TMI Blog2016 (1) TMI 947X X X X Extracts X X X X X X X X Extracts X X X X ..... et out in the first proviso to section 147 of the Act. Assessing Officer, during the regular assessment proceedings under section 143(3) of the Act, had specifically applied his mind to the dividend income earned by the Petitioner during the A.Y. 2000-2001 and on due consideration of these facts, he passed his assessment order under section 143(3) of the Act forming an opinion that the dividend income earned by the Petitioner was exempt from tax. This would clearly establish that there was due application of mind to all relevant facts and thereafter an opinion was formed that dividend income earned from the aforesaid three mutual funds are exempt from tax under section 10(33) of the Act. We have therefore no hesitation in holding that the initiation of reassessment proceedings has been undertaken merely on the basis of a change of opinion. Thus, the impugned notice is not sustainable also on the ground that it proceeds on a mere change of opinion. 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) of the Act, the said income was exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and cannot be supplemented by giving reasons either in the order disposing of the objections filed against the issuance of a notice under section 148 of the Act or in the affidavits filed in the Writ Petition; and (e) The belief that income has escaped assessment must not be on account of a change of opinion. According to the Petitioner, none of the aforesaid pre- requisite conditions have been fulfilled and therefore, no reassessment proceedings could be initiated against the Petitioner for the A. Y. 2000-2001. 4. The brief facts giving rise to the present controversy are that 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 ₹ 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 ₹ 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 ₹ 3,38, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed under section 143(3) of the Act, Respondent No.1 specifically exempted dividend income of ₹ 3,38,45,293/-, as is evident from page 150 of the paper-book. 8. In the meanwhile, a search action under section 132(1) of the Act 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. Respondent No.1, vide his order dated 28th February 2002, directed that a special audit under section 142(2A) of the Act be conducted by one M/s Chajed Kedia and Associates, Chartered Accountants. One of the issues on which Respondent No.1 required the auditors to report was as follows:- 13 Dividend : Please obtain the details of dividend earned on securities purchased immediately before the book closure whether such securities have been sold or continued to remain part of closing stock. The details should show name of schemes, dates of purchase and sale, dividend received and loss incurred. 9. In response to the order dated 28th February, 2002 initiating block assessment proceedings against the Petitioner, the special auditors gave a detailed rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock assessment order, after considering the objections of the Petitioner, Respondent No.1 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, Respondent No.1 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 ₹ 3,70,36,638/- suffered by the Petitioner on the sale of the units of the three mutual funds was disallowed. 11. Being aggrieved by this block assessment order dated 26th September 2003, the Petitioner approached the CIT (Appeals) without any success who upheld the finding of Respondent No.1 that while the dividend income was exempted under section 10(33) of the Act, the short term capital loss suffered by the Petitioner could not be allowed as a deduction. 12. Being dissatified with the order of the CIT (Appeals), the Petitioner approached the Income Tax Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38 B Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai 400 023 Sir, Sub : Reasons recorded for re-opening the assessment and issue of notice u/s 148 A.Y. 2000-01 reg. Please refer to your letter dtd. 5/11/2007 submitted during the course of hearing for reopened assessment. In this regard, I communicate you the reasons recorded for issuing notice u/s 148. The reasons recorded are as under :- It is observed from the income-tax record that the assessment of the above mentioned case has been completed u/s 143(3) on 31.03.2003. In this assessment, the assessing officer has allowed exemption u/s 10(33) claimed by the assessee on the dividend income on mutual funds as mentioned below : Prudential ICICI ₹ 32,77,613.90 Cholamandalam Rs.2,50,42,686.40 Reliance Capital ₹ 47,95,013,19 Total Rs.3,31,15,313.49 As per the CBDT Circular No.14/2001, the definition of share as mentioned in the section 10(33) includes units of UTI or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment proceedings for A. Y. 2000-2001 was beyond the period of four years. He therefore submitted that:- (i) the condition precedent to initiate reassessment proceedings under section 148 of the Act 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; (ii) 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. This was evident from the letters dated 22nd November, 2002 as well as 18th December, 2002 addressed by the Petitioner in reply to the queries by Respondent No.1 wherein full disclosure of the mutual funds purchased by the Petitioner was made alongwith the dividend income received thereon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; (b) 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; (c) as per explanation (1) to section 147 of the Act, production before the Assessing Officer of the books of accounts or other evidence from which material evidence could, with the due diligence, have been discovered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. As rightly submitted by Mr Murlidharan, learned counsel appearing on behalf of the Petitioner, there is not even an allegation in the said reasons that there was any failure on the part of the Petitioner to disclose truly and fully any material fact, let alone the details thereof. In fact, on a perusal of the said reasons and as reproduced above, it is clear that the reason given for initiating re-assessment proceedings under section 148 of the Act was that the exemption under section 10(33) of the Act, and which was amended retrospectively by the Finance Act, 2001 with effect from 1st April 2000, would not apply to any income arising from the transfer of units of a mutual fund. Since the Assessee had earned dividend income from transfer of units of mutual funds, it was not entitled to exemption under section 10(33) of the Act. It was further mentioned in the said reasons that since the Petitioner was trading in shares, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing officer to reach the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. The reasons are the manifestation of the mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reopening the assessment cannot be allowed to grow with age and ingenuity, by devising new grounds in replies and affidavits not envisaged when the reasons for reopening an assessment were recorded. The principle of law, therefore, is well settled that the question as to whether there was reason to believe, within the meaning of section 147 that income has escaped assessment, must be determined with reference to the reasons recorded by the Assessing Officer. The reasons which are recorded cannot be supplemented by affidavits. The imposition of that requirement ensures against an arbitrary exercise of powers under section 148. (emphasis supplied) 24. 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. 25. In the facts of the present case, even otherwise from the record we find that the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 143(3) of the Act, had specifically applied his mind to the dividend income earned by the Petitioner during the A.Y. 2000-2001 and on due consideration of these facts, he passed his assessment order under section 143(3) of the Act forming an opinion that the dividend income earned by the Petitioner was exempt from tax. This would clearly establish that there was due application of mind to all relevant facts and thereafter an opinion was formed that dividend income earned from the aforesaid three mutual funds are exempt from tax under section 10(33) of the Act. We have therefore no hesitation in holding that the initiation of reassessment proceedings has been undertaken merely on the basis of a change of opinion. Thus, the impugned notice is not sustainable also on the ground that it proceeds on a mere change of opinion. 27. Although not strictly relevant, it may be pointed out that the very same Assessing Officer initiated block assessment proceedings against the Petitioner. Even in block assessment proceedings, the Assessing Officer accepted that the dividend income earned by the Petitioner was exempt from tax under section 10(33) of the Act. He was however of the opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In fact, on the transfer of the units of the mutual fund, the Petitioner had sustained a loss for which it claimed a deduction which was initially disallowed by the Assessing Officer in the block assessment proceedings and which order of the Assessing Officer was overturned by the ITAT by its order dated 28th February, 2006. 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) of the Act, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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