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Mohan Jhangiani Versus A.C.I.T Cir-32, Kolkata

2015 (12) TMI 36 - ITAT KOLKATA

Reopening of assessment - computation of long term capital loss - Held that:- 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 es .....

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ence the reopening of assessment u/s 148 and consequential reassessment order passed u/s 147 is bad in law and accordingly the reassessment proceedings stand quashed. - Decided of assessee. - ITA No. 1039/Kol/2011 - Dated:- 6-11-2015 - Shri N.V. Vasudevan, Judicial Member, and Shri Shri M. Balaganesh, Accountant Member For The Appellant : Shri D. S Damble, FCA, ld.AR For The Respondent: Shri Debasish Banerjee, JCIT/ ld.DR ORDER SHRI M.BALAGANESH, AM This appeal of the assessee arises out of the .....

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rein. The grounds raised by the assessee on assumption of jurisdiction is reframed as under:- Whether, in the facts and circumstances of the case, the action of the Learned AO in reopening the assessment within the meaning of section 147 of the Act when the details of claim of long term capital loss of ₹ 3,48,579/- arising out of extinguishment of assessee s rights as a shareholder were filed in the return of income itself, more so, when the original assessment has been completed u/s 143(3 .....

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ught out by the Ministry of Corporate Affairs, wherein pursuant to the application made thereon, the name of the companies would be struck off from the records of the Registrar of Companies in terms of section 560 of the Companies Act, 1956. The said scheme mandates that there should not be any asset or liability in the balance sheet and balance sheet should only contain share capital of the companies in the liabilities side represented by the accumulated losses in the asset side. The companies .....

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pleted 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. 3.2. Later this assessment was sought to be reopened by issuance of notice u/s 148 of the Act. In the reassessment proceedings, the Learned AO found that the affidavits were filed by the assessee in the .....

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e is not one of sale, exchange or relinquishment of the shares held by the assessee. Neither is it a case where the rights of the assessee have been extinguished, since his rights as investor are indemnified by himself, in his capacity of the erstwhile director. In view of the above, I hold that there has been no transfer as such. Consequently, no capital loss is to be computed or allowed. Since the said loss was not claimed to be set off against any other current incomes, the total income is as .....

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res held by him. c) Affidavits were filed by him in the capacity of director that there were no assets and liabilities in the company. d) Indemnity bond was filed by him in the capacity of director only to safeguard the interests of any other person (ie. Any third person) who might be affected by the closure of the company. e) Company went into liquidation in terms of section 560 of the Companies Act, 1956. No dispute as to the fact whether the company is dissolved or not. In other words, the fa .....

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ich reads as under:- Section 46(2) of the Income- Tax Act, 1961 (2) Where a shareholder on the liquidation of a company receives any money or other assets from the company, he shall be chargeable to income- tax under the head" Capital gains", in respect of the money so received or the market value of the other assets on the date of distribution, as reduced by the amount assessed as dividend within the meaning of sub- clause (c) of clause (22) of section 2 and the sum so arrived at shal .....

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of Devesh Metcast Ltd vs JCIT reported in (2011) 338 ITR 130 (Guj) in support of this contention. He further argued that the provisions of section 46(2) of the Act is a deeming provision and hence full effect has to be given to the same. He further argued that the assessee is entitled for capital loss as per section 46(2). 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 sharehold .....

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d 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. 5. In response to this , the Learned DR argued that the assessee as a director had filed affidavit before the Registrar of Companies that there are no liabilities in the company. Hence it could be concluded that the assessee had received consideration for his extin .....

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rmation 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. We hold 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. In this regard, the reliance on the decision of Gujarat High Court in the case of Devesh Metcast Ltd vs JCIT reported in (2011) .....

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a period of eight years only whereas unabsorbed depreciation could be carried forward indefinitely. The said provision does not prescribe the manner in which unabsorbed depreciation allowance is to be computed under sub-section (2) of section 32 of the Act and as such, reliance placed upon the said provision is misconceived. 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 t .....

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me can be stated to have escaped assessment so as to vest in the Assessing Officer the jurisdiction to reopen the assessment under section 147 of the Act. 20. In the light of the aforesaid discussion, it is not possible to state that any income chargeable to tax has escaped assessment as is sought to be contended on behalf of the respondent-Assessing Officer who has reopened the assessment on the ground that the unabsorbed depreciation for the assessment years 1993-94 to 1996-97 could not be set .....

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not be sustained. 21. For the foregoing reasons, the petition succeeds and is accordingly allowed. The impugned notice dated March 28, 2000, seeking to reopen the assessment of the petitioner for the assessment year 1997-98 (exhibit B to the petition) is hereby quashed and set aside. Rule is made absolute accordingly with no order as to costs. 6.2. We find that the assessee had not received any consideration on his extinguishment of rights in shares held by him in the companies which went on liq .....

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directly on the impugned issue, wherein it was held that :- By virtue of section 46, a legal fiction has been created according to which firstly, a shareholder of the company-in-liquidation is chargeable to income-tax under the head Capital gains and, secondly, the money received or the market value of other assets received on the date of distribution, as reduced by the amount assessed as dividend within the meaning of section 2(22( c), is to be deemed to be the full value of the consideration f .....

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ccordance with the provisions of the Act. For giving effect to the fiction enacted under section 46(2), all the necessary requirements too have to be assumed to be existing, if the fiction is to be carried to its logical end. Ordinarily, section 45, to consider any transaction to be a transfer of capital asset by any of the modes referred to in section 2(47), apart from the legal fiction created therein, envisages passing of consideration from one hand to another and passing of rights, notwithst .....

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they held in the shares, no corresponding rights accrued to anyone for that consideration. However, once a legal fiction is created to treat the receipt of money or assets on distribution on liquidation in the hands of a shareholder, it inheres transfer of assets by extinguishment of rights by the recipient of consideration and once that fiction comes into existence, it must lead to its logical conclusion in the computation of capital gains in accordance with the provisions of the Act, whether .....

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winding up of company may mean winding up of a corporation where the assets are disturbed to those entitled to receive them and the process of reducing assets to cash discharging the liabilities and dividing the surplus or loss amongst contributories or members. The stage of distribution of surplus amongst contributories or members, so called owners of the company, is the final stage of liquidation, as until discharge of the liabilities and cost of liquidation the members are not entitled to any .....

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s capital comes to an end, any disbursement made to a shareholder either by way of cash or asset has to be treated in the hands of the recipient shareholder as the full value of consideration on deemed transfer of his capital asset as a result of extinguishment of all rights and has to be deemed to be resulting in capital gain or loss, as the case may be, as per the result of computation made under section 48, though the value of the asset has to be taken at its market value as on the date of ac .....

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case where a sum is received, however, negligible or insignificant it may be, it would result in the computation of capital gains or loss, as the case may be, but in a case where nothing is disturbed on liquidation of a company, the extinction of rights would result in total loss with no consequence. So, once a conclusion is reached that extinguishment of rights in shares on liquidation of a company is deemed to be transfer for operation of section 46(2), read with section 48, it is reasonable t .....

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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. Otherwise, a starling and unjust situation may arise where the receipt of even one paise would enable him to claim set-off or carry forward of capital loss as worked out under section 48, while a shareholder who is a shade wo .....

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uld have to be computed under section 48. 6.3. We also find 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 esc .....

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se of power by Assessing Officer and that the reasons must have a live link with formation of belief. Important extracts of the decision is reproduced hereunder: "However, 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 reopen assessments on the basis of mere change of opinion , which cannot be per se reason to reopen. One must also keep in mind the conceptual difference between p .....

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Assessing Officer has power to reopen, provided there is tangible material to come to conclusion that there is escapement of income from assessment. Under the Direct Tax Laws (Amendment) Act, 1987, the Parliament not only deleted the words reason to believe but also inserted the word opinion in section 147. However, on receipt of representations from the companies against omission of the words reason to believe , the Parliament reintroduced the said expression and deleted the word opinion on the .....

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y upon a mere change of opinion, the same may be held to be unconstitutional. We are therefore of the opinion that section 147 of the Act does not postulate conferment of power upon the A.O. to initiate reassessment proceeding upon his mere change of opinion. If "reason to believe" of the A.O. is founded on an information which might have been received by the A.O. after the completion of assessment, it may be a sound foundation for exercising the power under section 147 read with secti .....

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ve been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong. b) It has been held in CIT vs. Bhanji Lavji [1971] 79 ITR 582 (SC) that when the primary facts necessary for assessment are fully and truly dis .....

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assessment, do not warrant the initiation of a proceeding u/s 147. c) In 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, it was held that where there was no new material or information which came to the knowledge of the AO to re-initiate proceedings and since he had derived the facts and materials placed by the assessee himself during the original assessment proceedings , that did not constitute new inform .....

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ed by the Learned Tribunal. Since in this case, a regular assessment was made u/s 143(3) of the act, presumption can be drawn that such an order has been passed on application of mind and the subsequent action of the AO is nothing but a change of opinion. d) In ACIT vs ICICI Securities Primary Dealership Ltd , the Apex Court in Civil Appeal No. 5960 of 2012 dated 22.8.2012 held as under :- Leave granted. We have heard counsel on both sides. The assessee had disclosed full details in the Return o .....

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