Mr. J. D. Mistri, Senior Advocate, A/W Mr. B v. Dhiraj Singh Thakur And Kamal Khata, Jj

IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO.1994 OF 2022 Noshir Darabshaw Talati]Level 6, Ceejay House, Shivsagar Estate,]Dr. Annie Besant Road, Worli,]Mumbai-400 018.].. Petitioner v/s.1) Assistant Commissioner of Income Tax,] Central Circle-7(1),] having his office at Room no.653,] 6[th] Floor, Aayakar Bhavan,] M.K. Road, Mumbai - 400 020.] 2) Principal Commissioner of Income Tax,] Central Circle -4,] having his office at Room no.660,] 6[th] Floor, Aayakar Bhavan,] M.K. Road, Mumbai - 400 020. ]3) Union of India] through Ministry of Finance,] North Block, New Delhi – 110 001.] .. Respondents … Mr. J. D. Mistri, Senior Advocate, a/w Mr. B. V. Jhaveri & Ms.Bhargavi Rawal for the petitioner. Mr. Suresh Kumar for the respondents. … CORAM : DHIRAJ SINGH THAKUR AND KAMAL KHATA, JJ. RESERVED ON : 1ST FEBRUARY 2023. PRONOUNCED ON : 8TH MARCH 2023. 1/17 J U D G M E N T [PER: KAMAL KHATA, J.] 1.The present petition challenges the impugned noticeunder Section 148 of the Income Tax Act (“the Act”) dated31[st] March 2021 on the ground that the respondent no. 1 hadreasons to believe that income chargeable to tax forAssessment Year (AY) 2015-16 has escaped assessmentwithin the meaning of section 147 of the Act and theAssessment Order passed under Section 143(3) r.w.s. 147 ofthe Act dated 31[st] March 2022 thereby rejecting the set off ofthe current year’s long-terms capital loss against long termcapital gain and consequently the notice of demand u/s 156 ofthe Act dated 31[st] March 2022. 2.The reasons for reopening given under notice dated 28[th]January 2022 are as under: “The original return of income was filed on 31-03-2016 declaring total income at Rs.5,55,93,680/- for A.Y. 2015-116. Subsequently,the revised return was filed by the assessee on14.02.2017 declaring total income of Rs.5,56,63,130/-. In this case assessmentproceedings u/s.143(3) of the act completedassessing total income at Rs. 6,13,89,818/-.In this case on verification of case records, it is seen that the assessee had computed longterm capital gains of Rs. 2,25,57,987 byselling share of Silver Pearl Reality Pvt. Ltd.sold to Piramal Reality Pvt. Ltd. on 3.2.2015.A gain of Rs. 57,26,688 on sale of Non-Agricultural land. These capital gains wereoffset by a loss of Rs. 14.00 crores on sales ofshares of Shandilya Properties P Ltd and netloss of Rs. 11.17 crores was claimed as carryforward loss which was allowed in scrutinyassessment. The assessee had purchased the 3675shares of Shandilya Properties P Lid at Rs.25,000 each on 17.09.2010 for a totalconsideration of Rs. 9,75,00,000 and sold theshares to Seaface Buildcon company LLP on22.1.2015 at a price of Rs. 100 each therebybooking a loss of Rs. 14,00,31,941/-. The purchasing concern Seaface BuildconCompany LLP is owned by the assessee alongwith Rashna Noshir Talati a relative of theassessee, so the net effect is that thecontrolling interest in the company stillremained with the assessee. The company ofwhich the shares were sold i.e., ShandilyaProperties Pvt. Ltd was converted into LLPwith the name Shandilya Properties LLP on21[st] February 2015 and the new owners of theLLP were Talati Noshir Darabshaw and TalatiXeres Noshir the children / relatives of theassessee. This showed that the sale at such alow price was only a sham transaction to booka loss to avoid paying taxes on capital gains.The assessee had also received an amount ofRs. 124.36 crores from Shandilya PropertiesLLP (i.e., erstwhile Shandilya Properties Pvt.Ltd) which goes to show that the company which was sold was a cash rich company andtherefore the value of the company must havebeen very high and the sale price was muchbelow the Fair market value and the sale wasnot an a arm’s length price and the shareswere sold much below the market price only tobook the losses. Further the assessee continues to show anamount of Rs. 12.22 crores as receivable fromShandilya Properties Pvt.Ltd. As on 31[st]March 2015 even though the company wasliquidated due to conversion into LLP inFebruary 2015. Therefore, the whole transaction of sale ofshares of Shandilya Properties Pvt Ltd at theprice below the market value to a company inwhich the assessee had a control is a colorfuldevice to generate long term capital to offsetthe capital gains and therefore the capital lossof Rs. 14,00,31,941/- should have beendisallowed. The non-disallowance of loss Rs.14,00,31,941 has resulted in excess carryforward of long-term capital loss Rs.1,74,73,954/- and non-levy of tax on long termcapital gains of Rs. 2,25,57,987 resulting inshort levy of tax of Rs. 51,11,640 and furtherpotential revenue loss (due to carry forwardof losses) to the extent of Rs. 2,66,19,598/-. 3.Mr. Mistri the learned senior counsel for the petitioner submitted that the reopening of the assessment is based purely on change of opinion regarding set off of the long termcapital loss against the long term capital gain of the current4/17 year, which was considered and deliberated in the course of the original assessment proceedings by the respondent no.1who passed an order under Section 143(3) of the Act dated7[th] June 2017 for the Assessment Year 2015-16. 4.The learned counsel for the petitioner furthersubmitted that the respondent no.1 has failed to show anytangible material based on which he formed a belief that theset off of the long-term capital loss against the long-termcapital gain of the current year could not have been allowedwhile taxing the long-term capital gain. The learned counselsubmitted that the respondent no.1 has also failed to furnishthe copy of the approval of the Pr. CIT as provided underSection 151 of the Act before issuing the notice under Section148. 5.The learned counsel for petitioner relied on the case ofM/s. GKN Driveshafts (I) Ltd. V/s. ITO[1] in support of hiscontention that the respondent has failed to dispose of theobjections filed by the petitioner by his letter dated 8[th]February 2022 and consequently erred in passing the order under Section 143(3) r.w.s. 147 of the Act. The learnedcounsel submits that respondent no.1 failed to take intoconsideration the objections filed by the petitioner dated 8[th]February 2022 apart from the two letters dated 30[th] March2022 whereby the petitioner had given detailed reasons forsetting aside the notice on account of non-compliance withthe provisions of Section 147 of the Act. He submitted thatthe petitioner had filed the original return of income underSection 139(4) of the Act and submitted that the balance longterm capital loss is not carried forward though allowed in theoriginal Assessment Order that was filed by the petitioner inthe original return of income. In view of the above, he submitsthat the petition be made absolute with costs. 6.The learned counsel brought to our attention the noticedated 1[st] February 2017 under Section 142(1) of the Actwhereby the respondent no.1 had called upon the petitionerto produce all details in connection with the Assessment Year2015-16. He drew our attention particular to clause (9) of thesaid notice which sought an explanation for saleconsideration of the property on account of it being less in the ITR than what was reported in the AIR. He submitted that by 6.The learned counsel brought to our attention the noticedated 1[st] February 2017 under Section 142(1) of the Actwhereby the respondent no.1 had called upon the petitionerto produce all details in connection with the Assessment Year2015-16. He drew our attention particular to clause (9) of thesaid notice which sought an explanation for saleconsideration of the property on account of it being less in the ITR than what was reported in the AIR. He submitted that by a letter dated 16[th] February 2017, the petitioner hasspecifically answered the queries and had sought a copy of theAIR to enable them to furnish the explanation in that regard.He also drew our attention to the letter dated 3[rd] May 2017filed with the AO on 4[th] May 2017 on which the hearing washeld. He submitted that in paragraph 6 and 9 of the saidletter, the explanation sought by the respondent no.1 innotice dated 1[st] February 2017 was specifically answered inparagraph 6 along with the documents in that regard. Healso drew our attention to the letter issued by the petitioners’Chartered Accountants dated 22[nd] May 2017 and moreparticularly the explanation with respect to the gain arisingon account of the sale of the said non-agricultural land beingthe capital gain and not the business income, since it was soldafter a period of nearly 12 years. 7.The learned counsel laid stress on the order dated 7[th]June 2017 passed under Section 143(3) of the Act and moreparticularly paragraph 5 to contend that the respondent no.1had considered the effect of the long-term capital gain on the sale of non-agricultural land in A.Y. 2014-15, as alsoparagraph 6 to show that he had accepted the loss as claimedby the petitioner. The learned counsel also pointed out thefalse statement recorded in the affidavit that no question wasasked by the AO in any 142(1) notice which is clearlycontrary to the record in as much as the notice dated 1[st]February 2021 clearly evinces such explanation sought for bythe respondent no.1. He also submitted that the avermentthat no opinion has been expressed by the respondent no.1under Section 143(3) is also false, as can be evinced by theorder. 8.The learned counsel vehemently argued that whilst therespondent no.1 does not refute the receipt of the letter dated3[rd] May 2017 but only raised a contention regarding absenceof stamp of receipt by the department on the letter. Hesubmitted that since the letter was submitted to therespondent by hand delivery on the date of hearing,consequently, no stamp of receipt was taken from thedepartment. He accordingly submitted that the Petition bemade absolute as prayed. 9.Per Contra, Mr. Kumar the learned counsel for therespondent, submitted that the objections filed by thepetitioner through its letter dated 8[th] April 2021 have beenduly disposed of by the letter dated 31[st] January 2022. Hesubmitted that the notice under Section 148 and order underSection 147 r.w.s. 143 (3) was based on law and soundreasoning. He submitted that on perusal of the record, itcould be seen that the issue mentioned in the reasons forreopening was not raised during the original assessmentproceedings nor was it disclosed by the petitioner. Hesubmitted that the said issue was not investigated in theearlier proceedings nor was any opinion expressed in thatregard. He submitted that the reply dated 3[rd] May 2017(which did not have the stamp of receipt by the department)did not amount to full disclosure. He submitted that,particulars mentioned in the table given in paragraph 4.5 atpage 154 of the affidavit in reply dated 11[th] July 2022 clearlypointed what the petitioner failed to disclose. He submittedthat the objection raised by the assessee by letter dated 8[th]April 2021 was rebutted/removed by the office order dated31[st] January 2022. The contention of the petitioner that the objections were not disposed of, was not correct and the samewas done as per the guidelines of the Supreme Court in thecase of GKN Driveshaft (supra). He submitted that theintroduction of capital in the firm ought to be as per Section45(3) of the Act and the carry forward of capital loss ofRs.11.17 crores which was not claimed, ought not to be addedto the total income. He submitted that these two issues wereaddressed at paragraph 8 & 10 of the Assessment Orderpassed under Section 147 r.w.s. 143(3) of the Act. 10.Learned counsel for the respondents relied upon thetable to paragraph 4.11 at page 163 to submit that these factswere not part of the notices under Section 142(1) and reply ofthe assessee in the original proceedings that were culminatedunder section 143(3). He submitted that in view of theAssessment Order, the AO had rightly come to the conclusionthat the assessee had failed to disclose the fully and truly allmaterial facts and consequently the reopening of theassessment was justified. He submitted that the entiretransaction of sale of shares of Shandilya Properties P. Ltd. atthe price below the market value to a company in which theassessee had control was nothing but a colorful device to10/17 generate long term capital loss to offset the capital gains. He accordingly submitted that the capital loss ofRs.14,00,31,941/- ought to have been disallowed. This was inhis opinion is tangible material for reopening the assessmentas per Section 147. Conclusion : 11.We have heard both counsel at length. We find merit inthe Writ Petition. 12.In the case of ITO v/s. Lakhmani Mewal Das[2] theSupreme Court held that the duty of the assessee does notextend beyond making a true and full disclosure of theprimary facts. Once he has done that his duty ends, it is forthe Income Tax Offcer to draw the correct inference throughprimary facts. It is not responsibility of the assessee to advisethe Income Tax Officer with regard to the inference which heshould draw from the primary facts. If the Income Tax Officerdraws an inference which appears subsequently to beerroneous, mere change of opinion with regard to thatinference would not justify initiation of action for reopening 11/17 assessment. 13.In the present case the notice u/s 142 (1) of the Act r.w.s129 for AY 2015 -16 was issued to the petitioner on 1[st]February 2017 whereby at item 9 page 52 an explanation wassought for the said property. The details were offered by letterdated 3[rd] May 2017 at item 6 page 60 (which letter ispurportedly admitted as not stamped as received by thedepartment). However, the item no. 5 at page 66 r.w. 5 (h) atpage 68 of the section 143 (3) order dated 7[th] June 2017clearly evince that the issue was considered by the AO.Furthermore, the reasons recorded in paragraph 2 of noticedated 28[th] January 2022 at page no. 77 evince that thereopening is based on ‘verification of case records’ andonsecond last paragraph at page no. 78 evince “Based on thediscussion at above and perusal of available record” clearlyshow that there was no fresh material with the AO that couldjustify reopening of the assessment. It is apparent that thereason for reopening is on account of a “change of opinion” inas much as all the material had been placed before the AO. 14.It would be appropriate to refer to the case of Ananta12/17 Landmark (P.) Ltd. vs. Deputy Commissioner of Income-tax, Central Circle 5(3), Mumbai[3] in regard to “AO’s duty tomention” in his reasons : 14.It would be appropriate to refer to the case of Ananta12/17 Landmark (P.) Ltd. vs. Deputy Commissioner of Income-tax, Central Circle 5(3), Mumbai[3] in regard to “AO’s duty tomention” in his reasons : “… the Assessing Officer has to mention whatwas the tangible materialto come to the con-clusion that there is an escapement of incomefrom assessment and that there has been afailure to fully and truly disclose material fact.After a period of four years even if the Assess-ing Officer has some tangible material to cometo the conclusion that there is an escapementof income from assessment, he cannot exer-cise the power to reopen unless he discloseswhat was the material fact which was nottruly and fully disclosed by the asessee.” 15.Therefore, based upon the reasons recorded, one needsto scrutinize whether there was any tangible material withthe Assessing Officer justifying reopening of the assessmentor can it be said to be a case of ‘review’ and ‘change of opinion’by the said officer.On the perusal of the papers and thereasons mentioned in the notice for reopening we find that AOhas not mentioned what was the new tangible material tojustify the reopening and what was the material fact whichwas not truly and fully disclosed. 3[2021] 131 taxmann.com 52 (Bombay) 16.In the present case the AO had passed an order u/s 143 (3) on 7[th] June 2017. Therefore, the passage in Kelvinator ofIndia Limited (Supra), would be relevant. A Full Bench of theDelhi High Court held : “….We also cannot accept submission of Mr.Jolly to the effect that only because in theassessment order, detailed reasons have notbeen recorded on analysis of the materials onthe record by itself may justify the AssessingOfficer to initiate a proceeding under section147 of the Act. The said submission isfallacious. An order of assessment can bepassed either in terms of sub-section (1) ofSection 143 or Sub-section (3) of Section 143.When a regular order of assessment is passed-in terms of the said subsection (3) of section143 a presumption can be raised that such anorder has been passed on application of mind.” 17.The respondent has failed to show why the presumptionshould not be applied in the present case. Further, it can alsobe seen from the reasons recorded that there was no newmaterial which had come to the notice of the Assessing Officerand the entire reference in the reasons recorded is only to thematerial on record. 18.Testing the facts of the present case on the touchstone of the judgments (Supra), it can be seen that there was no newmaterial in the possession of the Assessing Officer. Nothingnew had happened, neither was there any change in theapplicable law, which would have warranted the reopening ofthe case. It clearly suggests that in the garb of reopening theassessment, the Assessing Officer was reviewing the earlierorder of assessment. In the absence of any new tangiblematerial available with the Assessing Officer, and in view ofthe fact that there is a general presumption that an order ofassessment under section 143(3) has been passed afterproper application of mind and considering the fact that inthe present case, the Assessing Officer had soughtclarification with regard to the details of sale of property andtransfer of shares, details whereof were submitted during thecourse of the proceedings, it certainly goes to show that theissue with regard to transactions with all parties had beengone into by the said Assessing Officer. There is no failure onthe part of the petitioner to disclose any material facts andconsequently the reopening is invalid in view of the proviso ofSection 147 of the IT Act. 19.In this regard reliance is placed on Tata Sons v/s, DCIT[4]where the Court held that "when there is a discretion in theassessment order connected with the issue for which thereassessment is initiated, the reopening was struck down asbeing without jurisdiction on the ground of change ofopinion.” 19.In this regard reliance is placed on Tata Sons v/s, DCIT[4]where the Court held that "when there is a discretion in theassessment order connected with the issue for which thereassessment is initiated, the reopening was struck down asbeing without jurisdiction on the ground of change ofopinion.” 20.In the case of Joint Commissioner of Income Tax v/s.Cognizant Technology Solutions India Pvt. Ltd.[5] the decisionof the Court holding that in cases where queries were askedon the issue during the original assessment proceedings, eventhough there is no discussion in the assessment order andwhere it could be shown either positively or by necessaryimplication that the AO had applied his mind to the issue, thereopening should be struck down as being withoutjurisdiction on the ground of change of opinion, was upheld bythe Supreme Court whilst dismissing the SLP with a speakingorder. 21.In our view, once the facts and claims were enquired intoduring the original assessment, a notice on the same would be construed as a change of opinion, for the purposes of4(2022) 286 Taxman 587 (Bombay)5(2023) 146 taxman.com 197 (SC)4(2022) 286 Taxman 587 (Bombay)5(2023) 146 taxman.com 197 (SC) 16/17 reopening of the assessment. 22.In the present case, the petitioner has disclosed all theprimary facts to the respondent as can be evinced from theresponses to the original proceedings. We are, accordingly, ofthe opinion that the original assessment was completed with,after having considered all the facts and material. 23.In view of the above, the impugned notice u/s 148 of theAct dated 31[st] March 2021 and assessment order passed u/s143 (3) r.w.s. 147 of the Act dated 31[st] March 2022 arequashed and set aside and all consequent actions infurtherance thereto are stayed. 24.The petition is allowed with no order as to costs. (KAMAL KHATA, J.) (DHIRAJ SINGH THAKUR, J.)