Case Law Details
Brief of the Case
Bombay High Court held In the case of Nirmal Bang Securities Pvt. Ltd. vs. ACIT that section 10(33) provides that any income by way of (i) dividends referred to in section 115-O; or (ii) income received in respect of the units from the Unit Trust of India established under the Unit Trust of India Act, 1963; or (iii) income received in respect of units of a mutual fund specified under section 10(23D), shall be exempt from tax. The proviso to section 10(33) stipulates that this clause shall not apply to any income arising from transfer of units of the Unit Trust of India or of a mutual fund, as the case may be. From these provision, it is clear in the facts of the present case that the proviso to section 10(33) could never apply to the dividend income earned by the Petitioner. In the facts of the present case, dividend received by the Petitioner does not arise from the transfer of units of the mutual fund but arises by virtue of the fact that those units were held by the Petitioner. We are therefore view that the Assessing Officer could have no reason to believe that the dividend income earned by the Petitioner from the mutual funds had escaped assessment. As stipulated in section 10(33), the said income was exempt and therefore could not have been brought to tax. Thus the impugned notice is also without jurisdiction as the Assessing Officer could have had no reason to believe that income chargeable to tax had escaped assessment.
Facts of the Case
In respect of A. Y. 2000-2001, the Petitioner filed a return of income on 27th November, 2000 by which it returned a total income of Rs.6,70,66,640/-.The said return was accompanied by a copy of the Petitioner’s audited accounts for the year ending 31st March, 2000.In the return, the Petitioner has stated by way of a note that it had earned dividend income of Rs.3,38,45,293/- which was fully exempt from tax under section 10(33) of the Act. Similarly, in the profit and loss account, the Petitioner had disclosed in Schedule ‘M’ that it had earned dividend income of Rs.3,38,45,293/-.
Thereafter, notices were issued under section 143(2) of the Act dated 27th August, 2002 and 12th November, 2002 whereby certain queries were raised by the Assessing Officer. In reply to the aforesaid notices, the Petitioner addressed a letter dated 22nd November, 2002 wherein details with reference to secured loans, IPO, share application money, dividend received, inventory etc. were forwarded. After the queries raised by Revenue were answered by the Petitioner, Revenue passed an assessment order under section 143(3) of the Act dated 31st March, 2003 by which the total income of the Petitioner was assessed at Rs.6,81,54,960/-.In determining the above income, Respondent No.1 noted that the Petitioner had borrowed money to invest in mutual funds and earned dividend there from. He took the view that interest on the said borrowings computed at Rs.3.49 lakhs had to be disallowed under section 14A. However, he specifically noted that the Petitioner had earned dividend income of Rs.3,38,45,293/- which was exempt from tax.
In the meanwhile, a search action under section 132(1) was carried out on 23rd March, 2001 in the case of the Petitioner and block assessment proceedings were commenced against it for the period from 1st April, 1991 to 23rd March, 2001. As can be seen from a perusal of the block assessment order, after considering the objections of the Petitioner, Revenue took the view that the Petitioner was showing a loss on account of purchase and sale of units of mutual funds on the one hand when he was getting a similar amount of dividend which he can claim exempt from tax under section 10(33) of the Act, on the other. In this view of the matter, Revenue held that the Petitioner had entered into a transaction of “dividend stripping” and accordingly, while the dividend received by the Petitioner in the A.Y. 2000-2001 was exempt from tax under section 10(33) of the Act, the loss of Rs.3,70,36,638/- suffered by the Petitioner on the sale of the units of the three mutual funds was disallowed.
Further Revenue issued the impugned notice dated 30th March, 2007 under section 148 of the Act wherein it was stated that Respondent No.1 had reason to believe that the Petitioner’s income chargeable to tax for A.Y. 2000-2001 had escaped assessment within the meaning of section 147 of the Act. Revenue accordingly directed the Petitioner to deliver to him within 30 days a return in the prescribed form for the subject Assessment Year. Finally Revenue passed the impugned order dated 5th December, 2007 by which he rejected the objections of the Petitioner and held that he had reason to believe that the income of Rs.3,31,15,313.49 had escaped assessment for the A.Y. 2000-01.
Contention of Assessee
The ld counsel of the assessee submitted that admittedly in the facts of the present case, the impugned notice issued under section 148 of the Act to initiate reassessment proceedings for A. Y. 2000-2001 was beyond the period of four years. He therefore submitted that: – the condition precedent to initiate reassessment proceedings under section 148 after a period of four years from the end of the relevant assessment year was only if there was a failure on the part of the assessee to make a return under sections 139 or 142(1) or 148 of the Act or a failure to disclose fully and truly all material facts necessary for his assessment for that Assessment Year. In the present case, the reasons recorded for re-opening the assessment do not even allege that there was any failure on the part of the Petitioner to disclose truly and fully any material fact in the regular assessment proceedings. In fact there was a full and true disclosure of all material facts necessary for assessment during the regular assessment proceedings for A. Y. 2000-2001.
In any event, Revenue had already considered this issue in the regular assessment proceedings leading to an assessment under section 143(3) of the Act and came to the conclusion that the dividend income received by the Petitioner from the aforesaid three mutual funds was exempt from tax under section 10(33) of the Act. Therefore the re-opening of the assessment proceedings for A. Y. 2000-2001 was merely on the basis of a change of opinion which was impermissible in law. He further submitted that in any event, re-assessment could not have been proposed as in the present facts there could be no reason to believe that income has escaped assessment. In terms of section 10(33) as amended by the Finance Act, 2001 w.e.f. 1st April 2000, income received in respect of units of a mutual fund specified under clause 10(23D) of the Act were exempt from tax. In this case it is undisputed that the mutual funds in question are specified mutual funds. The proviso to the said section applies only to income arising from transfer of units of a mutual fund and not to the dividend earned by holding such units. In the present case, the Petitioner had earned dividend income by holding the units of the aforesaid three mutual funds and not by its transfer. Thus, in the face of this clear position in law, there could be no reason to believe that income chargeable to tax had escaped assessment. For these submissions, he relied upon the following two judgments – Hindustan Lever Ltd. v/s R.B. Wadkar, Assistant Commissioner of Income-Tax and others (2004) 268 ITR 332 and CIT – 17, Mumbai v/s M/s K. Mohan and Co. (Exports) (Reg.) (ITXA (L) No.2347 of 2010) decided on 1st July 2011.
Contention of the Revenue
The ld counsel of the revenue submitted that the reasons recorded for initiation of reassessment proceedings under section 148 of the Act do indicate a failure to disclose fully and truly all material facts necessary for assessment. Thus the notice is within jurisdiction. It is not necessary to specifically mention the words “there was a failure to disclose truly and fully all material facts necessary for assessment” in the reasons recorded. This is particularly so as on a holistic reading of the reasons recorded for reopening the assessment for A. Y. 2000-2001, there was a failure on the part of the Petitioner to fully and truly disclose all material facts relating dividend income received by the Petitioner during the subject Assessment Year.
The reassessment proceedings were rightly initiated on the basis of material facts which came to the notice of the Assessing Officer subsequent to the completion of the regular assessment proceedings under section 143(3) of the Act as mentioned in the reasons recorded for re-opening the case of the Petitioner. Thus there was a failure to disclose fully and truly all material facts necessary for assessment. He further submitted that in the present facts there was no change of opinion as in the absence of all facts being disclosed truly and fully in the regular assessment proceedings, there could be no formation of an opinion.
Held by ITAT
The ITAT by its order dated 28th February, 2006 allowed the appeal of the Petitioner and held that Revenue was not justified in disallowing the loss suffered by the Petitioner from the redemption of the units of the mutual funds held by it. Whilst coming to this conclusion, the ITAT followed the decision of a five member Special Bench of the Tribunal in the case of Wallfort Shares and Stock Brokers Ltd. v/s ITO 96 ITD 1 (Mum)(SB).
Held by High Court
High Court held that in the present case, admittedly, the assessment had been made under section 143(3) for A.Y. 2000-2001. It is also admitted that the reassessment proceedings initiated for A.Y. 2000-2001 was after the expiry of four years from the end of the said Assessment Year. In such a scenario, as per the first proviso to section 147, no action for initiation of reassessment proceedings for A.Y. 2000-2001 could have been taken unless the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment by reason of a failure on the part of the Petitioner to disclose fully and truly all material facts necessary for assessment. A bare reading of the reasons would ex-facie show that there was not even an allegation in the said reasons that there was any failure on the part of the Petitioner to disclose any material fact, let alone the details thereof, which led to any income escaping assessment. Moreover, even on a holistic reading of the reasons recorded it cannot be said that it suggests any failure on the part of the Petitioner to disclose truly and fully all material facts necessary for assessment.
It is now well settled that the reasons which are recorded by the Assessing Officer for re-opening an assessment are the only reasons which could be considered. No substitution or deletion is permissible. No addition can be made to those reasons and no inference can be allowed to be drawn based on reasons not recorded. The reasons which are recorded by the Assessing Officer for re-opening the assessment are the only reasons which could be considered when the formation of the belief is impugned. The requirement of recording reasons is a check against arbitrary exercise of power, for it is on the basis of the reasons recorded and those reasons alone that the validity of the notice for re-opening an assessment can be sustained. The reasons cannot be allowed to grow with age and ingenuity by devising and/or supplementing additional reasons in replies and affidavits not envisaged in the reasons recorded for re-opening the assessment. In this regard judgment of this Court in the case of Hindustan Lever Ltd. (2004) 268 ITR 332 is well founded. Same views were taken in the case of Prashant S. Joshi v/s Income Tax Officer and another (2010) 325 ITR 154.
In view of the aforesaid well settled legal position and there admittedly being not even an allegation in the reasons recorded that there was any failure on the part of the Petitioner to disclose truly and fully any material fact necessary for assessment, let alone the details thereof, the impugned notice dated 30th March, 2007 and the impugned order dated 5th December, 2007 are liable to be quashed and set aside on this ground alone.
Further Section 10 falls under Chapter III and stipulates that in computing the total income of a previous year of any person, any income falling within any of the clauses mentioned therein shall not be included. Section 10(33) provides that any income by way of (i) dividends referred to in section 115-O; or (ii) income received in respect of the units from the Unit Trust of India established under the Unit Trust of India Act, 1963; or (iii) income received in respect of units of a mutual fund specified under section 10(23D), shall be exempt from tax. The proviso to section 10(33) stipulates that this clause shall not apply to any income arising from transfer of units of the Unit Trust of India or of a mutual fund, as the case may be. On an ex-facie reading of the said provision, it is clear in the facts of the present case that the proviso to section 10(33) could never apply to the dividend income earned by the Petitioner. In the facts of the present case, dividend received by the Petitioner does not arise from the transfer of units of the mutual fund but arises by virtue of the fact that those units were held by the Petitioner. We are therefore clearly of the view that the Assessing Officer could have no reason to believe that the dividend income earned by the Petitioner from the aforesaid three mutual funds had escaped assessment. As stipulated in section 10(33), the said income was exempt and therefore could not have been brought to tax. Thus the impugned notice is also without jurisdiction as the Assessing Officer could have had no reason to believe that income chargeable to tax had escaped assessment.
Accordingly, appeal of the assessee allowed.
