Delhi H.C : the assessee petitioner has prayed for issue of writ of certiorari for quashment of the notice dt. 31st March, 2010 issued under s. 148

High Court Of Delhi

Ritu Investments (P) Ltd. Vs. DCIT

Section 147

Asst. Year 2005-06

Dipak Misra, C.J. & Manmohan, J.

Writ Petn. No. 7515 of 2010

22nd November, 2010

Counsel appeared :

C.S. Aggarwal with Prakash Kumar, for the Petitioner : Mrs. P.L. Bansal, for the Respondent



Invoking the jurisdiction of this Court under Art. 226 of the Constitution of India, the assessee petitioner has prayed for issue of writ of certiorari for quashment of the notice dt. 31st March, 2010 issued under s. 148 of the IT Act, 1961 (for brevity ‘the Act’) by the AO and the order dt. 18th Oct., 2010 passed by the said authority dealing with the objections filed by the assessee.

The facts, in brief, are that the assessee-petitioner is a private limited company and has been assessed to income- tax from 1976-77. It is engaged in the business of investment and trading in securities, investments in real estate. For the asst. yr. 2005-06, the assessee-company filed its return of income on 31st Oct., 2005 declaring an income of Rs. 1,60,35,700 as set forth along with computation of income, audited accounts, etc. before the AO. The income in entirety, as pleaded, was fully disclosed before the AO and the said officer passed the order of assessment on 12th Dec., 2007 under s. 143(3) of the Act. After the said order of assessment came to be passed, a notice was issued under s. 148(1). As stated earlier, objections were filed and eventually the same were disposed of by order dt. 18th Oct., 2010.

Mr. C.S. Aggarwal, learned senior counsel along with Mr. Prakash Kumar, learned counsel for the petitioner raised the following contentions : (a) The AO has dealt with the objections as if there was escapement of turnover but if the order of assessment and the order rejecting the objections are scrutinized appropriately, it would be clear that there has been change of opinion and, hence, initiation of proceeding under s. 147 and issuance of notice under s. 148 are vulnerable in law. (b) The AO has treated the income as business income but while issuing notice the AO has stated that it will be adventure in the nature of trade vis-à-vis short-term capital gain; however there will be no change as both will come within the compartment of business income. © The error of judgment cannot clothe the AO with the jurisdiction to reopen the completed assessment. Be it noted, the learned counsel for the assessee has commended us to certain decisions which we shall refer to at the appropriate place. Mrs. P.L. Bansal, learned counsel for the Revenue, supported the order passed by the AO. To appreciate the first issue whether there has been change of opinion, it is apposite to refer to the reasons recorded for initiating the proceeding. In the said order, the AO has stated thus : “2. In the judgment of Hon’ble apex Court in the case of G. Venkataswami & Co. vs. CIT (supra), the following facts have to be taken into account while concluding the nature of transactions. (a) Whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or were incidental to it. (b) The nature and quantity of the commodity purchased and resold if the commodity purchased is in very large quantity, it could tend to eliminate the possibility of investment for personal use, possession or enjoyment. © The repetition of the transaction.

The Supreme Court in this case has also discussed the test of intention; it was held that in cases where the purchase was made exclusively with the intention of resale at a profit and the purchaser had no intention to hold the asset for himself or otherwise enjoy it or use it, the presence of such intention is a relevant factor and unless it is offset by the presence of other factors, it would raise a strong presumption that a transaction is an adventure in the nature of trade.

In view of the above facts, it is clear that the trading activity carried out by the assessee company by diversion from stock-in-trade was definitely an adventure in the nature of trade and would construe to be a business activity. I have reasons to believe that income of Rs. 2,01,81,691 has escaped assessment by virtue of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for assessment in this year in this case and the same is to be brought to tax under s. 147/148 of the IT Act.”

7. After the objections were filed, the same were dealt with by the order dt. 18th Oct., 2010 whereby the AO referred to certain decisions and eventually came to hold as follows :”4.2 Further, as per the Expln. 1 to s. 147 of the IT Act, production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure within the meaning of proviso to s. 147 of the IT Act. 4.3 Thus, to summarize, in the present case, the AO had rightly initiated the reassessment proceedings under s. 147 of the IT Act, after recording in detail the reasons to believe that income has escaped taxation and there is no change of opinion as contended by the assessee.” In the ultimate eventuate, the objections were rejected.

8. The first issue that emerges for consideration is whether there has been change of opinion or not. The AO while passing the assessment order under s. 143(3) of the Act and while dealing with the income on account of transfer of equity shares of company from stock-in-trade to investments has held thus :

“3. Income on account of transfer of equity shares of company from stock-in-trade to investments. As per point 8 of notes on accounts in Sch. 12 of balance sheet and P&L a/c, the assessee has transferred 2,27,400 equity shares, valued at Rs. 2,40,29,595, of various companies from stock-intrade into investments. It was also mentioned that the provisions of s. 45(2) had been considered while calculating income-tax provisions. In the course of assessment proceedings assessee was asked to furnish details of conversion of stock-in-trade to investments and to explain why income on accounts of above transfer be not taxed as business income, at the time of such transfer. Assessee has furnished a detail of stock converted into investment with its reply dt. 21st Nov., 2007, which is annexed with this order as Annex-1. As per the details submitted, the transfer made on 17th May, 2004/18th May, 2004 resulted in a profit (being difference in the cost of shares transferred) and its value at the market rate as on 17th May, 2004, of Rs. 35,57,144. This amount is added to assessee’s income for the following reasons :(i) The equity shares, which were held as stock-in-trade, have been transferred to investment and this has been recorded in the books of accounts in the shares sale ledger account as ‘To amount transferred from stock-in-trade to investment at the market value as on 17th May, 2004’. However, the actual transfer has been recorded at cost of shares and not at the market value. Since the assessee has decided to transfer the equity shares, the sales should have been recorded at market price on the date of such transfer, as if the assessee has sold the shares as stock-intrade and repurchased it as investment.

(ii) Assessee has referred to s. 45(2) in the notes to account. However, the said section refers to profits or gains arising from the transfer by way of conversion of a capital asset into stock-in-trade of a business. Here the case is vice versa. As per the said section, the profits on such conversion, for the purpose of s. 48 shall be chargeable to income-tax, as the income of previous year in which such stock-in-trade is sold and the fair market value of the asset on the date of such conversion, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. This section is not applicable to a case of transfer by way of conversion from stock-in-trade to a capital asset. Further, the assessee has transferred the stockin-trade at cost and has not disclosed the profits even on sale of such equity shares made later during the year. For instance 20,000 shares of Avery India which were held as stock-in-trade as on 1st April, 2004 were converted into investments as on 17th May, 2004 at cost of Rs. 6,96,000. The unit cost comes to Rs. 34.8 and market rate on the date of conversion was Rs. 35. On conversion, there was a profit of Rs. 4,000. Assessee has sold 5,000 shares out of above, taking the unit cost at Rs. 34.8, and has booked the entire profits as short-term capital gain, attracting a lower rate of tax @ 10 per cent. The short-term gain has been worked out as under : Date of Name of No. Cost Date of Sale Gain/loss purchase script sale amount 18-5-04 Avery India 5,000 1,74,000 12-2-05 2,47,400 73,400

Similarly, in the case of 9 other equity shares, converted into investment from stock-in-trade on 17th May, 2004 and sold later during the year, the entire gain (i.e. gain on conversion and gains on appreciation) has been shown as capital gain. The gain arising on conversion/transfer from stockin-trade to investment has not been shown during the year as business income. Thus, it is clear that assessee itself has not followed the provisions of s. 45(2), as claimed, even though, such provision is not applicable to this case as mentioned above. (iii) In the absence of specific provision in the Act regarding taxing the gains from transfer of stockin-trade to investment, the entire gains on the transfer/conversion is brought to tax in this year itself i.e. in asst. yr. 2005-06. Accordingly, an addition of Rs. 35,57,144 is made to assessee’s income from business. I am satisfied that assessee has filed inaccurate particulars of income and penalty proceedings under s. 271(1)© is initiated separately for the abovesaid addition. [Addition : Rs. 35,57,144]”

9. On a perusal of the order for initiation of proceeding and the order passed at the stage of assessment, it is noticeable that the said issue was dealt with after due application of mind and a computation was made. Against the aforesaid order, the assessee preferred an appeal before the CIT(A) and the CIT(A) vide order dt. 27th Aug., 2008 decided the said issue in favour of the assessee. As is evident, an appeal was preferred by the Revenue before the Tribunal which vide order dt. 31st July, 2009 concurred with the view expressed by the first appellate authority and dismissed the appeal. Though we have narrated these facts, yet the core issue that emanates for adjudication is whether there has been change of opinion while issuing notice under s. 148(1) of the Act. On a perusal of the order of assessment, we find that the AO initially dealt with the issue and expressed the view that the income on account of transfer of equity shares of company from stock-in-trade to investments is income but while reopening of the assessment, he has taken a view that it is an adventure in the nature of trade vis-à-vis short- term capital gain.

In this context, we may refer with profit to the decision of the Full Bench of this Court in CIT vs. Kelvinator of India Ltd. (2002) 174 CTR (Del)(FB) 617 : (2002) 256 ITR 1 (Del)(FB) wherein the Full Bench has held thus : “The scope and effect of s. 147 as substituted w.e.f. 1st April, 1989, by the Direct Tax Laws (Amendment) Act, 1987, and subsequently amended by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1st April, 1989, as also of ss. 148 to 152 have been elaborated in Circular No. 549 dt. 31st Oct., 1989 [(1990) 82 CTR (St) 1]. A perusal of cl. 7.2 of the said circular makes it clear that the amendments had been carried out only with a view to allay fears that the omission of the expression ‘reason to believe’ from s. 147 would give arbitrary powers to the AO to reopen past assessments on a mere change of opinion. It is, therefore, evident that even according to the CBDT a mere change of opinion cannot form the basis for reopening a completed assessment. A statute conferring an arbitrary power may be held to be ultra vires Art. 14 of the Constitution of India. If two interpretations are possible, the interpretation which upholds constitutionality should be favoured. In the event it is held that by reason of s. 147 the ITO may exercise his jurisdiction for initiating a proceeding for reassessment only upon a mere change of opinion, the same may be held to be unconstitutional. An order of assessment can be passed either in terms of sub-s. (1) of s. 143 or sub-s. (3) of s. 143. When a regular order of assessment is passed in terms of the sub-s. (3) of s. 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of cl. € of s. 114 of the Indian Evidence Act, 1872, judicial and official acts have 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 AO 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. Hence, it is clear that s. 147 of the Act does not postulate conferment of power upon the AO to initiate reassessment proceedings upon a mere change of opinion.”

12. The said decision was challenged before the apex Court in CIT vs. Kelvinator of India Ltd. (2010) 228 CTR (SC) 488 : (2010) 34 DTR (SC) 49 : (2010) 320 ITR 561 (SC) wherein their lordships have ruled thus :”6. On going through the changes quoted above, made to s. 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the AO to make a back assessment, but in s. 147 of the Act (w.e.f. 1st April, 1989), they are given a go-by and only one condition has remained, viz., that where the AO has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post—1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words ‘reason to believe’ failing which, we are afraid, s. 147 would give arbitrary powers to the AO to reopen assessments on the basis of ‘mere change of opinion’, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The AO has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain preconditions and if the concept of ‘change of opinion’ is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of ‘change of opinion’ as an inbuilt test to check abuse of power by the AO. Hence, after 1st April, 1989, AO has power to reopen, provided there is ‘tangible material’ to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief……..”

From the aforesaid enunciation of law, it is quite vivid that change of opinion cannot clothe the AO with the jurisdiction to initiate the proceeding under s. 147 of the Act.

It is also worth noting, an error of judgment also does not confer such a jurisdiction on the AO. In this context, we may fruitfully refer to the decision in Gemini Leather Stores vs. ITO & Ors. 1975 CTR (SC) 1127 : (1975) 100 ITR 1 (SC) wherein it has been held that when the ITO had all the material facts before him when he had framed the original assessment, he could not take recourse to s. 147(a) to remedy the error resulting from his own oversight. Similar view was expressed in Indian & Eastern Newspaper Society vs. CIT (1979) 12 CTR (SC) 190 : (1979) 119 ITR 996 (SC). In the said case, it has been held thus : “Now, in the case before us, the ITO had, when he made the original assessment, considered the provisions of ss. 9 and 10. Any different view taken by him afterwards on the application of those provisions would amount to a change of opinion on material already considered by him. The Revenue contends that it is open to him to do so, and on that basis to reopen the assessment under s. 147(b). Reliance is placed on Kalyanji Mavji & Co. vs. CIT 1976 CTR (SC) 85 : (1976) 102 ITR 287 (SC), where a Bench of two learned Judges of this Court observed that a case where income had escaped assessment due to the ‘oversight, inadvertence or mistake’ of the ITO must fall within s. 34(1)(b) of the Indian IT Act, 1922. It appears to us, with respect, that the proposition is stated too widely and travels farther than the statute warrants insofar as it can be said to lay down that if, on reappraising the material considered by him during the original assessment, the ITO discovers that he has committed an error in consequence of which income has escaped assessment, it is open to him to reopen the assessment. In our opinion, an error discovered on a reconsideration on the same material (and no more) does not give him that power. That was the view taken by this Court in Maharaj Kumar Kamal Singh vs. CIT (1959) 35 ITR 1 (SC), CIT vs. A. Raman & Co. (1968) 67 ITR 11 (SC) and Bankipur Club Ltd. Vs. CIT 1972 CTR (SC) 245 : (1971) 82 ITR 831 (SC) and we do not believe that the law has since taken a difference course. Any observations in Kalyanji Mavji & Co. vs. CIT (supra) suggesting the contrary do not, we say with respect, lay down the correct law.”

In view of the aforesaid analysis, the irresistible conclusion is that initiation of proceeding is in the realm of change of opinion and the same is not sustainable and, therefore, initiation of proceeding as well as reasons for continuing with the said proceeding stand quashed.

Consequently, the writ petition is allowed without any order as to costs.

[Citation : 345 ITR 214]

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