Brief of the case
In the case of Equity Intelligence India Pvt Ltd vs. Assistant Commissioner Of Income Tax High Court of Kerala at Ernakulam has held that (1) for reopening u/s 147 of the IT Act The requirement that the Assessing Officer must have ‘reason to believe’ cannot be taken to mean that the Assessing Officer must be satisfied that there exists grounds for reopening the assessment or the Assessing Officer should have formed an opinion about the nature of the final order that is likely to be passed after reopening the assessment. (2) profit on sale of shares is to be treated as business income when the assessee carried on business by systematic and organised manner.
Facts of the case
Company engaged in portfolio management services having obtained necessary registration from the SEBI. The return of income for the assessment year 2008-09 was filed and assessment under section 143(3) of the Income Tax Act was completed, treating the transactions in purchase and sale of shares as ‘business income’ instead of capital gains as shown by the assessee company.
In so far as the assessment year 2006-07 is concerned, return of income was processed under section 143(1) of the Act and assessment was completed. After completing the assessment for the assessment year 2008-09, the assessment for 2006-07 was reopened by the Assessing Officer invoking his power under section 147 of the Act. Accordingly, assessment was completed under section 143(3), where also, the income of the assessee from the purchase and sale of shares, which was originally treated as short term capital gains and taxed at the lower rate, was assessed as business income. The assessment for the year 2010-11 was also completed under section 143(3) as in the case of the assessment year 2008-09.
Both the authority i:e CIT(A) and Tribunal confirm the action of AO and Aggrieved against the said decision, the Assessee preferred an appeal before High Court
Issue
Whether on the facts and circumstances of the case, the Appellate Tribunal is right in confirming the reopening of assessment under Section 147?
Whether on the facts and circumstances of the case, the Appellate Tribunal is right in confirming that the profit on sale of shares is to be assessed under the head “income business”
Contention of Assessee
The reopening of the assessment for the year 2006-07, invoking the power under section 147 of the Act, is illegal. That the grounds contemplated for re-opening an assessment under section 147 are not existing in this case. The assessee has been in the business since the assessment year 2002-03 and that till 2006-07, the income derived by the assessee from the sale and purchase of shares was accepted by the Department as capital gains and that by treating such income for the aforesaid three assessment years as business income, the Department has shown that it did not have consistency in the matter of assessment and treatment of income. That even after reopening the assessments for the year 2006-07 and completing the assessments for the years 2008-09 and 2010-11, the Department has left out assessments for the years 2007-08 and 2009-2010. Such picking and choosing some of the years and leaving out the remaining years when the assessee had returned loss is impermissible.
High Court decision / observations
1. The first issue that is required to be considered is the scope of the power of the Assessing Officer under section 147 of the Act. The expression ‘reason to believe’ incorporated in Section 147 by Act 3 of 1989 with effect from 1.4.1989 came up for the consideration of courts on various occasions. In Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd [(2007)291 ITR 500], the Apex Court examined this expression and held thus:
“Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word reason in the phrase reason to believe would mean cause orjustification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991 (191) ITR 662], for initiation of action under Section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is reason to believe, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm o subjective satisfaction (see ITO v. Selected Dalurband Coal Co. Pvt. Ltd. [1996 (217) ITR 597 (SC)]; Raymond Woollen Mills Ltd. v. ITO [1999 (236) ITR 34 (SC)].
2. Commissioner of Income Tax v. Kelvinator of India Ltd. [(2010) 228 CTR 488] is another case where the Apex Court had again considered the scope of this provision and it was held that one needs to give a schematic interpretation to the words ‘reason to believe’, failing which, section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of ‘mere change of opinion’ which may not be, per se, reason to re-open.
