HIGH COURT OF GUJARAT
Jayesh Raichand Shah
Assistant Commissioner of Income-tax
Special Civil Application Nos. 6830 & 6861 Of 2012
Date of Pronouncement – October 22, 2012
Akil Kureshi J.
Heard learned counsel for the respective parties for final disposal of the petitions. These petitions arise out of similar background involving the same assessee. We have heard these petitions together and propose to dispose them off by this common order.
2. The petitioner is common in both the petitions. He has challenged two separate notices issued by the Assessing Officer seeking to reopen the completed assessments for the assessment years 2007-08 and 2008-09 which assessments were framed after scrutiny. The petitioner is a proprietary concern and is engaged in the business of wholesale of gold and silver ornaments, labour job of gold and silver ornaments and trading in gold and hedging in metal on commodity exchange.
3. For the assessment year 2007-08, the petitioner had filed a return of income on 31-10-2007 declaring a total income of Rs. 1.92 crores (rounded off). Such return was taken in scrutiny assessment. The Assessing Officer framed the assessment under section 143(3) of the Income Tax Act, 1961 (‘the Act’, for short) on 24-12-2009 determining the total income at Rs. 1.95 crores (rounded off).
4. In the return that the petitioner had filed, he had claimed loss on hedging of metal in Multi Commodity Exchange (‘MCX’, for short) at Rs. 12.76 lakhs (rounded off). In the notes forming part of the accounts for the year under consideration, the assessee had stated as under:-
“During the year, the assessee has entered into transactions for trading in gold and silver futures on commodities exchange. The net amount payable/receivable based on contract notes and detailed bill reports, on account of buy and sells contracts during the year, shows a loss. Such loss shown is accounted as loss for the year, to the extent of bills upto year end, and is shown separately in trading account. We are informed that such contracts are settled otherwise than by delivery of respective commodity. Due to non-availability of information, an adjustment on account of open position, if any, is not made and it would be made at the time of settling of contracts. Such transactions have been shown by the assessee in the nature of hedging in metals.”
5. The accounts were supported by audit report as required under section 44AB of the Act. In such audit report, in the statement of particulars required to be furnished under Form 3CD, it was stated as under:-
|8.||(a) Nature of business or profession (if more than one business or profession is carried on during the previous year, nature of every business or profession)(b) If there is any change in the nature of business or profession, the particulars of such change.||Wholesaler of Gold and Silver Ornaments, Labour job of Gold and Silver Ornaments and trading in gold. Hedging in metal on commodity exchange.There is no change during the year.|
6. In the assessment order, the Assessing Officer noted that the assessee was involved besides in the business of wholesale of gold and silver ornaments and labour job of gold and silver ornaments, also in hedging in metal on commodity exchange. With respect to the assessee’s claim of hedging loss of Rs. 12.76 lakhs, however, there was no reference in the assessment order. In fact, it is an undisputed position that during the scrutiny assessment, there was no query raised by the Assessing Officer on this particular issue, obviously, therefore, the assessee also did not elaborate such loss claimed by him in the return filed.
7. It is this scrutiny assessment which the Assessing Officer desired to reopen for which he issued the impugned notice dated 10-10-2011 calling upon the petitioner to deliver within thirty days from the date of service of the notice, a return in the prescribed form.
8. At the request of the petitioner, the Assessing Officer supplied the reasons recorded by him for issuing the notice for reopening of the assessment. Such reasons read as under:
“Reasons for reopening of assessment.—In this case return of income for the A.Y. 2007-08 showing the income of Rs. 19243343/- was filed on 31/10/2007 and the assessment was finalized u/s 143(3) vide assessment order dtd. 24-12-2009 determining income at Rs. 19508730/-. Subsequently it was found that:
“In this case it is observed that the assessee has debited Rs.1276386/- towards “Loss of hedging of metal in MCX” in P&L A/c. The loss in hedging transactions carried out in the previous year is Speculative transaction as per the definition provided in section 43(5) of the Act. Considering the fact that Multi Commodity Exchange of India Ltd. (MCX) was notified as the recognized exchange only on and with effect from 22/5/2009 and therefore the transactions entered into the previous year 2006-07 were not covered by proviso (d) of section 43(5) of the Act. Thus the loss to the tune of Rs. 1276386/- incurred by the assessee in hedging activities were speculative in nature and disallowable in computing the total income.” This has resulted under assessment of Rs. 1276386/-.
In view of the above, I have reasons to believe that the income chargeable to tax to the extent above has escaped the assessment within the meaning of sec. 147 of the I.T. Act 1961.”
9. The petitioner raised his objections to such proposal of reopening under his communication dated 24-12-2011. Such objections were, however, rejected by the Assessing Officer under communication dated 4-1-2012. The petitioner has, therefore, approached this court challenging the very validity of the notice for reopening.
10. In Special Civil Application No. 6830/2012, facts are very similar. The petitioner had filed the return of income for the assessment year 2008-09 on 29-9-2008 declaring total income of Rs. 16.04 lakhs (rounded off). Such return was taken in scrutiny. The Assessing Officer framed scrutiny assessment under section 143(3) of the Act on 27-12-2010 determining total income of the assessee at Rs. 1.61 crores (rounded off).
11. In the return that the petitioner has filed, he had claimed hedging loss of Rs. 20.60 lakhs (rounded off). The Assessing Officer in the original assessment while rejecting the books of the assessee and computing the total income at a fair gross profit rate, had not examined the question of the hedging loss claimed by the assessee in the return.
12. It is this scrutiny assessment which the Assessing Officer desired to reopen for which he issued the impugned notice dated 24-11-2011. The reasons that the Assessing Officer had recorded for issuing such notice were supplied to the assessee which read as under:-
“Reasons for reopening of assessment: In this case the Return of Income showing income of Rs. 1604107/- was filed on 29/09/2008. The assessment was finalized u/s. 143(3) of the Act vide order dated 27/12/2010, determining the income at Rs. 16139361/-. Subsequently it is found that the assessee had debited the profit and loss account with “loss on hedging of metal on MCX” of Rs. 20,60,095. The losses in hedging transactions carried out in the previous year 2007-08 relevant to A.Y. 2008-09 was “speculative transaction” as per the definition provided in Section 43(5) of the Act in view of the fact that MCX Stock Exchange Ltd. (MCX) was notified as the recognized exchange only on and with effect from 22.5.2009. Thus, the losses to the tune of Rs. 20,60,095 incurred by assessee in hedging activity were speculative in nature and it was disallowable in computing the income under the head “profits and gains of business or profession” of the non-speculative business. However, the deduction claimed by the assessee by debiting in the Profit & Loss Account against “Income from business and profession” was not is allowed. Income-tax involved on the underassessment of Rs. 20,60,095/-
This resulted in underassessment of income of Rs. 20,60,095/-.
In view of the above I have reasons to believe that the income chargeable to tax to the extent above has escaped the assessment within the meaning of sec. 147 of the I.T. Act 1961.”
13. The petitioner raised his detailed objections under communication as at Annexure ‘G’ which was received by the Assessing Officer on 11-4-2012. Such objections were disposed of under communication dated 18-4-2012. The petitioner has, therefore, approached this court challenging the very notice for reopening the assessment.
14. From the above facts, it emerges that in both the years the assessments previously framed after scrutiny are sought to be reopened within a period of four years from the end of the relevant assessment years. The reasons recorded are also very similar. For the assessment year 2007-08, the reasons recorded specifically mention that the assessee was dealing in speculative transaction as covered under section 43(5) of the Act. Considering that MCX was notified as recognized exchange only with effect from 22-5-2009, the transaction would not be covered under the proviso (d) to section 43(5) of the Act and, therefore, the loss to the tune of Rs. 12.76 lakhs was not allowable as the same was incurred by the assessee in hedging activities which were speculative in nature. The language used for the reasons recorded for the assessment year 2008-09 is somewhat different. The thrust of the Assessing Officer’s argument, however remains the same. For the said year, he recorded that it was found that the assessee had debited the Profit & Loss Account with loss on hedging of metal on MCX of Rs. 20.60 lakhs. The losses of hedging transactions were out of speculative transactions. MCX Stock Exchange was notified as recognized exchange only with effect from 22-5-2009. Such losses to the tune of Rs. 20.60 lakhs were, therefore, not allowable.
15. Learned counsel Shri Hemani for the petitioner raised the following contentions in support of the challenge.
(1) That the transactions carried out by the assessee fell in clause (a) of the proviso to section 43(5) being hedging loss and not under clause (d) thereof which concerns the derivative transactions. The Assessing Officer erroneously treated such transactions as covered under clause (d) and thereby wrongly applied the exclusion clause. The very foundation that MCX not being recognized prior to 22-5-2009 and, therefore, such loss was not allowable was wholly invalid. Counsel, therefore, submitted that the entire basis for the Assessing Officer to form a belief that income chargeable to tax has escaped assessment was invalid.
(2) Counsel further submitted that during the assessments in both the assessment years, full facts were presented by the assessee before the Assessing Officer. The losses claimed were duly supported by the documents and the audited accounts. At no stage the Assessing Officer raised any question about the validity of such claim. In the assessment orders framed also, the Assessing Officer noted that the assessee was dealing in hedging transactions. He, therefore, submitted that the Assessing Officer should be seen to have formed an opinion with respect to such loss claimed in the original assessments and any attempt on his part to reopen the assessment at this stage would be based only on mere change of opinion.
(3) With respect to assessment year 2008-09, the counsel raised an additional contention namely, that the Assessing Officer having rejected the books of accounts of the assessee and having framed an assessment on best judgment, the question of further disallowing the the loss could not arise. He contended that the Assessing Officer having discarded the books of the assessee, the question of disallowing loss as claimed in such books thereafter would not arise.
16. On the other hand, learned counsel Shri Pranav Desai for the revenue opposed the petitions contending that at this stage when mere notice for reopening has been issued, all such contentions cannot be gone into. Only prima facie belief of the Assessing Officer is required to be examined. He submitted that in the original assessment, no opinion was formed by the Assessing Officer for reopening. The notice which has been issued within four years from the end of the relevant assessment year should, therefore, be upheld.
16.1 The counsel further submitted that whether the case of the assessee falls under clause (d) or clause (a) of sub-section (5) of section 43 of the Act is required to be examined. If the same falls under clause (d) by virtue of the fact that MCX was not recognized exchange till 22-5-2009, would be sufficient to reject the assessee’s claim. If the case of the assessee is that such loss was covered under clause (a) of sub-section (5), there are certain conditions required to be fulfilled. It would be necessary to examine whether such conditions in the present case have been fulfilled or not.
16.2 With respect to the assessment year 2008-09, counsel submitted that the Assessing Officer while adopting a fair G.P. ratio on the basis of the turnover of the assessee, had taken last three years of profit margin including the assessment year 2008-09. In such year, the Assessing Officer had accepted the declared G.P. rate of 10.59 and thereby arrived at an average of 18.31% of the total turnover by way of gross profit. In this manner, the loss claimed by the assessee is already reflected in the original assessment order.
17. Having thus heard learned counsel for the parties and having perused the documents on record, in view of the fact that the notice for reopening has been issued within a period of four years from the end of the relevant assessment year, the requirement that the income chargeable to tax had escaped assessment due to the reason of the assessee failing to disclose truly and fully all material facts for assessment is not required to be satisfied. Nevertheless, the requirement that such reopening cannot be based on mere change of opinion, would still be relevant as held by the Apex Court in the case of CIT v. Kelvinator of India Ltd.  320 ITR 561. Additionally, the ground that the Assessing Officer could not form such belief that income chargeable to tax has escaped assessment would also have to be examined.
18. Coming first to the question of the Assessing Officer previously having formed an opinion in the original assessments, we may recall that though the assessee had claimed such hedging losses in both the assessment years, the Assessing Officer in the original returns had not addressed such question and had proceeded to frame the assessments without addressing such claims. In the assessment order, there is no reference that the Assessing Officer examined such claim and either for the reasons recorded or otherwise, accepted the claim. During the assessment proceedings also, no questions were raised by the Assessing Officer with respect to such claims. In that view of the matter, we are unable to accept the contention of the counsel for the assessee that the Assessing Officer should be seen to have formed an opinion with respect to validity of such claims and that, therefore, any attempt on his part now to reopen such a question would be a mere change of opinion.
19. In a recent decision by this court dated 30-7-2012 in Special Civil Application No. 29792/2007, we had examined various aspects touching such an issue and come to following conclusion:-
“30. In the result, we are of the opinion that reopening of an assessment within a period of four years from the end of relevant assessment year after 1.4.1989 could be made as long as the same is not based on mere change of opinion. Merely because a certain material which is otherwise tangible and enables the Assessing Officer to form a belief that income chargeable to tax has escaped assessment, formed part of original assessment record, per se would not bar the Assessing Officer from reopening the assessment on the basis of such material. Expression “tangible material” does not mean material alien to the original record.”
20. The main contention of the counsel for the petitioner that the reasons recorded do not disclose any belief on the part of the Assessing Officer that income chargeable to tax has escaped assessment still requires to be addressed. In this context, we may recall that the assessee having claimed the hedging loss in two consecutive years, the Assessing Officer has recorded reasons for reopening such a claim on the ground that the same was not allowable in terms of clause (d) of section 43(5) of the Act since MCX was not a recognized exchange till the notification was issued on 22-5-2009. We may notice that the assessee who has been dealing in wholesale of gold and silver ornaments, labour job of gold and silver ornaments and also hedging in metal on commodity exchange, had claimed that while undertaking such hedging, in both the years he suffered certain losses. The case of the assessee is that such loss would be covered in clause (a) of section 43(5) and not clause (d) thereof. To appreciate such controversy, we may take note of the statutory provision. Section 43 defines certain terms relevant to income from profit and gains from business or profession for the purpose of section 28 to 41 unless the context otherwise requires. Sub-section (5) thereof provides for a definition of “speculative transaction”. Relevant portion thereof reads as under:-
(5) “speculative transaction” means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips:
Provided that for the purposes of this clause –
(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or
(b) an eligible transaction in respect of trading in derivatives referred to in clause [(ac)] of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange;]
21. From the above provision, it can be seen that “speculative transaction” means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. It is not in dispute that ordinarily the transactions entered into by the petitioner in hedging would fall under such definition of speculative transaction. However, sub-section (5) contains several exclusion clauses under the proviso containing clauses (a) to (d). Clause (a) of the said proviso excludes a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him. Clause (a) thus covers hedging losses. Clause (d) on the other hand refers to an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 which is carried out in a recognized stock exchange.
22. From the outset, the petitioner has been claiming that he is dealing in hedging besides in the wholesale business of gold and silver ornaments. To insure against price fluctuations, he has been hedging in such metals in MCX. The claim of the assessee, therefore, had to be examined in terms of clause (a) to sub-section (5) to section 43 of the Act. If for some reason such claim was not sustainable, it was open for the Assessing Officer in the original assessment to discard the same. If for valid reasons recorded, the Assessing Officer formed a prima facie belief that even after the completed assessment when where such claim was never examined, the same was not required to be accepted in terms of clause (a) to the proviso, he could have perhaps done so. However, this is not the situation presented before us. The Assessing Officer, however, pitched his case under exclusion clause (d) proviso to sub-section (5). According to the Assessing Officer, the transaction was one which was covered under clause (d). While elaborating, the Assessing Officer in the reasons recorded noted that the MCX not being recognized till 22-5-2009, such exclusion would not be available.
23. To our mind, such reason would not clothe the Assessing Officer with the jurisdiction to re-open the assessment. It is trite law that the notice for reopening must stand or fail on the basis of reasons recorded by the Assessing Officer for issuing such a notice. This does not require any case law in support, however, this court in the case of Aayojan Developers v. ITO  335 ITR 234 reiterated this proposition. If, therefore, the reasons are appreciated as recorded by the Assessing Officer, the transaction being one covered under clause (d) to sub-section (5), in absence of any recognition of MCX till 22-5-2009, the loss would continue to be treated as arising out of speculative transaction. To our mind, this is based on complete misconception. The assessee never claimed such transaction to be one arising out of trading in derivatives requiring therefore any recognition of the stock exchange i.e. MCX in which such transactions had taken place. From the beginning, the case of the assessee was that he was insuring himself against losses due to fluctuation of precious material by entering into hedging contracts. Thus, clearly the case of the assessee was that by virtue of clause (a) of sub-section (5) of section 43, the same would not be treated as speculative transaction. It is not the case of the Assessing Officer in the reasons recorded for reopening the assessment that for any particular reason such claim under clause (a) was not acceptable. On the basis of the reasons recorded, therefore, the impugned notices for reopening must fail. As already noted, the counsel for revenue yet made an attempt to argue that the assessee’s claim for exclusion by virtue of clause (a) of sub-section (5) was not verified and required certain verifications. We are conscious that for a transaction of hedging to fall under clause (a), there are certain conditions to be fulfilled. However, we are afraid such a contention cannot be accepted for two reasons. Firstly, any attempt on the part of the Assessing Officer now to fall back on the conditions required to be satisfied for application of clause (a) would amount to change of reasons recorded for reopening. Secondly, any such inquiry would be wholly a fishing inquiry. It is not the case of the Assessing Officer in the reasons recorded that the hedging transactions did not satisfy such conditions and therefore the case did not fall under clause (a). It is thus presently, at least, not even the case of the Assessing Officer that the assessee not fulfilling the requirements contained in clause (a) of sub-section (5), such loss should be treated as arising out of speculative transaction. That the exclusion contained in clause (a) would not be available and the transaction, therefore, should be treated as speculative transaction as defined in clause (d) of sub-section (5) to section 43. In light of the above reasons, we do not propose to go into the third additional contention with respect to the assessment year 2008-09 raised by the counsel for the petitioner that the Assessing Officer having rejected the books and independently computed the income, the question of disallowing the loss thereafter would not arise. We keep such question open.
24. In the result, both the petitions are allowed. The impugned notices are quashed.