, while recording reasons, was swayed by a subsequent Ruling of the Hon’ble AAR in the case of Fidelity Northstar Fund. In the light of this subsequent Ruling the Assessing Officer opined, at the time of recording the reasons, that the latter ruling has the effect of overruling the Ruling given in assessee’ s own case which ceases to be applicable any more. The Hon’ble jurisdictional High Court by way of elaborate verdict given on the writ petition filed by the assessee against the initiation of proceedings u/s 263 for the subsequent two assessment years has thoroughly considered the provisions of Chapter XIX-B from sections 245N to 254V dealing with the Advance Ruling. Section 254S(2) postulates that the Ruling shall be binding unless there is a change in law or facts on the basis of which the advance ruling was pronounced. Rule 18 of the Authority for Advance Rulings (Procedure) Rules, 1996 provides that where the Authority finds suo moto or on a representation made to it by the applicant or the Commissioner or otherwise but before the ruling pronounced by the Authority has been given effect to by the Assessing Officer, that that there is a change in law or facts on the basis on which the ruling was pronounced, it may by order modify such ruling in such respects as it considers appropriate, after allowing the applicant and the Commissioner a reasonable opportunity of being heard. The above provisions make it crystal clear that any Ruling given in a particular case hold the field and cannot be characterized as suffering from any infirmity by reason of some other ruling rendered in another case or otherwise, unless the procedure adopted under rule 18 is adopted. It is only the Authority who is competent to modify the ruling laid down by it. Such modification may be done by the authority suo motu or on application filed by the assessee or the Commissioner. Where the assessee or the Department feel that the subsequent events warrant the modification in the Ruling, they can apply to the Authority in this regard. It is not open to the Revenue to suo motu conclude that subsequent change in the factual or legal position has rendered the ruling awry. The procedure as prescribed under rule 18 needs to be resorted before jumping to such conclusion inasmuch as unless the Authority itself amends its ruling, it can not lie in the mouth of the authorities under the Act to declare that the ruling has lost its sanctity. The ld. DR has brought nothing on record to indicate that the Ruling delivered in the assessee’ s own case has been modified or even any process to get it modified has been initiated by the Revenue. In this view of the matter there remains no doubt whatsoever that the Ruling in the case of Fidelity Northstar Fund cannot apply to the facts of the instant case and the case of assessee shall continue to be governed by the Ruling given in its own case. We thus hold that the reason recorded by the A.O. in initiating the reassessment proceedings by opining that the loss of ~48.80 crore which resulted from sale and purchase of shares is liable to be considered under the head `Capital gains’, is not in order.
13. The main question which falls for our adjudication is whether the assessee is entitled to set off of income of ~12.57 crore against the business loss of ~48.80 crore. The Assessing Officer in the impugned order has held that since the assessee has no PE in India, there cannot be any question of taxation of business income in India or for that purpose allowing set off of business loss income against income from other sources. The learned Departmental Representative has also supported this view by pointing that the Hon’ble AAR in its Ruling has held that the assessee’s income from business is not liable to tax in India because of the absence of PE of the assessee in India. In order to answer the main question, we need to answer the preliminary question as to whether the assessee, who is a non-resident, is bound by the DTAA or can choose to be governed by the provisions of the Income-tax Act (hereinafter called the Act). The assessee claimed the `Business loss’ under the Act and as per the provisions of section 71 claimed set off of such business loss against income from other sources. On the other hand, the AO held that since the assessee has no PE in India in the previous year relevant to the assessment year under consideration, it can neither have any income nor loss from business operations capable for consideration under the Act. The action of the AO has the effect of pushing the assessee compulsorily under the DTAA thereby not permitting it to be governed by the provisions of the Act.
14. Section 90 of the Act assumes significe in this regard, the relevant of which reads as under : –
“90. Agreement with foreign countries.—
(1)
(2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.”
15. A bare perusal of the above provision indicates that where the Central Government has entered into DTAA with the Government of any other country for granting of relief in respect of income on which tax is payable both in India as well as the other country or for the purposes of avoidance of double taxation of income under this Act or under the corresponding law in force in that other country, then the assessee to whom such agreement applies shall be entitled to be governed by the provisions of DTAA or the provisions of the Act, whichever is more beneficial to the assessee. A plain language of this provision indicates, firstly, that the DTAA is entered into between two countries `for granting relief of tax’ . Secondly, the manner of granting relief is also enshrined in the provision itself which states that `the provisions of this Act shall apply to the extent they are more beneficial to that assessee’. Ordinarily, but for such provision, an assessee to which the DTAA applies shall be subjected to tax in India as per the provisions of the Act. If, however, the provisions of the DTAA are more beneficial to the assessee, then such provisions, shall override the corresponding provisions of the Act. On the other hand, if the provisions of the Act are more beneficial to the assessee, it is such provisions which shall apply notwithstanding less beneficial provision in the DTAA. The logic behind it is simple that the DTAA is intended to grant relief of tax and not create any fresh tax liability, which is not provided under the Act. To state simply, if a particular income falls under the tax net as per the Act, the same shall be chargeable to tax in the hands of the assessee to whom DTAA applies, unless it is shown that the provisions of DTAA provide for non-taxability of such income or taxability at a lower rate. In such a situation, the beneficial provision as contained in the DTAA shall prevail over the provision under the Act. It shows that the legislature has given an option to the assessee to be governed by the provisions either of the Act or of the DTAA, which is more beneficial to it. It is manifest that it is an option which rests with the assessee as to whether or not he wants to take the benefit of DTAA. The situation is not that if an assessee to whom DTAA applies, shall be mandatorily ruled by the provisions of such DTAA in supersession of the provisions of the Act. Thus if the income itself is not chargeable to tax under the Act, then the DTAA cannot create a liability to tax by roping in such income under any of its relevant Articles. Even if any Article of DTAA provides for chargeability of a particular amount which is not chargeable to tax under the Act, then such provision of the DTAA shall have to lean in favour of the provision of the Act. The corollary that follows is that one needs to firstly examine as to whether the particular sum is chargeable to tax under the Act or not. If it is chargeable to tax then it needs to be examined as to whether such income is not taxable as per DTAA. If the income is chargeable to tax both under the Income-tax Act as well as DTAA, then the assessee cannot escape tax on it. If however such income is not chargeable to tax in India under the Act, then the matter ends there. There is no need to consider the provisions of the DTAA as to whether any charge is attracted there under on such income. If such income is chargeable to tax in India under the Act but the provisions of DTAA exempt it, then again there can be no question of taxability of such sum due to the mandate of section 90(2). The essence is that an assessee, to whom the DTAA applies, has been given option to be governed by the Act or DTAA, whichever is more beneficial to it.
16. The Hon’ble Supreme Court in the case of CIT v. P. V.A.L.Kulandagan Chettiar [(2004) 267 ITR 654 (SC)] has held that where the tax liability is imposed by the Act, the DTAA may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. Similar view has been expressed by the Mumbai Bench of the Tribunal in DDIT (IT) v. Safmarine Container Lines N. V. [(2009) 120 ITD 71 (Mum.)] by holding that : “Section 90(2) gives the option to an assessee to whom DTAA applies either to be governed by the Income-tax Act, 1961 or take resort to the DTAA. The option is with the assessee to be ruled by either of the two which is more beneficial to it”. In view of the above discussion, it becomes manifest that the statute by way of section 90(2) has itself given an option to an assessee to be ruled either by the Act or the DTAA, whichever is more beneficial to him. Such an option lies with the assessee and not with the Revenue. The Assessing Officer cannot thrust the provision of DTAA on an assessee, who has chosen to be governed by the Income-tax Act.
17. Adverting to the facts of the instant case, it is observed that the assessee chose to be ruled by the provisions of the Act. However, the Assessing Officer superimposed his choice on the assessee by considering the case only under DTAA and holding that since the assessee has no PE in India, there can be no business loss available for set off against income from other sources. The view of the A.O. runs contrary to the manifest prescription of section 90(2) which in unequivocal terms provides that the provisions of DTAA shall apply to the extent they are more beneficial to the assessee. When the assessee chose to be governed by the provisions of the Act and not DTAA by not claiming to have any PE in India or be regulated by Article 7 read with Article 5, in our opinion, the A.O. was not justified in directing that the business loss should be considered as per provisions of DTAA and not the Act.
18. Now let us espouse the contention of the ld. DR with reference to para 12 of the Ruling in which it has been held that the applicant’s income from business is not liable to tax in India. Here it is relevant to note that the Ruling has been rendered on the questions asked by the assessee. All the questions are in relation to ascertaining the taxability of income from sale and purchase of shares as per the provisions of the DTAA. Even the sentence from the Ruling relied on by the ld. DR completes with the expression `because of the absence of any permanent establishment in India’. Thus the real meaning of sentence read by the ld. DR claiming to be in its favour is that the assessee’s income from business is not liable to tax in India because it has no permanent establishment in India. The Ruling has not been rendered on the question of the taxability of such income under the provisions of the Act. It can be seen from the sequence of all the questions answered by the Hon’ble AAR. In response to question no. 1 it has been held that the assessee is covered under the DTAA. In answer to question no. 2 it has been held that the gain arising from the realization of portfolio investment in India will be treated as part of the company’s business profits and hence covered under Article 7. In response to question no. 3 it has been decided that the assessee has no PE in India. And answer to question no. 4 finally says that based on the provisions of Article 7 of the Treaty, the assessee will not be taxable in India in respect of its business profits.
19. When we consider the mandate of section 90(2) in juxtaposition to the Ruling given in the context of DTAA in assessee’ s case, the following features emerge in so far as income from purchase and sale of shares held as portfolio investment is concerned :-
i. Income from realization of portfolio investment in India is `Business income’ and not `Capital gains’.
ii. Such income is not taxable under DTAA because the assessee does not have any PE in India.
iii. Such Business income is taxable in India u/s 9 of the Act.
20. Let us understand the effect of the above features with the help of hypothetical figures. Suppose the assessee has such business income of ~. 100 and also income from other sources say Rs. 30, his total income under the Act will become Rs. 130. If the assessee exercises option given to it u/s 90(2) and chooses to be covered under DTAA, then his total income in India will stand reduced to Rs. 30, because the Business income of ~. 100 will not be taxable because of absence of any PE in India as held by the Hon’ble AAR in its Ruling, which is still valid. Now suppose instead of income, there is a business loss of ~. 100 and income from other sources continues to be Rs. 30. Under the provisions of the Act, the assessee will get the benefit of set off of business loss against such income of Rs. 30, thereby leaving total income at Rs. Nil. If the assessee opts to be governed by the DTAA, in that case, its total income would be ~.30 because of non-consideration of business income, positive or negative, for the purposes of the computation of total income due to absence of its PE in India. Thus it is clear that as per the facts of the instant case, the assessee suffered a business loss of ~48.80 crore which was liable to be considered under the provisions of the Income-tax Act, 1961, when the assessee did not go in for DTAA.
21. Now we turn to the main question as to whether the assessee is entitled to set off the business loss of ~48.80 crore against income of ~12.57 crore chargeable under the head `Income from other sources’. The ld. AR contended that once loss of ~.48.80 crore is held to be `Business loss’ and the further fact that the assessee chose to be governed under the Act, then such business loss should be set off against other income of ~12.57 crore as per section 71 of the Act. That is precisely the prayer as per ground no. 2. The ld. DR contended that such business loss can not be set off against income of ~. 12.57 crore.
22. Section 71 deals with “Set off of loss from one head against income from another”. Sub-section (1) provides that where in respect of any assessment year the net result of the computation under any head of income, other than “Capital gains”, is a loss and the assessee has no income under the head “Capital gains”, he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head. Sub-section (2A) of section 71 provides that notwithstanding anything contained in sub-sections (1) and (2), the loss under the head “Profits and gains of business or profession” shall not be set off against income assessable under the head “Salaries”. Other sub-sections of section 71 are not relevant in the present context. From the prescription of section 71, it is palpable that there is no bar in allowing set off of loss under the head “Profits and gains of business or profession” against income under the head “Income from other sources”. This section applies to all assesses, whether resident or non-residents, so long as income of non-resident assesses is computed under the provisions of the Act. The present assessee has also chosen to be covered under the Act. It is seeking loss under the head `Profits and gains of business or profession’ to be set off against `Income from other source’. There is hardly any difficulty in holding that the Assessing Officer was not justified in taxing `Income from other sources’ amounting to Rs. 12.57 crore without allowing its set off against the business loss of Rs. .48.80 crore. We order accordingly. The assessment order is overturned to this extent. Ground no. 2 is, therefore, allowed.
23. The assessee has raised ground no. 3, which reads as under : –
`Without prejudice to the above grounds, on facts and in law the learned Assessing Officer erroneously calculated the tax payable considering the refund issued to the Appellant at Rs. 2,86,99,513 as against Rs. 2, 59,91,859.
24. In view of our decision on ground no. 2 above holding that the total income for the current year shall be Rs. Nil because of the set off of business loss against the income from other sources, the calculation of tax made by the AO, which is subject matter of the above ground no. 3, has become academic.
25. Ground no.1 is against the initiation of reassessment proceedings. It has been noticed above that the assessment in this case was completed u/s 143(3) on 28.02.2006. The AO issued notice u/s 148 on 3 1.03.2010 for the reasons set out above. The learned A.R. contended that the initiation of such reassessment proceedings be held as void as having been barred by time.
26. We have heard the rival submissions and perused the relevant material on record. First proviso to section 147 provides: “that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return 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”. From the above statutory provision contained in the proviso to section 147 it is abundantly clear that where an assessment order is passed u/s 143(3), no action can be taken under this section after the expiry of four years from the end of the relevant assessment year unless any income chargeable to tax escaped assessment by reason of failure on the part of the assessee inter alia to disclose fully and truly all material facts necessary for his assessment. Admittedly the assessment in this case was completed u/s 143(3) on 28.02.2006 and the assessment year under consideration is 2003-2004. Action for reassessment could have been taken on or before 31.03.2008, that is within a period of four years from the end of the relevant assessment year, without there being any failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. Beyond that date, the action could have been taken only if the assessee had failed to disclose fully and truly all material facts necessary for his assessment. Admittedly notice u/s 148 has been issued on 31.03.2010, which is beyond 31.03.2008. In such a case failure of the assessee to disclose fully and truly all material facts necessary for assessment is sine qua non to initiate the reassessment proceedings. From the reasons recorded above it is observed that the A.O. was swayed by a Ruling by the Hon’ble AAR in the case of Fidelity Northstar Fund which in his opinion correctly laid down that the income from investment activity of the assessee was taxable under the head `Capital gain’ and as such the set off of such loss against income from other sources was not permissible. It is absolutely not the case of the Revenue that the assessee failed to disclose fully and truly all material facts necessary for assessment, which led to the escapement of income. The assessee claimed loss from sale of shares as `Business loss’ by relying on the Ruling given by the Hon’ble AAR in its own case. While disposing ground no. 2 of the assessee’s appeal above we have noted that such ruling is binding on the Department and it is impermissible to deviate from it without following the prescribed procedure. The assessee religiously followed the ruling and declared all the particulars in its return of income, which came to be accepted by the AO in the original assessment made u/s 143(3). The situation would have been otherwise if the such ruling had been modified earlier and the assessee had still taken the benefit of this ruling in this year itself without specifically disclosing it in the return of income. Thus it becomes to be a clear case of no failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. In such a situation the issuance of notice u/s 148 after the expiry of four years from the end of the relevant assessment year is clearly barred by time.
27. There is one more reason for which the initiation of reassessment cannot be upheld. From the computation of income it is observed that the assessee appended a note that the business loss of ~36.22 crore was carried forward to subsequent years. Such amount of business loss was computed after deducting income from other sources from the amount of business loss. The Assessing Officer in the original assessment accepted this contention by treating loss of Rs. 48.80 crore as business loss and allowing set off of such loss against the income from other sources. The reassessment has been initiated on the score that the loss so declared by the assessee was liable to be considered as `Capital gain’ and not `Business income’ and hence its set off was not permissible against income from other sources. Apart from wrongly relying on a subsequent ruling in the case of Fidelity, nothing is emanating from the reasons reproduced above justifying the departure from the opinion already taken by the AO while finalizing the original assessment u/s 143(3). It appears that the Assessing Officer changed his opinion in this regard without there being any valid reason for doing so. It is a trite law that change of opinion cannot be a reason to reopen the completed assessment. The Hon’ble Supreme Court in CIT VS. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC) has held that no reassessment is possible on a mere change of opinion. The following observations of the Hon’ble Apex Court in this regard need to be accentuated :
`The Assessing Officer has no power to review ; he has the power to reassess. But reassessment has to be based on fulfilment of certain preconditions and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening 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, the Assessing Officer has power to reopen, 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.’
28. Thus the present case turns out to be a case of simple change of opinion without there being any tangible material in the possession of the AO for coming to conclusion that there was an escapement of income. As such this ground is allowed.
29. In the light of the above discussion we are of the considered opinion that the A.O. was not justified in initiating reassessment and there after framing the present assessment order in the way in which it has been done on merits. We, therefore, quash the initiation of reassessment and also set aside the impugned order on merits.
30. In the result, the appeal is allowed.
Order pronounced on this 26th day of March, 2012.
