Dhruv Dipakbhai Panchal Vs ITO (Gujarat High Court)
The Gujarat High Court considered a challenge to a notice issued under Section 148 of the Income-tax Act, 1961, seeking to reopen the petitioner’s assessment for Assessment Year 2010-11. The original assessment had been completed under Section 143(3) after scrutiny by accepting the returned income. The Assessing Officer sought to reopen the assessment on two grounds. First, it was alleged that the assessee had incorrectly claimed business loss arising from the conversion of investment in shares into stock-in-trade and the subsequent sale of such shares. Relying on the Supreme Court’s decision in Shri Kikabhai Premchand v. CIT, the Assessing Officer held that the omission to disallow the claimed business loss resulted in underassessment of income. Secondly, the Assessing Officer alleged that expenditure relatable to exempt income, including long-term capital gains exempt under Section 10(38) and dividend income exempt under Sections 10(34)/(35), had not been disallowed under Section 14A, resulting in further underassessment. The assessee’s objections to the reopening were rejected, leading to the filing of the writ petition.
The High Court observed that the original assessment had been completed after scrutiny and that the reassessment notice had been issued beyond four years from the end of the relevant assessment year. Examining the recorded reasons, the Court noted that on both issues the Assessing Officer had expressly stated that, upon “verification of case records”, he had formed the belief that income had escaped assessment. Thus, the reasons themselves demonstrated that the belief was founded entirely on the material already available on record during the original assessment and not on any new or external material.
The Court held that where reassessment is initiated after expiry of four years from the end of the relevant assessment year, Section 147 requires the existence of failure on the part of the assessee to fully and truly disclose all material facts necessary for the assessment. In the present case, since the Assessing Officer had relied exclusively upon the existing assessment records and there was no allegation or material indicating any failure by the assessee to make full and true disclosure, the statutory condition for reopening beyond four years was not satisfied.
Accordingly, the High Court held that the impugned notice under Section 148 had been issued without satisfying the mandatory requirement contained in Section 147. On this ground alone, the reassessment notice was quashed and the petition was disposed of.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Additional affidavit filed by the Revenue to the amended petition is taken on record.
2. The petitioner has challenged notice dated 23.03.2017 issued by the respondent-Assessing Officer seeking to reopen the petitioner’s assessment for the assessment year 2010-11. In order to do that, the Assessing Officer had recorded following reasons:
“(1) In this case, the assessee filed his return of income on 24/09/2010 for A.Y. 2010-11 declaring total income of Rs. 1,57,500/-. The assessee had engaged in the business of dealing in shares and mutual funds. Assessment Order u/s. 143(3) of the Act was passed on 26.03.2015 by accepting the total income at Rs. 1,57,500/-.
(2) Irregular allowance of prior-period item on account of conversion of stock-in-trade to investment:
On verification of case records, it is found that the assessee had executing affidavit dated 09.03.2009, converted his investment in shares, shares lying into stock-in-trade as on 09.03.2009 amounting to Rs. 9,20,69,997/- and treated accordingly in the books of account based on the market value as on the date of conversion. Consequent upon above treatment, unrealized loss amount to Rs. 4,68,12,889/- which was shown in the balance sheet as unrealized business loss which could be claimed as and when and to the extent actually incurred on sale of the shares so converted. The said conversion is as per the provisions of section 45(2) which explains the accounting treatment at the time of converting investment into stock in trade. The said effected was given in the accounts for all years i.e. from A.Y. 2009-10 to A.Y. 2012-13. On sale of shares of relevant conversion during each year, the resultant loss was claimed as realized loss and debited in the Profit and loss account. The realized actual business loss was worked out as under:-
A.Y. 2009-10 Rs 19,87,428/-
A.Y. 2010-11 Rs 2,99,32,344/-
A.Y. 2011-12 Rs 22,39,695/-
A.Y. 2012-13 Rs. 71,76,435/-
“It was held in the Hon’ble Supreme Court in the case of Shri Kikabhai Premchand vs. CIT (1953) 24 ITR 506 that no man can be supposed to be trading with himself for the purpose of ascertaining taxable profits and this has not been overruled or reversed by the Supreme Court in any subsequent decisions. Thus a person cannot be said to make a profit/loss by reason of his transferring an asset to himself in a different capacity from the one in which he held them before the transfer.
(i) Accordingly, when an assessee, who is a dealer in shares, withdraws a part of the stock in trade from his business of share dealings, and transfers such shares to an investment account, the withdrawal of the shares should be reflected in the accounts of the business at the cost price and not at the market value of the shares.”
(ii) In view of the decision of the Hon’ble Supreme Court, it is seen that, in the instant case, the business loss was carried forward in the annual account only and remained outside IT scrutiny thus was not conforming to the provisions of the I.T.Act. The omission to disallow the same has resulted into underassessment of income of Rs. 2,99,32,343/- and short levy of tax of Rs. 1,20,10,302/- including interest.
(3) Excess allowance of expenditure on account o the expenditure relatable to exempt income.
On verification of case records, it is seen that during A.Y. 201011 the assessee has claimed exempt income on account of LTCG on securities u/s. 10(38) amounting to Rs. 47,45,433/-and Dividend income u/s. 10(34/35) of the Act amounting to Rs. 23,18,511/-. The assessee had disallowed the expenditure relatable to the exempt income though it had incurred even direct expenditure i.e. Security transaction tax on investment (Rs. 80,911/-) etc. Thus, the disallowance of expenses pertaining to earn exempt income was required to be disallow u/s. 14A of the Act. The omission to disallow the same has resulted into underassessment of Rs. 5,06,225/- which resulted into short levy of tax of Rs. 2,06,479/- including interest.
(4) In view of the above facts I have reason to believe that the above income chargeable to tax has escaped from assessment. Thus, the case needs to be reopened by issuing notice u/s. 148 of the I.T.Act, 1961.”
3. The assessee raised objections to the notice of reopening under letter dated 07.07.2017. Such objections were, however, rejected by an order dated 28.07.2017 upon which, the assessee filed the present petition.
4. It is not in dispute that the original assessment was framed by the Assessing Officer after scrutiny. To reopen such assessment he had issued the impugned notice. In the reasons recorded, he had raised two disputes with the assessee’s claims. One was with respect to the business loss claimed by the assessee which was previously accumulated on account of sale of shares. According to the Assessing Officer, such claim was not acceptable particularly in view of the judgement of Supreme Court in case of Shri Kikabhai Premchand vs. CIT reported in 24 ITR 506. The second dispute raised by the Assessing Officer in the reasons recorded is with respect to the long term capital gain on securities and the expenditure claimed by the assessee for earning such income. According to the Assessing Officer, expenditure pertaining to such exempt income was required to be disallowed under section 14A of the Act.
5. With respect to both these grounds the Assessing Officer in the reasons had begun with expression “verification of case records it is found that/seen that”. Thus on both issues, the Assessing Officer was referring to the materials on record to form a belief that income chargeable to tax had escaped assessment. There was thus nothing extraneous to the record which led the Assessing Officer to form such a belief. On both counts thus, there was clear and ample material on the basis of which the assessee had made respective claims. When therefore the Assessing Officer was seeking to reopen the assessment beyond a period of four years from the end of the relevant assessment year, the question of failure on part of the assessee to disclose truly and fully all material facts for such assessment was an important aspect. Ignoring such additional requirement flowing from section 147 of the Act, the Assessing Officer issued the impugned notice. There being no element of failure on part of the assessee to disclose true and full facts, the impugned notice could not have been issued. To reiterate, the Assessing Officer in the reasons recorded itself proceeded to peruse the materials on record to form a belief that the income chargeable to tax had escaped assessment. Notice having been issued beyond a period of four years, in absence of any failure on part of the assessee to disclose true and full facts, such notice could not have been issued.
6. In the result, only on this ground impugned notice is quashed. Petition is disposed of.
