Brief of the case
In Mohan Jhangiani vs ACIT, Kolkata Tribunal held that Non-consideration of the relevant provisions of the Act while forming a belief that income has escaped assessment is not permissible as per law. Further, the assumption of jurisdiction u/s 147 by the Learned AO is based only on change of opinion and made without any tangible material on record, hence the reopening of assessment u/s 148 and consequential reassessment order passed u/s 147 is bad in law.
Fact of the Case
The assessee was a shareholder and director in two companies namely PAN Services Pvt Ltd and Cemcoat India Pvt Ltd. The said companies choose to avail the easy exit scheme brought out by the Ministry of Corporate Affairs in view of no running business operations. The Companies went into liquidation in accordance with the provision of the Companies Act, 1956 and shares held by the assessee got extinguished. Admittedly, no consideration was paid by the companies to the shareholder and accordingly the assessee claimed the long term capital loss duly indexed amounting to Rs. 3,48,579/- to be eligible to be carried forward to subsequent years. The detailed workings of the same had been filed along with the return of income by the assessee. The Assessment was completed u/s 143(3) of the Act accepting the income returned. No finding was given in the said assessment order with regard to examination of the veracity of the long term capital loss claimed by the assessee and with regard to the eligibility of the same to be carried forward to subsequent years. Later this assessment was sought to be reopened by issuance of notice u/s 148 of the Act and loss claim by the assessee disallowed by the A.O which was upheld by the Learned CIT(A). Aggrieved, the assessee filed appeal before Tribunal.
Contention of Assessee
The Ld. AR argued that the relevant provisions to be looked into in the facts of the case is section 46(2) of the Act which has not been applied by the Learned AO while forming an opinion of reason to believe that income has escaped. He further argued that formation of belief for reopening the assessment without considering the relevant provisions of the Act is bad in law. He placed reliance on the decision of the Gujarat High Court in the case of Devesh Metcast Ltd vs JCIT reported in (2011) 338 ITR 130 (Guj) in support of this contention. He further argued that the provision of section 46(2) of the Act is a deeming provision and hence full effect has to be given to the same. As per sec 46(2), the capital gain arising out of extinguishment of capital assets pursuant to liquidation of company shall be chargeable to tax in the hands of the shareholders as company could not be in existence after liquidation. In this regard, he placed reliance on the decision of Gujarat High Court in the case of CIT vs Jaykrishna Harivallabhdas reported in (2000) 112 Taxman 683 (Guj) in support of this contention. He further argued that the reopening is bad in law in the facts of the case as even though it is done within 4 years but still all the details were already on record before the Learned AO and hence there is no tangible material with the Learned AO which enables him to form an opinion that income has escaped assessment. It only amounts to revisiting of existing materials already available on record which is not permissible in law. Hence it only amounts to change of opinion.
Contention of Revenue
The Learned DR argued that the assessee as a director had filed affidavit before the Registrar of Companies that there are no liabilities exist in the company as on the date of filing of application. Hence it could be concluded that the assessee had received consideration for his extinguishment of rights in the shares held by him which was not disclosed by the assessee and hence the long term capital loss could not be allowed to be carried forward.
Held by Tribunal
The Tribunal found that the provisions of section 46(2) of the Act are squarely applicable in the facts of the instant case. Hence the Learned AO had reopened the assessment without considering the provisions of section 46(2) of the Act and hence his basic formation of belief that income has escaped assessment fails. It is settled law that formation of belief by the Learned AO should have direct nexus with the provisions of the Act and in this case, it fails directly. Non-consideration of the relevant provisions of the Act while forming a belief that income has escaped assessment is not permissible as per law. In this regard, the reliance on the decision of Gujarat High Court in the case of Devesh Metcast Ltd vs JCIT reported in (2011) 338 ITR 130 (Guj) is very well placed and is directly on the point, wherein it was held that:-
19. As submitted by the learned counsel for the respondent, it may be that the Assessing Officer has reopened the assessment under an honest belief that income chargeable to tax has indeed escaped assessment, however, if such honest belief is entertained on an erroneous interpretation of the relevant statutory provisions, the assessee should not be required to face the rigours of reassessment merely because the Assessing Officer entertains an honest belief. Such honest belief should be based upon the material on record and should, in fact, give rise to the belief that income has escaped assessment.
Further, when the fact of liquidation is not disputed on record and there is no evidence brought on record as to whether any consideration was indeed received by the assessee on extinguishment of rights in shares, the assessee’s claim of long term capital loss needs to be allowed to carry forward to subsequent years. In this regard, reliance on the decision of Gujarat High Court in the case of CIT vs Jaykrishna Harivallabhdas reported in (2000) 112 Taxman 683 (Guj) is very well placed and is directly on the impugned issue. The instant case was concerned with the return of capital of shareholder, which is a final act in the process of winding up. The conclusion reached was that even extinguishment of the right of a shareholder amounts to transfer for the purposes of section 48. In a case where nothing is distributed on liquidation of a company, the extinction of rights would result in total loss with no consequence. A shareholder who has incurred total loss in a transaction of sale of shares would be entitled to claim set-off or carry forward as the cased may be, in respect of capital loss suffered by virtue of section 45 read with section 48, 71 and 74. There is, therefore, no reason why a shareholder, who is in distribution of assets has not received any deemed consideration in satisfaction of his rights and interests in the holding and has thereby suffered a total loss, cannot claim the benefit of set-off or carry forward of the loss suffered by him.
The Tribunal also found that the Learned AO had originally completed the assessment u/s 143(3) of the Act and the details of computation of long term capital loss is part and parcel of the memo of income filed along with the return of income by the assessee. Even though the reopening in this case was done within the period of 4 years, we find that there is absolutely no tangible material available with the Learned AO to come to a conclusion that income has escaped assessment. It only amounts to revisiting of the existing materials already available on record. It only amounts to change of opinion on which ground reopening is not permissible as per law. In support, reliance was placed on the decision of CIT vs. Kelvinator of India Ltd.  320 ITR 561 (SC), CIT vs. Bhanji Lavji  79 ITR 582 (SC) and CIT-Central I vs M/s Kanoi Industries (P) Ltd in ITA No. 108 of 2012 dated 15.6.2012 rendered by the Jurisdictional Calcutta High Court.
Respectfully following the judicial precedents on the impugned subject including that of Supreme Court, Jurisdictional High Court and other High Courts, reassessment order passed u/s 147 was held to be bad in law and accordingly the reassessment proceedings stand quashed.