Dolaria Enterprises Private Limited v. Honourable Mr. Justice Bhargav D. Karia

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 19018 of 2021 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE N.V.ANJARIA andHONOURABLE MR. JUSTICE BHARGAV D. KARIA ========================================================== DOLARIA ENTERPRISES PRIVATE LIMITED Versus THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(1) ==========================================================Appearance:MR TUSHAR HEMANI, SENIOR ADVOCATE WITH MS VAIBHAVI K PARIKH(3238) for the Petitioner(s) No. 1 for the Respondent(s) No. 1 MR MR BHATT, SENIOR ADVOCATE WITH MR KARAN SANGHANI WITH MR MUNJAAL BHATT FOR M R BHATT & CO.(5953) for the Respondent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIAand HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 29/08/2022 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1.Heard learned Senior Advocate Mr. TusharHemani with learned advocate Ms. VaibhaviParikh for the petitioner and learned SeniorAdvocate Mr. M.R. Bhatt with learned advocateMr. Karan Sanghani with learned advocate Mr.Munjaal Bhatt for M.R. Bhatt and Co. for therespondent. 2.Having regard to the controversy involved inthe present case which lies in a very narrowcompass, with the consent of the learnedadvocates for the respective parties, thematter is taken up for final hearing. 3.Rule returnable forthwith. Learned advocateMr. Karan Sanghani waives service of noticeof rule on behalf of the respondent. 4.By this petition under Article 226 of theConstitution of India, the petitioner haschallenged the notice dated 21.03.2021 issuedunder section 148 of the Income Tax Act, 1961(For short “the Act”) for reopening of theassessment proceedings for the AssessmentYear 2015-2016. 5.Brief facts of the case are as under : 5.1)The petitioner is engaged in tradingof cotton as well as share trading. 5.2)The petitioner filed return ofincome on 30.09.2015 for the Assessment Year2015-2016declaringlossatRs. (-)53,12,248/-. 5.3) Case of the petitioner was selectedfor scrutiny assessment vide notice dated6.06.2017 under section 142(1) of the Act. 5.4) The petitioner vide letter dated26.06.2017 furnished various details whichwere called for by the Assessing Officer. 5.5)Eventually the assessment was framedunder section 143(3) of the Act vide orderdated 24.11.2017 determining total income atRs(-)36,20,770/-. 5.6)The respondent thereafter issued theimpugned notice dated 21.03.2021 undersection 148 of the Act seeking to reopen theassessment proceedings in case of thepetitioner. Yet another notice came to beissued on 20.04.2021. 5.7)The petitioner filed return ofincome for the year under consideration andrequested for reasons for reopening videletter dated 30.04.2021. 5.8)The respondent supplied copy ofreasons for reopening on 12.05.2021. The reasons recorded by the Assessing Officerfor reopening the assessment under section147 of the Act read as under : “Reasons for reopening of the assessmentin the case of M/s.Dolaria EnterprisesPvt. Ltd. for A.Y. 2015-16 u/s 147 ofthe I.T.Act 1. Brief details of the assessee:In thiscase, the assessee is engaged in thebusiness of trading of cotton and sharetrading. The assessee was filed itsreturn of income for A.Y.2015-16 on30.09.2015declaring total income of Rs.(-)53,12,248/- The same was processed u/s. 143(1) of the Act and subsequentlyorder u/s 143(3) of the Act was passedon 24.11.2017determining total income atRs.(-)30,20,767/-. 5.8)The respondent supplied copy ofreasons for reopening on 12.05.2021. The reasons recorded by the Assessing Officerfor reopening the assessment under section147 of the Act read as under : “Reasons for reopening of the assessmentin the case of M/s.Dolaria EnterprisesPvt. Ltd. for A.Y. 2015-16 u/s 147 ofthe I.T.Act 1. Brief details of the assessee:In thiscase, the assessee is engaged in thebusiness of trading of cotton and sharetrading. The assessee was filed itsreturn of income for A.Y.2015-16 on30.09.2015declaring total income of Rs.(-)53,12,248/- The same was processed u/s. 143(1) of the Act and subsequentlyorder u/s 143(3) of the Act was passedon 24.11.2017determining total income atRs.(-)30,20,767/-. 2. Brief details of Informationcollected/received by the AO: On perusalof the assessment records for the yearunder consideration, it is found thatthe assesseehas incurred loss of Rs.76,68,956/- onsale of F&O carried out during the AY2015-16 and is loss from revenue fromsale of shares. Further, it is noticedfrom the ledger account of MarwadiShares and finance Ltd that the aboveloss was mentioned as mark to market (MTM) loss giving effect of changes inF&O rate as on 31.03.2015. As such, F&O transactions carried out byassessee are speculation transactionsand any loss incurred in F&O trading isa speculation loss which cannot beadjusted against current year's businessincome u/s 73(1) of the Act.Accordingly. the adjustment/ set off ofF&O loss, being speculation loss,against current year's business incomeis required to be disallowed. However,the above loss is not shown separatelyunder speculative loss but set off withbusiness income. This has resulted inescaped assessment of business income ofRs.76,68,956/- 3.Analysisofinformationcollected/received: As per section 73(1) of the Act anyloss, computed in respect of aspeculation business carried on; by theasses see, shall not be set off exceptagainst profits and gains, if any, ofanother speculation business. As persection 43(5) of the Act, "speculativetransaction" means a transaction inwhich a contract for the purchase orsale of any commodity, including stocksandshares,isperiodicallyorultimately settled otherwise than by theactual delivery or transfer of thecommodity or scripts: Provided that for the purposes of thisclause. (a) a contract in respect of raw materials or merchandise entered into bya person in the course of hismanufacturing or merchanting business toguard against loss through future pricefluctuations in respect of his contractsforactualdeliveryofgoodsmanufactured by him or merchandise soldby him; or (b) a contract in respect of stocks andshares entered into by a dealer orinvestor therein to guard against lossin his holdings of stocks and sharesthrough price fluctuations; or (c) a contract entered into by a memberof a forward market or a stock exchangein the course of any transaction in thenature of jobbing or arbitrage to guardagainst loss which may arise in theordinary course of his business as suchmember; or (d) an eligible transaction in respectof trading in derivatives referred to inclause [(ac)] of section 2 of theSecurities Contracts (Regulation) Act,1956 (42 of 1956) carried out in arecognised stock exchange; or (e) an eligible transaction in respectof trading in commodity derivativescarried out in a recognised association,shall not be deemed to be a speculativetransaction. As regards the meaning of the term"speculation business", Explanation 2 tosection 28 of the Act states: "Wherespeculative transactions carried on byan assessee are of such nature as to constitute a business, the business(hereinafter referred to as "speculationbusiness") shall be deemed to bedistinct and separate from any otherbusiness." (d) an eligible transaction in respectof trading in derivatives referred to inclause [(ac)] of section 2 of theSecurities Contracts (Regulation) Act,1956 (42 of 1956) carried out in arecognised stock exchange; or (e) an eligible transaction in respectof trading in commodity derivativescarried out in a recognised association,shall not be deemed to be a speculativetransaction. As regards the meaning of the term"speculation business", Explanation 2 tosection 28 of the Act states: "Wherespeculative transactions carried on byan assessee are of such nature as to constitute a business, the business(hereinafter referred to as "speculationbusiness") shall be deemed to bedistinct and separate from any otherbusiness." On perusal of the assessment records forthe year under consideration, it isfound that the assessee has incurredloss of Rs.76,68,956/- on sale of F&Ocarried out during the AY 2015-16 and isloss from revenue from sale of shares.Further, it is noticed from the ledgeraccount of Marwadi Shares and financeLtd that the above loss was mentioned asmark to market (MTM) loss giving effectof changes In F&O rate as on 31.03.2015. As such, F&O transactions carried out byassessee are speculation transactionsand any loss incurred in F&O trading isa speculation loss which cannot beadjusted against current year's businessincome u/s 73(1) of the Act.Accordingly. the adjustment/ set off ofF&O loss, being speculation loss,against current year's business incomeis required to be disallowed. However,the above loss is not shown separatelyunder speculative loss but set off withbusiness income. This has resulted inescaped assessment of business income ofRs.76,68,956/-. 4. Enquiries made by the AO as sequel toinformation collected/ received: Thefacts enumerated above have been foundout on examination on the case recordsof the assessee and are selfexplanatory. Therefore, no furtherenquiry is required in this case. On the basis of the same there are reasons tobelieve that the income chargeable totax has escaped assessment. 5. Findings of the AO:During theexamination of the assessment records,it is noticed that the mark to market(MTM) loss of Rs.76,68,956/-is not shownseparately under speculative loss butset off with business income. Theadjustment/ set off of F&O loss, beingspeculation loss, against current year'sbusiness income is required to bedisallowed. Hence, it is found that an amount ofRs.76,68,956/- for the year underconsideration has escaped assessmentwithin the meaning of section 147 of theI.T. Act. 6. Basis of forming reason to believeand details of escapement of income: Ithas already been established in thepreceding paras that the assessee hasincurred loss of Rs.76,68,956/- on saleof F&O carried out during the AY 2015-16and is loss from revenue from sale ofshares. Further, it is noticed from theledger account of Marwadi Shares andfinance Ltd that the above loss wasmentioned as mark to market (MTM) lossgiving effect of changes in F&O rate ason 31.03.2015. As such, F&O transactions carried out byassessee are speculation transactionsand any loss incurred in F&O trading isa speculation loss which cannot beadjusted against current year's businessincome u/s 73(1) of the Act. Accordingly, the adjustment/ set off ofF&O loss, being speculation loss,against current year's business incomeis required to be disallowed. However,the above loss is not shown separatelyunder speculative loss but set off withbusiness income. This has resulted inescaped assessment of business income ofRs.76,68,956/-. As such, F&O transactions carried out byassessee are speculation transactionsand any loss incurred in F&O trading isa speculation loss which cannot beadjusted against current year's businessincome u/s 73(1) of the Act. Accordingly, the adjustment/ set off ofF&O loss, being speculation loss,against current year's business incomeis required to be disallowed. However,the above loss is not shown separatelyunder speculative loss but set off withbusiness income. This has resulted inescaped assessment of business income ofRs.76,68,956/-. In view of the facts enumerated above itcan reasonably concluded that theassessee is not eligible of adjustment/set off of F&O loss, being speculationloss, against current year's businessincomeand therefore the same requires tobe added to the total income. Therefore,have reasons to believe that incomechargeable to tax to the extent ofRs.76,68,956 has escaped the assessmentwithin the meaning of section 147 of theI. T. Act and it is a fit case to issuenotice u/s 148 of the Act. 7. Seventh paragraph will includeescapement of income chargeable to taxin relation to any assets (includingfinancial interest in any entity)located outside India: Not Applicable. 8. Applicability of the provisions ofsection 147/151 to the facts of thecase: In this case a return of income wasfiled for the year under considerationand regular assessment u/s 143(3) wasmade on 24.11.2017. Since, 4 years fromthe end of the relevant year has notexpired in this case, the onlyrequirement to initiate proceedings u/s 147 is reasons to believe which has beenrecorded above (Para 5 & 6). It is pertinent to mention here that inthis case an assessment was made asstipulated u/s 2(40) of the Act.However, as discussed in reason tobelieve in this case Income chargeableto tax has been escaped assessment by anamount of Rs. 76,68,956/- In view of the above facts, theprovisions of clause (c) of explanation2 to section 147 are applicable to factsof this case and the assessment yearunder consideration is deemed to be acase where income chargeable to tax hasescaped assessment. In this case more than four years havebeen lapsed from the end of theassessment year under consideration.Hence necessary sanction to issue thenotice u/s 148 has been obtainedseparately from Pr. Commissioner ofIncome Tax as per the provisions ofsection 151 of the Act.” 5.9) The petitioner raised objections against reopening vide letter dated08.06.2021. 5.10)The respondent vide order dated24.11.2021 rejected such objections raised by the petitioner. 5.11)The respondent also issued noticedated 24.11.2021 under section 142(1) of theAct calling upon the petitioner to furnishvariousinformationinrelationtoreassessment proceedings. 5.12) Being aggrieved by the action of therespondent, the petitioner has preferred thispetition. 6.Learned Senior Advocate Mr. Tushar Hemani forthe petitioner submitted that assessmentproceedings under section 143(3) of the Actwas completed in case of the assessee companyon 24.11.2017 determining total loss ofRs.30,20,767/- and subsequently case of theassessee company was sought to be reopenedunder section 147 of the Act. It wassubmitted that during the original assessment proceedings the petitioner had supplied return of income, annual report andcomputation of income, details in respect of sale of shares, futures (derivatives) including details of purchase, sale and profit/loss. It was submitted that thepetitioner had already given explanation asto why loss on account of sale of shares orunit which is settled otherwise than by theactual delivery or transfer should not be considered as speculation loss. Thepetitioner had also produced broker ledgersof the brokers in the books of the petitionerand justification for loss of Rs. 76,68,956/-incurred in trading of derivatives. proceedings the petitioner had supplied return of income, annual report andcomputation of income, details in respect of sale of shares, futures (derivatives) including details of purchase, sale and profit/loss. It was submitted that thepetitioner had already given explanation asto why loss on account of sale of shares orunit which is settled otherwise than by theactual delivery or transfer should not be considered as speculation loss. Thepetitioner had also produced broker ledgersof the brokers in the books of the petitionerand justification for loss of Rs. 76,68,956/-incurred in trading of derivatives. 6.1) Learned advocate for the petitioner submitted that after having gone through allthese materials, the Assessing Officer passedthe assessment order determining the totalincome at Rs.(-)36,20,767/-. 6.2) Learned Senior Advocate Mr. Hemanifor the petitioner submitted that anassessment framed under section 143(3) of theAct can be reopened beyond the prescribedperiod of four years from the end of relevantassessment year if and only income chargeableto tax has escaped assessment by reason orfailure on part of the petitioner to make areturn under section 139 of the Act or inresponse to the notice under sub-section(1)of section 142 or section 148 or there isfailure on part of the assessee to disclosefully and truly all material facts necessaryfor assessment. 6.3) It was submitted that admittedlypetitioner had supplied all necessary documents as were required by the AssessingOfficer during the original assessment proceedings and therefore, there was no failure on part of the petitioner to disclosefully and truly all material facts. 6.4) Learned Senior Advocate Mr.Hemanifurther submitted that notice can be issuedunder section 148 of the Act, if theAssessing Officer has reason to believe thatany income chargeable to tax has escapedassessment and there must be live link orclose nexus between the material before theAssessing Officer and the belief he hasformed regarding escapement of income. 6.5) Learned Senior Advocate Mr. Hemanisubmitted that case of the petitioner wasselected for scrutiny assessment mainly forscrutinising the transactions in derivativesand the resultant profit/loss which issue wasalready examined by the Assessing Officerwhile framing the assessment. It wassubmitted that no new tangible material has come in possession of the respondent afterframing of the original assessment andtherefore, reopening is merely based on thematerial already available on record. 6.6) It was submitted that in the presentcase, even on merits, loss incurred on Futureand Options transactions cannot be treated as“speculative loss” and therefore, even onmerits disallowance sought to be made byreopening the case is not permissible. 6.7) Learned Senior Advocate Mr. Hemanisubmitted that it appears that case of thepetitioner has been reopened on the basis ofaudit objection raised by the audit party,however, it is a well settled law that anassessment cannot be reopened on auditobjection. 6.8) Learned Senior Advocate Mr. Hemani further submitted that as per section 151 ofthe Act, no notice shall be issued undersection 148 of the Act after expiry ofperiod of four years from the end of relevantassessment year unless the Principal ChiefCommissioner or Chief Commissioner orPrincipal Commissioner or Commissioner issatisfied on the reasons recorded by theAssessing Officer that it is a fit case forissue of such notice. However, in the presentcase there is no valid sanction from thePrincipal Chief Commissioner or ChiefCommissioner or Principal Commissioner orCommissioner for reopening the case of thepetitioner beyond a period of four years fromthe end of relevant assessment year. 6.8) Learned Senior Advocate Mr. Hemani further submitted that as per section 151 ofthe Act, no notice shall be issued undersection 148 of the Act after expiry ofperiod of four years from the end of relevantassessment year unless the Principal ChiefCommissioner or Chief Commissioner orPrincipal Commissioner or Commissioner issatisfied on the reasons recorded by theAssessing Officer that it is a fit case forissue of such notice. However, in the presentcase there is no valid sanction from thePrincipal Chief Commissioner or ChiefCommissioner or Principal Commissioner orCommissioner for reopening the case of thepetitioner beyond a period of four years fromthe end of relevant assessment year. 7.On the other hand learned Senior Advocate Mr.M.R. Bhatt for the Revenue submitted that thepetition is filed at a pre-mature stageinasmuch as only notice under section 148 read with section 147 of the Act has beenissued and in the event the petitioner isaggrieved by reassessment, the petitioner hasalternative efficacious remedy by way ofappeal before the CIT(Appeal) and thereafterbefore the Tribunal. 7.1) Learned Senior Advocate Mr. Bhattsubmitted that it was found that the assesseehas incurred loss of Rs. 76,68,956/- on saleof F&O carried out during the Assessment year2015-2016 and it was noticed from the ledgeraccount of Marwadi Shares and Finance thatthe above loss was mentioned as mark tomarket (MTM) loss giving effect of changes inF&O rate as on 31.03.2015 and as such, F&Otransactions carried out by assessee arespeculation transactions and any lossincurred in F&O trading is a speculation losswhich cannot be adjusted against currentyear’s business income u/s 73(1) of the Act and therefore, the same is required to bedisallowed. 7.2) Learned Senior Advocate Mr. Bhattsubmitted that notice under section 148 ofthe Act was issued after following the dueprocedure of law mandated in the Act, afterrecording reasons as per the provisions ofsub-section(2) of section 148 read with section 51 of the Act. It was submitted thatit is true that the assessee has filed a copyof annual report and audited Profit & Lossaccount, balance sheet along with return ofincome where various information weredisclosed, however, the requisite full andtrue disclosure of all the material factsnecessary for assessment has not been made asnoted in the reasons recorded for thereopening. Therefore, it is evident that theassessee has not disclosed fully and trulymaterial facts necessary for assessment for the year under consideration. It wastherefore, submitted that there is escapementof income in view of the aforesaid facts which give jurisdiction to the AssessingOfficer to reopen the assessment. 8.Considering the submissions made by the learned advocates on both the sides, it appears that the impugned notice undersection 148 of the Act, 1961 is issued onlyon the ground that the it was noticed thatthe Mark to Market (MTM) loss of Rs.76,68,956/- is not shown separately underspeculative loss but set off with businessincome and therefore, there is escapement ofincome due to non-disclosure on part of theassessee fully and truly all material factsnecessary for assessment. 9.On perusal of the record, it appears that the assessee has furnished details regarding return of income, annual report andcomputation of income, brokers ledgers andledgers of the brokers in the books of thepetitionerandalsohasprovided justification for loss of Rs. 76,68,956/- incurred in trading of derivatives. Eventually assessment was framed undersection 143(3) of the Act wherein no additionwas made in respect of loss of Rs.76,68,956/- incurred in derivatives. 10.Further, the assessee company had alsosubmitted copies of the contract notes whichprove that the transactions entered into bytheassesseecompanyareeligible 9.On perusal of the record, it appears that the assessee has furnished details regarding return of income, annual report andcomputation of income, brokers ledgers andledgers of the brokers in the books of thepetitionerandalsohasprovided justification for loss of Rs. 76,68,956/- incurred in trading of derivatives. Eventually assessment was framed undersection 143(3) of the Act wherein no additionwas made in respect of loss of Rs.76,68,956/- incurred in derivatives. 10.Further, the assessee company had alsosubmitted copies of the contract notes whichprove that the transactions entered into bytheassesseecompanyareeligible transactions of derivative trading and entered into on recognized stock exchange. 11.It is therefore, apparent that there is change of opinion by the Assessing Officer toreopen the assessment for the Assessment Year 2015-2016, more particularly, when the issueof Mark to Market (MTM) loss not shownseparately under speculative loss is alreadyconsidered during the assessment proceedingsunder section 143(3) of the Act, 1961. TheAssessingOfficercannothaveanyjurisdiction to issue the notice undersection 148 of the Act, 1961 for reopeningthe assessment for the year underconsideration more particularly, when theassessment is sought to be reopened beyond aperiod of four years as held by the SupremeCourt in case of Commissioner of Income tax v. Kelvinator of India Ltd. reported in 2010(2) SCC 723 as under: “2. A short question which arisesfor determination in this batch ofcivil appeals is, whether theconcept of "change of opinion"stands obliterated with effect from1st April, 1989, i.e., aftersubstitution of Section 147 of theIncome Tax Act, 1961 by Direct TaxLaws (Amendment) Act, 1987? xxxx 6. On going through the changes,quoted above, made to Section 147 ofthe Act, we find that, prior toDirect Tax Laws (Amendment) Act,1987, re-opening could be done underabove two conditions and fulfillmentof the said conditions aloneconferred jurisdiction on theAssessing Officer to make a backassessment, but in section 147 ofthe Act [with effect from 1st April,1989], they are given a go-by andonly one condition has remained,viz., that where the AssessingOfficer has reason to believe thatincome has escaped assessment,confers jurisdiction to re- open theassessment.Therefore,post-1stApril, 1989, power to re-open ismuch wider. However, one needs togive a schematic interpretation tothe words "reason to believe"failing which, we are afraid,Section 147 would give arbitrarypowers to the Assessing Officer tore-open assessments on the basis of"mere change of opinion", whichcannot be per se reason to re-open.We must also keep in mind theconceptual difference between powerto review and power to re-assess.The Assessing Officer has no powerto review; he has the power to re-assess. But re-assessment has to bebased on fulfillment of certain pre-condition and if the concept of"change of opinion" is removed, ascontended on behalf of theDepartment, then, in the garb of re-opening the assessment, review wouldtake place. One must treat the concept of "change of opinion" as anin-built test to check abuse ofpower by the Assessing Officer.Hence, after 1st April, 1989,Assessing Officer has power to re-open, provided there is "tangiblematerial" to come to the conclusionthat there is escapement of incomefrom assessment. Reasons must have alive link with the formation of thebelief. Our view gets support fromthe changes made to Section 147 ofthe Act, as quoted hereinabove.UndertheDirectTaxLaws(Amendment) Act, 1987, Parliamentnot only deleted the words "reasonto believe" but also inserted theword "opinion" in Section 147 of theAct. However, on receipt ofrepresentations from the Companiesagainst omission of the words"reason to believe", Parliament re-introduced the said expression anddeleted the word "opinion" on theground that it would vest arbitrarypowers in the Assessing Officer. Wequote hereinbelow the relevantportion of Circular No.549 dated31st October, 1989, which reads asfollows: "7.2 Amendment made by theAmending Act, 1989, to reintroducethe expression `reason to believe'in Section 147.--A number ofrepresentationswerereceivedagainst the omission of the words`reason to believe' from Section147 and their substitution by the`opinion'oftheAssessingOfficer. It was pointed out that the meaning of the expression,`reason to believe' had beenexplained in a number of courtrulings in the past and was wellsettled and its omission fromsection 147 would give arbitrarypowers to the Assessing Officer toreopen past assessments on merechange of opinion. To allay thesefears, the Amending Act, 1989, hasagain amended section 147 toreintroduce the expression `hasreason to believe' in place of thewords `for reasons to be recordedby him in writing, is of theopinion'. Other provisions of thenew section 147, however, remainthe same." 12.Inviewofforegoingreasons, considering the facts of the case impugnednotice under section 148 of the Act, 1961 is not tenable in law and is accordingly quashedand set aside. 13.Rule is made absolute to the aforesaidextent. No order as to costs. (N.V.ANJARIA, J) RAGHUNATH R NAIR (BHARGAV D. KARIA, J)