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2016 (1) TMI 947 - BOMBAY HIGH COURT

2016 (1) TMI 947 - BOMBAY HIGH COURT - [2016] 382 ITR 93 - Reopening of assessment - undisclosed dividend income - entitlement to exemption from tax under section 10(33) - Held that:- In the facts of the present case, even otherwise from the record we find that the Petitioner had disclosed fully and truly all material facts relating to the dividend income received by it. This is clear firstly from the return of income filed by the Petitioner on 27th November, 2000 where in the computation annexe .....

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pugned notice is without jurisdiction as it fails to satify the criteria as set 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 .....

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und 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 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 .....

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ome Tax Act, 1961 (for short, the Act ) as well as the order dated 5th December, 2007 (for short, the impugned order ) disposing of the objections filed by the Petitioner against issuance of the impugned notice under section 148 of the Act. As a consequence, the Petitioner has also challenged the Notices dated 24th October, 2007 and 5th December, 2007 issued by the Respondent No.1 under sections 142(1) and 143(2) of the Act respectively. 2. The impugned notice under section 148 of the Act has be .....

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ears from the end of the A. Y. 2000-2001 and therefore, bad-in-law for want of satisfaction of the following pre-requisite conditions :- (a) There must be reason to believe that income chargeable to tax has escaped assessment; (b) There must be a failure on the part of the Assessee to disclose full and truly all material facts as a result of which income has escaped assessment; (c) The allegation of failure of the Assessee to disclose fully and truly all material facts should be in the reasons a .....

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said 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, 2 .....

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end of the year was also annexed to the return. 5. 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 to Respondent No.1. This letter as well as the detai .....

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lity of earning money through mutual funds. It pointed out that after proper analysis it had decided to make investments in equity mutual funds of Prudential ICICI, Cholamandalam Cazenove Mutual Fund as well as Reliance Capital Mutual Fund and thereafter decided to exit the said funds at the available NAV price. The Petitioner pointed out that the transaction was a normal business transaction and also disclosed the dividend earned from the aforesaid three mutual funds. 7. After the queries raise .....

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ction 14A of the Act. However, he specifically noted that the Petitioner had earned dividend income of ₹ 3,38,45,293/- which was exempt from tax. In this view of the matter, in the Assessment Order dated 31st March, 2003 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 i .....

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curities 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 report dated 10th August, 2002 in which full details to the various queries raised by Respondent .....

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been received, the basic nature of the transaction did not change colour. The Petitioner reiterated that it had correctly claimed exemption under section 10(33) of the Act in respect of the said dividend. Be that as it may, Respondent No.1 passed a block assessment order dated 26th September, 2003 under section 158BC of the Act by which he computed the total alleged undisclosed income of the Petitioner at ₹ 11,50,16,300/-. With regard to the dividend earned by the Petitioner from its holdi .....

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sessee had traded in shares / securities during the year, which included the units of mutual fund. As the assessee has mitigated the loss incurred on account of sale of mutual fund units against the gains derived on sale of shares and since the purchase and sale of such units were made with the intention to procure dividend income which is exempt from tax, the assessee's representative was asked to explain as to why the said loss claim of ₹ 3,70,36,638/- for the assessment year 2000-01 .....

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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 fun .....

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t, the ITAT ). The ITAT by its order dated 28th February, 2006 allowed the appeal of the Petitioner and held that Respondent No.1 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). 13. After the proceedings in relation to .....

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for the subject Assessment Year. In reply thereto, the Petitioner by its letter dated 1st April, 2007 requested Respondent No.1 to provide the reasons for issuance of the said impugned notice. By another letter dated 26th April 2007, the Petitioner stated that the return earlier filed by it on 27th November, 2000 may be treated as having been filed in response to the said notice. 14. Instead of replying to the aforesaid letters of the Petitioner, Respondent No.1 issued a notice dated 24th Octobe .....

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recorded for issuance of the impugned notice under section 148 of the Act. Accordingly, Respondent No.1 by its letter dated 7th November, 2007 communicated the reasons to the Petitioner. This letter can be found at page 421 of the paper-book and reads as under :- No.ACIT/CC-41/Reasons/2007-08 Date: 07.11.2007 To: M/s Nirmal Bang Securities Pvt.Ltd., 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 o .....

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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 any other mutual funds. But later on, this section 10(33) was amended retrospectively by Finance Act, 2001 w.e.f. 01.04.2000 as per which, from A.Y. 2000-01 onwards, the exemption u/s 10( .....

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earned should have been charged to tax as short-term capital gain. Therefore, I have reasons to believe that the income of ₹ 3,31,15,313.49 has been escaped for the A.Y. 2000-01. Sd/- ACIT, Cent.Cir.41, Mumbai. (emphasis supplied) 15. The Petitioner thereafter by its letter dated 13th November, 2007 furnished its objections to the proposed reassessment. The grounds taken in the aforesaid letter were, in a nutshell, that the assessment order under section 143(3) had already been passed and .....

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essment proceedings were based on a mere change of opinion which was impermissible under the Act. There were also other objections that were set out in the said letter. 16. Be that as it may, Respondent No.1 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 ₹ 3,31,15,313.49 had escaped assessment for the A.Y. 2000-01. 17. In this factual backdrop, Mr Murlidharan, learned counsel .....

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ssessee 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 necessar .....

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ii) in any event, Respondent No.1 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; and (iv) in a .....

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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. 18. In support of the aforesaid arguments, Mr Murlidharan relied upon the following two judgments :- (1) Hindusta .....

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el appearing on behalf of the Revenue, in support of the impugned notice, submitted as under:- (a) 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. Th .....

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oceedings 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 by the Assessing Officer, will not necessarily amount to a dis .....

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of an opinion. For the aforesaid reasons, Mr Malhotra submitted that there was no merit in the Writ Petition and the same ought to be dismissed. 20. We have heard learned counsel at great length and perused the papers and proceedings in the Writ Petition alongwith the annexures thereto. Section 147 of the Act deals with income escaping assessment. The said section inter alia provides that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for .....

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assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year. (emphasis supplied) 21. In the present case, admittedly, the assessment had been made under section 143(3) of the Act .....

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er 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 .....

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n shares, the dividend income received was an integral part of trading goods and could not be segregated from the acquisition of the shares. It was for these reasons and these reasons only that Respondent No.1 opined that the dividend income so earned should have been charged to tax as a short term capital gain and therefore he had reason to believe that income to the tune of ₹ 3,31,15,313.49 had escaped assessment for the A. Y. 2000-2001. A bare reading of the reasons would ex-facie show .....

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he 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 arbitra .....

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orded for initiating the re-assessment proceedings. The reasons recorded cannot be supplemented by affidavits and other material. In this regard, Mr Murlidharan's reliance upon the judgment of this Court in the case of Hindustan Lever Ltd. (2004) 268 ITR 332 is well founded. At pages 337 and 338, this Court held as under :- The reasons recorded by the Assessing Officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary fo .....

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on 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 .....

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ssment year, so as to establish the vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the Assessing Officer cannot be supplemented by filing an affidavit or making an oral submission, whereas, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches the court, on the strength of the affidavit or oral submissions advanced. 23. In fac .....

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me chargeable to tax, which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section. The first proviso to section 147 has no application in the facts of this case. The basic postulate which underlies section 147 is the formation of the belief by the Assessing Officer that any income chargeable to tax has escaped assessment for any assessment year. The Assessing Officer must have reason to believe that such is the case before he proceed .....

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ng 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 sup .....

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der 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 Petitioner had disclosed fully and truly all material facts relating to the dividend income received by it. This is clear firstly from the return of income filed by the Petitioner on 27th November, 2000 where in the computation annexed to the return, the Petitioner had stated that it had earned dividend income of ₹ 3 .....

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fy the criteria as set out in the first proviso to section 147 of the Act. 26. We further find that during the assessment proceedings under section 143(3) of the Act, the Assessing officer called for particulars and sought explanations from the Petitioner specifically on the issue of the dividend income earned by the Petitioner from mutual funds. By its letters dated 22nd November, 2002 and 18th December 2002, the Petitioner furnished all the information and complied with the requisitions of the .....

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ook. In this assessment order, the Assessing Officer specifically refers to the names of the aforesaid three mutual funds, the number of units purchased by the Petitioner and the dividend received therefrom. In the computation of income, the Assessing Officer has specifically recorded that the dividend income of ₹ 3,38,45,293/- is exempt from tax. It is on this basis that the total income computed by the Assessing Officer came to ₹ 6,81,54,960/-. All this material would clearly show .....

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hereafter 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 Assessi .....

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lier, this order of the Assessing Officer in relation to block assessment proceedings was overturned by the ITAT by its order dated 28th February, 2006. It is only when the block assessment proceedings attained finality all the way upto the ITAT that the Revenue sought to re-open the assessment for A.Y. 2000-2001. All these facts would further fortify our finding that the initiation of reassessment proceedings for A.Y. 2000-2001 was based only on a change of opinion and which is impermissible in .....

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of units from the Unit Trust of India established under the Unit Trust of India Act 1963 (52 of 1963) or (iii) income received in respect of the units of a mutual fund specified under clause (23D); Provided 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. 29. Section 10 of the Act falls under Chapter III and stipulates that in computing the total income of a previous year of any person, any income fa .....

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