Reasons are required to be recorded by the AO on valid material and an assessment cannot be reopened on mere assumptions

Weizmann Capital Ltd. Vs ACIT (ITAT Mumbai)- The income, which the Assessing Officer initially formed a reason to believe had escaped assessment, has as a matter of fact, not escaped assessment, it is not open to the Assessing Officer independently to assess some other income. In the present case, the Assessing Officer reopened the assessment for the reason to believe that there is diminution in the value of shares but it is not correct and while making assessment the Assessing Officer had made an assessment on a different ground that the loss claimed by the assessee is not capital loss and it is a speculative loss.

If we apply the ratio laid down by the Honourable jurisdictional High court to the facts of the case under consideration, the addition made by the AO cannot be sustained. We, therefore, delete the addition made on this count.

When the facts are available on record, the Tribunal has the power to admit a legal ground raised even for the first time before the Tribunal.

Weizmann Capital Ltd. Vs Asst. Commissioner of Income Tax

In The Income Tax Appellate Tribunal

Mumbai Bench “0”, Mumbai

ITA No. 7136/Mum/2006

Assessment Year: 1999- 2000      

Decided on: 27 May 2011

ORDER

PER V. DURGA RAO, J.M.:

This appeal filed by the assessee is directed against the order of CIT(A)- XIV, Mumbai, passed on 2/11/2006 for the assessment year 1999-2000.

2. The assessee raised an additional ground, for the first time before the Tribunal, which reads as under:-

“On the facts and circumstances of the case and in law, the Honourable CIT(A) erred in upholding the re-opening u/s 148 of the Act. The Honourable CIT(A) ought to have held that reasons recorded by the Assessing Officer are not in conformity with the provisions of section 148 of the Act and hence resultant assessment order is null and void”.

3. The learned counsel for the assessee has submitted that this is a legal ground, which goes to the route of the matter and for adjudication of the said additional ground, all the facts are available on record, therefore, no further investigation on facts are required and, hence, the same may be admitted. It is submitted that when the facts are available on record, Tribunal have powers to admit a legal ground raised even for the first time before the Tribunal. For the above submission, he relied on the judgement in the case of National Thermal Power Corporation Vs. CIT, 229 ITR 383 (SC), Jute Corporation of India Ltd. Vs. CIT, 187 ITR 688 (SC) and Ahmedabad Electricity Co. Vs. CIT, 199 ITR 315 (Bom.)(Full Bench).

4. The learned Departmental Representative, on the other hand, has strongly objected for admission of additional ground raised by the assessee.

5. We have heard both the sides and perused the record as well as gone through the orders of the authorities below. The point for consideration is whether the additional ground raised by the assessee is admissible at this stage or not ?The additional ground raised by the assessee is with regard to the validity of reopening u/s 147 of the Act. The reasons recorded by the Assessing Officer for reopening assessment are available on record and all the facts are also available on record, therefore, by taking into consideration the law laid down by the Honourable Supreme Court in the case of National Thermal Power Corporation Vs. CIT, (supra) the additional ground raised by the assessee is hereby admitted. Now we proceed to adjudicate the additional ground raised by the assessee in respect of legal issue, which has been admitted by us for adjudication.

6. Briefly the facts of the case are that the assessee company is engaged in the business of merchant banking and trading of shares. The assessee filed its return of income declaring loss of Rs. 9,25,052/- and the same was processed u/s 143(1) of the Act, on 16/10/2010. Subsequently, the assessment was reopened by issuing a notice u/s 148 of the Act on 14/05/2003 on the ground that the certain income of the assessee had escaped assessment. On being asked to explain as to why the capital loss should not be treated as speculation loss and thereby under the set off done by the assessee against interest income, it was explained that the loss resulted in short term capital loss and not speculation loss. The Assessing Officer did not accept the claim of the assessee and held that the loss resulting from any share trading done by the assessee is not capital loss but it is speculation loss. Accordingly, applying the provisions of section 73 of the Act, the set off amount of Rs. 32,16,005/- was added back by the AO to the total income of the assessee and the remaining amount of Rs. 9,17,095/- was allowed to be carried forward as speculative loss for the subsequent years. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) confirmed the order of Assessing Officer on the ground that the entire transaction was not genuine transaction and the loss claimed on account of sale at Rs. 41,32,100/- deserved to be disallowed. Still aggrieved, the assessee is in appeal before the ITAT.

7. The learned counsel for the assessee has submitted that the reason for reopening of assessment is on the ground that there is a diminution in the value of stock of Rs. 2,70,22,375/-, in fact, there is no diminution of value and the AO himself noted that there is increase in stock. Therefore, the learned counsel contended that the reasons recorded by the AO were not correct and the reopening is bad in law. For the above proposition, the learned counsel relied upon the following case laws:-

1. Hindustan lever Ltd. Vs. RB Wadekar & others, 268 ITR 332 (Bom.)

2. Prashant S. Joshi and Others vide WP No. 2287 of 2009 and others, judgement by Bombay High Court.

3. Smt. Maniben Lalji Shah, 283 ITR 453 (Bom.)

4. CIT Vs. Jet Airways (I) Ltd, [2010] 195 Taxman 117 (Bom.)

8. On the other hand, the learned DR has submitted that the entire reasons recorded by the AO has to be read together to form an opinion that whether there is an escapement of income or not. He further submitted that in this case the AO has rightly formed an opinion and the learned DR has strongly supported by the reopening assessment made by the AO.

9. We have heard the learned representatives of the parties, perused the record and gone through the orders of the authorities below as well as decisions cited. The main legal issue involved in this appeal is whether the reasons recorded by the AO for reopening of assessment are valid u/s 148 or not. To examine the issue, tt is relevant to reproduce the reasons recorded by the AO, which are as under:-

Assessee’s company is engaged in the business of merchant banking. Assessee company filed return of income on 30/10/1999 declaring loss of Rs. 9,25,050/-. From the break up of the operating income shown by the assessee company it is seen that operating income consist of following different heads:-

From this break up it is clear that assessee company’s main activity is dealing in shares/stock and securities. From the quantitative details of shares and securities submitted along with the return of income, it is seen that there is diminution in the value of the stocks of Rs. 2,70,22,375/-. There is income on account of interest received of Rs. 48,24,787/- + interest on FDR of Rs. 400/- & expenses on account of interest paid of Rs. 16,09,182/- i.e. net income on account of interest is Rs. 32,16,005/-. As assessee company’s main business is dealing in shares & securities, the assessee company is covered under explanation to section 73 of the Act, 1961. The diminution in value of share/stock is speculative in nature, hence diminution in value of the share/stock being speculative loss cannot be set off against income from non-speculative activities. Assessee company has set off net interest income of Rs. 32,16,005/- against diminution in the value of the shares/ stock. Hence, I have reasons to believe that the amount of Rs. 32,16,005/- chargeable to tax has escaped assessment for Ay 1999-2000. Hence, the case is reopened u/s 147 of the Act. Issue of notice u/s 148 of the Act.”

10. On perusal of the above reasons recorded by the AO, we find that the reason for reopening of assessment was that there is a diminution in the value of stock of Rs. 2,70,22,375/-, it is speculative in nature, therefore, it cannot be set off against non-speculative activities. However, during the course of reopening assessment proceedings, the AO made an addition on the ground that the capital loss claimed by the assessee is not allowable in the light of the Explanation to section 73 and disallowed the claim of the assessee. On perusal of reopening assessment order, it is clear that no addition was made by the AO on the ground on which reopening made by him.

11. The Honourable Bombay High Court in the case of Hindustan Lever Ltd., 268 ITR 332 observed that in order to reopen the assessment AO should have valid reasons to doubt the correctness of the return filed by the assessee. In other words, reasons are required to be recorded by the AO on valid material and assessment cannot be reopened on mere assumptions.

12. In the instant case, the AO has ultimately not completed the assessment on the strength of the reasons recorded for the reopening of the assessment but altogether on different grounds and hence reopening of assessment is bad in law. Similarly, in the case of Smt. Maniben Lalji Shah, 283 ITR 453, the Hon’ble Bombay High Court had taken into consideration the principle laid down by the Apex Court in the case of Ganga Saran & Sons P. Ltd., Vs. ITO, 130 ITR 1 to hold that at the time of issuance of notice the AO should have proper basis to entertain a belief that any part of the income of the assessee has escaped assessment and reopening cannot be made merely to collect further details. The Apex Court, in turn, observed that the belief entertained by an AO must not be arbitrary or irrational and it must be reasonable; Though the Court cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the AO in coming to the belief, Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain belief, before issuing a notice for reopening of assessment. The Apex Court further observed that if there is no rational and intelligible nexus between the reasons and the belief, the conclusion would be inescapable that the AO could not have reason to believe that any part of the income of the assessee had escaped assessment, in which event notice issued by the AO would be liable to be struck-down as invalid.

13. The Honourable Jurisdictional High Court in the case of Prashant S. Joshi & Others V. ITO vide W.P. No. 2287 of 2009 and others, judgement dated 22nd February, 2010 observed as under:-

“Section 147 provides that if the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to the provisions of sections 148 to 163, assess or reassess such income and also any other income chargeable to tax, which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section. The first proviso to section 147 has no application in the facts of this case. The basic postulate which underlines section 147 is the formation of the belief by the AO that any income chargeable to tax has escaped assessment for any assessment year. 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. For it is on the basis of the reasons recorded and on those reasons alone that the validity of the order reopening the assessment is to be decided. 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. The principle of law, therefore, is well settled that the question as to whether there was reason to believe, within the meaning of section 147 that income has escaped assessment, must be determined with reference to the reasons recorded by the AO. The reasons which are recorded cannot be supplemented by affidavits. The imposition of that requirement ensures against an arbitrary exercise of powers under section 148.

14. In the present case, the reason for reopening was diminution of value in the stock and in fact the AO himself has noted that there is increase in stock. Therefore, it appears from the reasons that the AO without applying his mind properly, issued notice u/s 148 of the Act. The very basis for reopening of assessment is mere assumption of the AO and the reopening cannot be sustained on the assumptions and surmises and he never cared to verify the factual position correctly. In view of the above facts and circumstances of the case and following the judicial precedents, we hold that the reopening of assessment made by the AO is invalid and liable to be quashed.

15. In so far as the addition made by the AO in respect of set off claimed by the assessee is not warranted in the light of the Honourable Jurisdictional High Court in the case of CIT Vs. Jet Airways (I) Ltd., [2010] 195 Taxman 117 (Bom.) wherein similar legal issue came up for consideration before the Honourable Court and the Court in its order vide para No. 16 held as under:-

“Explanation 3 lifts embargo, which was inserted by judicial interpretation, on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued under section 148 setting out the reasons for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the Assessing Officer could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of Explanation 3 by the Finance Act (No.2) of 2009. However, Explanation 3 does not and cannot override the necessity of fulfilling conditions set out in the substantive part of section 147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Section 147 has this effect that the Assessing Officer has to assess or reassess the income (‘such income’) which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which, comes to his notice during the course of the proceedings. However, if after issuing a notice under section 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under section 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee.”

16. As per the above decision, the income, which the Assessing Officer initially formed a reason to believe had escaped assessment, has as a matter of fact, not escaped assessment, it is not open to the Assessing Officer independently to assess some other income. In the present case, the Assessing Officer reopened the assessment for the reason to believe that there is diminution in the value of shares but it is not correct and while making assessment the Assessing Officer had made an assessment on a different ground that the loss claimed by the assessee is not capital loss and it is a speculative loss. If we apply the ratio laid down by the Hon’ble jurisdictional High court to the facts of the case under consideration, the addition made by the AO cannot be sustained. We, therefore, delete the addition made on this count.

17. Since, the legal issue of reopening of assessment itself is quashed, the original grounds raised by the assessee are not required to be adjudicated by us.

18. In the result, the appeal of the assessee is allowed.

Pronounced in the open court on this day of 27^th May, 2011.