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2015 (12) TMI 305 - DELHI HIGH COURT

2015 (12) TMI 305 - DELHI HIGH COURT - [2016] 384 ITR 505 - Reopening of assessment - genuineness of the loss in respect of shares held as stock-in-trade is perverse and accordingly cannot be sustained - Held that:- Interestingly nearly two years prior to the issuance of the notice, the AO had issued a notice on 26th March 2000 under Section 148 of the Act for re-opening of the assessment for AY 1996-97 on account of unexplained credits from two firms but that ended in an order of re-assessment .....

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y the Assessee to make a full and true disclosure of all material facts in the original assessment. This is significant in the context of the AO noting in the original order of assessment under Section 143(3) of the Act, passed by the AO on 10th July 1997, that the Assessee had produced the books of accounts which had been checked by the AO. The AO also noted that the Assessee was dealing in shares and securities. - The fact that Mr. R.R. Modi, the Director of the Assessee was also the perso .....

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s lower and that this method had been accepted by the Revenue for the earlier AYs. Clearly, therefore, the legal requirement that "the reason to believe must be predicated on tangible material or information" and that "the belief must be rational and bear a direct nexus to the material on which such a belief is based" was not fulfilled in the present case. - Decided in favour of assessee. - ITA 1108/2010, ITA 1109/2010 - Dated:- 3-12-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : .....

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No. 1109/2010, which is the penalty appeal, is directed against the order dated 30th April 2009 in ITA No.113/Del/2008. 2. While admitting ITA No. 1108/2010 on 27th November 2014, the following questions of law were framed by the Court: (1) Whether Income Tax Appellate Tribunal was right in holding that reassessment proceedings under Section 147/148 of the Income Tax Act, 1961 were bad in law? (2) Whether the finding of the Income Tax Appellate Tribunal accepting the genuineness of the loss in .....

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s 1997-98, 1998-99 and 1999-2000. However as regards the Revenue s appeals against the same impugned order of the ITAT for those AYs being ITA Nos. 1105, 1106 and 1107 of 2010, a separate judgment has already been passed by this Court on 30th April 2015 allowing the said appeals. What distinguishes those appeals from the present one is that in none of those appeals a question concerning the validity of the assumption of jurisdiction under Section 147 of the Act arose. As far as those appeals wer .....

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e is a non-banking finance company registered as such with the Reserve Bank of India ( RBI ). Its objects are investments in shares and providing loans and advances. The Assessee s shares are listed in Delhi Stock Exchange. 6. For AY 1995-96, the Assessee filed a return of income on 29th November 1995 declaring an income of ₹ 6,23,880. The return was picked up for scrutiny and by an assessment order dated 10th July 1996 under Section 143(3) of the Act, the Assessing Officer ( AO ) determin .....

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as ₹ 32,20,000 at ₹ 2 per share. Thus the loss on the valuation of the shares was shown at ₹ 1,28,80,000. 7. The Assessee continued filing returns for the subsequent AYs 1996-97, 1997-98 and 1998-99 in which it showed losses on the sale of shares of PPL and sought to set off those losses against its income. For AY 1997-98, the loss shown in the purchases and the sales of shares was disallowed by the AO. It was noted by the AO that Mr. R.R. Modi, a Director of the Assessee compa .....

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the facts concerning the dismissal of the Assessee s appeal by CIT (A) for AY 1997-98 it was recorded as under: In this manner the assessee understated its income for the asstt year 1995-96 by an amount of ₹ 1,28,80,000/- and this income has escaped asstt. Obviously there was failure on the part of the assessee to disclose the complete facts to the Assessing Officer at the time of completion of assessment for the asstt year 1995-96. Therefore it is proposed to reopen the case U/s 147. The .....

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ction 148 of the Act. A reference was made in the said notice not to the losses as regards the valuation of the shares but regarding unexplained liabilities comprising credit received from M/s. Toko Fin and Associates and Shri Nemi Chand Jain. It was stated that an amount of ₹ 3,95,77,133 relating to AY 1996-97 was an unexplained credit under Section 68 of the Act. The reopening of the assessment for AY 1996-97 was held to be invalid by the ITAT by an order dated 19th October 2004 since in .....

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e remand ordered by the ITAT in respect of AYs 1997-96 to 1999-2000, the AO had held the transactions to be genuine. The Supreme Court, however, set aside this Court's order dated 5th October 2010. In its order dated 27th August 2012 in Civil Appeal No. 6058/2012 (Commissioner of Income Tax v. M/s. Visisth Chay Vyapar Limited), the Supreme Court noted that for AY 1996-97, the question concerning validity of the reopening of the assessment for AY 1996-97 was required to be considered by this .....

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₹ 3,72,75,000. 13. However as far as the present AY, i.e., AY 1995-96 is concerned, as noticed hereinbefore, the reasons for reopening concerned the claim for loss on valuation of shares which is also the reason for passing of the reassessment order. Hence the present appeals were heard separately and orders reserved. 14. In the present appeals, as noticed earlier, the first question concerns the validity of the reopening of the assessment for AY 1995-96. In the reassessment order dated 24 .....

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) the date of payment made/received to/by stock exchange. However, no one from the side of the Assessee attended the hearing on the dates fixed after adjournment and the details were also not supplied. Consequently, the sum as proposed in the notice under Section 148 of the Act, i.e., ₹ 1,28,80,000 was added to the income of the Assessee. 15. The appeal of the Assessee was dismissed by the CIT (A), by the order dated 8th December 2003, confirming the additions. The CIT (A) referred to the .....

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validity of the assumption of jurisdiction under Section 147 of the Act since it was beyond the period of four years from the end of the relevant AY. Since this aspect of the matter was not urged and, therefore, not decided by the CIT (A), the appeal was restored to the file of the CIT (A) for a fresh disposal. 17. On remand, the CIT (A) held, by the order dated 3rd August 2007, that the reopening of the assessment was illegal and without jurisdiction. Inter alia it was held that in the reasons .....

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hat the rate at which the shares of PPL was valued was based on the quoted rate of the said shares at the Gauhati Stock Exchange. The principle applied for valuation of closing stock, i.e., at cost or market rate whichever is lower, was an accepted system. 18. The Revenue then went in appeal before the ITAT by filing ITA No. 4403/Del/2007 relevant to AY 1995-96 in which the impugned order dated 30th June 2009 was passed upholding the order of the CIT (A). 19. The ITAT noted that in the original .....

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hat the reopening of assessment was to be made beyond four years after the end of the AY in question, the recording of the above reason for reopening of the assessment was a jurisdictional one in the absence of which the re-assessment proceedings is void. 20. The ITAT concurred with the CIT (A) even as regards the merits by holding that the value of the closing stock of shares had been computed on the basis of the quotation in the Gauhati Stock Exchange which was at ₹ 2 per share. The Asse .....

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it Madan, learned Senior Standing counsel for the Revenue, that the crucial fact that Mr. R.R. Modi, the Director of the Assessee, also controls PPL, whose shares he had purchased and sold, was not disclosed during the assessment proceedings for this year i.e. AY 1995-96 and that this was a material fact which came to light only during the assessment proceedings for AY 1997-98. He pointed out that the entire assessment record for the two AYs 1995-6 and 1997-98 were before the AO when the reasons .....

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failed to raise any objections to the reasons recorded by the AO either before the AO or before the CIT (A) in the first round of the appeal before the CIT (A). He accordingly submitted that there was a failure by the Assessee to disclose the material facts and that the reopening of the assessment was, therefore, justified. 22. In reply to the above submissions, Mr. Ajay Vohra, learned Senior counsel appearing for the Assessee, submitted that the very basis for reopening the assessment for AY 1 .....

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of one Mr. Nemi Chand Jain who purportedly acted on the instructions of Mr. R.R. Modi as stated by him during the course of search and seizure operation conducted in his case. Therefore, the basis of the additions for AY 1997-98 was different from what was proposed for AY 1995-96. Mr. Vohra submitted that a perusal of the reasons recorded show that the AO had proceeded on surmises that for AY 1995-96 there was a failure on the part of the Assessee to disclose fully and truly all the material fa .....

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recapitulated. In Chhugamal Rajpal v. SP Chaliha (1971) 79 ITR 603, the Supreme Court was dealing with a case where the AO came to the conclusion that there were reasons to believe that income of the Assessee had escaped assessment pursuant to communications from the Commissioner of Income Tax showing that the alleged creditors of the Assessee were name-lenders and the transactions are bogus. The Supreme Court disagreed and observed that the AO had not even come to a prima facie conclusion that .....

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his assessment for that year, income chargeable to tax has escaped assessment for that year or alternatively notwithstanding that there has been no omission or failure as mentioned above on the part of the assessee, the ITO has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. Unless the requirements of cl. (a) or cl. (b) of S. 147 are satisfied, the ITO has no jurisdiction to issue a notice under S. 1 .....

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es, there is no merit in the civil appeal. The Department was not entitled to reopen the assessment. 26. The decision of the Supreme Court in CIT v. Kelvinator of India Ltd.: [2010] 320 ITR 561 (SC) was in an appeal against the decision of this Court. It was observed: We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfilment of cer .....

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income from assessment. Reasons must have a live link with the formation of the belief. 27. In Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers Pvt. Ltd. 291 ITR 502, it was held: 16. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word "reason" in the phrase "reason to believe" would mean cause or justificatio .....

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he Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. 28. In Calcutta Discount Company v. Income Tax Officer 41 ITR 191 the Supreme Court, while considering the import of the words "omission or failure to disclose fully and truly all material facts necessary for his assessment", observed as .....

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e, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession whether on disclosure by the assessee, or discovered by him on the basis of the facts disclose, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the .....

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ched, a proceeding under Section 34(1)(a) will not lie merely on the ground that the Income-tax Officer has raised an inference which he may later regard as erroneous. 30. The above decisions were followed in ITO v. Madnani Engineering Works Ltd. (1979) 118 ITR 1 (SC). 31. Turning to the decisions of this Court, in Haryana Acrylic Manufacturing Company v. CIT [2008] 175 Taxman 262 (Del), the legal position as regards the reopening of an assessment after the expiry of four years from the end of t .....

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on carved out by the proviso came into play, the case would fall outside the ambit of section 147. 19. Examining the proviso [set out above], we find that no action can be taken under section 147 after the expiry of four years from the end of the relevant assessment year if the following conditions are satisfied : (a) an assessment under subsection (3) of section 143 or this section has been made for the relevant assessment year; and (b) unless any income chargeable to tax has escaped asses .....

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ement of income chargeable to tax. The escapement must arise out of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under subsection (1) of Section 142 or Section 148. This is clearly not the case here because the petitioner did file the return. Since there was no failure to make the return, the escapement of income cannot be attributed to such failure. This leaves us with the escapement of income chargeable to tax which arises out of .....

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to the petitioner, there is no whisper, what to speak of any allegation, that the petitioner had failed to disclose fully and truly all material facts necessary for assessment and that because of this failure there has been an escapement of income chargeable to tax. Merely having a reason to believe that income had escaped assessment is not sufficient to reopen assessments beyond the four year period indicated above. The escapement of income from assessment must also be occasioned by the failur .....

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in the context of Section 147(a) of the Act as it existed prior to the amendment introduced w.e.f. 1st April, 1989. 33. In Oriental Insurance Company v. CIT (decision dated 15th September 2015 in ITA 174/2013), it was observed: 9. A bona fide reason to believe that income has escaped assessment is a necessary pre-condition that clothes the AO with the power to reopen the assessment, which has otherwise attained finality. The reasons to believe must have a direct nexus and a live link with the f .....

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l or information. A reason to suspect cannot be a reason to believe; the belief must be rational and bear a direct nexus to the material on which such a belief is based. 34. In CIT v. Multiplex Trading (decision dated 22nd September 2015 in ITA 356/2013), this Court surveyed the above case law and held: 12. ... [I]t would be impermissible for the AO to reopen the assessment unless the AO, on the basis of credible and tangible material, which was not in his possession during the initial assessmen .....

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al facts necessary for his assessment for that year. After the amendment, only one singular requirement is to be fulfilled under Section 147(a) and that is, that the AO has reason to believe that income of an Assessee has escaped assessment. However, the proviso to Section 147 of the Act provides a complete bar for reopening an assessment, which has been made under Section 143(3) of the Act, after the expiry of four years. However, this proscription is not applicable where the income of an Asses .....

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that this Court in M/s Haryana Acrylic Manufacturing Co. (P) Ltd. (supra) explained that the ratio of the decision in Phool Chand Bajrang Lal (supra) may not be entirely applicable since the same was in respect of Section 147(a) as it existed prior to the amendment. 35. Recently in CIT v. Indo Arab Air Services (decision dated 20th October 2015 in ITA 292/2015) this Court held: The explanation or the lack of it of the entries in the books of accounts may have certain relevance as far as ED is c .....

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certainly does require him to form a prima facie opinion based on tangible material which provides the nexus or the link to having reason to believe that income has escaped assessment. 36. Turning to the case on hand, the only reason for forming the 'reasons to believe' that income had escaped assessment was the dismissal of the Assessee s appeal by CIT (A) for AY 1997-98 when the share loss was disallowed for the first time. There was no material as such for coming to the conclusion tha .....

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6th March 2000 under Section 148 of the Act for re-opening of the assessment for AY 1996-97 on account of unexplained credits from two firms but that ended in an order of re-assessment dated 27th March 2002 referring to the unexplained share loss. Therefore, when the AO issued the notice on 26th March 2002 under Section 148 proposing to reopen the assessment for 1995-96, there was no fresh material to enable him to form reasons to believe that income on account of share loss had escaped assessme .....

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