KHAZANA HOLDINGS (P) LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX
[Citation -2007-LL-0607-2]

Citation 2007-LL-0607-2
Appellant Name KHAZANA HOLDINGS (P) LTD.
Respondent Name ASSISTANT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 07/06/2007
Assessment Year 1998-99
Judgment View Judgment
Keyword Tags valuation of closing stock • reassessment proceedings • income chargeable to tax • value of closing stock • speculation business • business of trading • valuation of stock • deeming provision • change of opinion • reason to believe • trading of shares • speculation loss • audited accounts • original return • succeeding year • issue of notice • speaking order • stock-in-trade • business loss • opening stock • market value • actual sale • nil income
Bot Summary: Proviso to section 147 provides that after the lapse of four years from the end of assessment year, no action shall be taken under section 147 unless escapement of income is on account of failure on the part of the assessee to make all returns under section 139 or in response to a notice issued under sub-section of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. Sub-section of section 151 provides where original assessment has been made under section 143(3), then notice under section 148 could not be issued after the expiry of four years from the end of relevant assessment year unless the Chief Commissioner of Income-tax or the Commissioner of Income-tax is satisfied that it is a fit case for issue of such notice. In a case where a return is processed under section 143(1)(a), the Assessing Officer was not required to scrutinize the facts and figures in the return filed by the assessee as he was bound to accept the return without adjustment as per the amended provisions of section 143(1)(a) effective from 1- 6-1999. As a result of the above exercise, if there are losses in such business, then the assessee, but for the provisions of section 73, would be entitled to set- off such losses against the other incomes by virtue of sections 70 and 71 of the Act. Section 70 starts with the words 'save as otherwise provided in this Act' and section 71 is subject to the provisions of Chapter-VI. Section 73, falling in Chapter-VI, provides that any loss computed in respect of a speculative business shall not be set-off except against profits of any other speculation business. Even the assessee itself has considered and computed the loss as business loss under section 28 of the Act and set off the same against other income, i.e., dividend under section 71 of the Act. In our view, the assessee cannot be permitted to blow hot and cold in the same breath by saying that it is business loss under section 28 of the Act but is not the same for the purpose of section 73.


first issue arising in this appeal relates to validity of reassessment proceedings under section 147 of Income-tax Act, 1961 ('Act'). 2. Briefly stated facts are, that assessee filed its return of income for year under consideration on 27-11-1998, declaring nil income. said return was processed under section 143(1)(a) of Act, vide intimation dated 9- 9-1999 accepting return. Subsequently, on perusal of records, it was noticed that company was dealing in purchase and sale of shares/debentures, etc., and had loss of Rs. 1,12,88,130 on sale of such shares/debentures. assessee had also declared income from dividend and interest on debentures, etc., at Rs. 8,54,250 which was adjusted against loss from share trading. On these facts, Assessing Officer was of view that income to extent of Rs. 8,54,250 had escaped assessment as per provisions of section 147 of Act inasmuch as loss in shares was deemed to be speculation loss as per Explanation to section 73 of Act and consequently, same could not be set-off against profit under other heads. Accordingly, reassessment proceedings were initiated by issue of notice under section 148 of Act on 5-3-2003. 3. In course of reassessment proceedings, assessee did not challenge validity of reassessment proceedings and consequently, reassessment was concluded by determining total income at Rs. 8,61,949 after denying set-off of loss from share trading. 4. However, validity of reassessment proceedings was challenged before learned CIT(A) by raising two contentions namely - (i) since all facts relating to purchase and sale of shares/debentures were available from audited accounts, reassessment proceedings could not be initiated in view of judgment of Hon'ble Bombay High Court in case of Citibank N.A. v. S.K. Ojha [2002] 257 ITR 663 and (ii) re-assessment proceedings could not be initiated on mere change of opinion in view of judgment of Hon'ble Bombay High Court in case of IPCA Laboratories Ltd. v. Gajanand Meena, Dy. CIT [2001] 251 ITR 416. learned CIT(A) rejected submissions of assessee and upheld action of Assessing Officer by observing as under:I have gone through all contentions of appellant and do not find any merit in its claim. It is on determining fact that by virtue of adjusting speculation loss from other income appellant's income has escaped assessment. It is also clear from fact that aforesaid issue is not raised on account of change of opinion but on account of honest and genuine belief on part of Assessing Officer that income had escaped assessment. Considering facts that Assessing Officer had not applied mind on this account in accepted return under section 143(1)(a), I do not find any infirmity in Assessing Officer's action. As such this ground of appeal is rejected.' 5. learned counsel for assessee has reiterated above contentions before us and, therefore, need not be repeated. In addition, he relied on decision of Hon'ble Bombay High Court in case of CIT v. Smt. Maniben Valji Shah [2006] 195 Taxation 493 in respect of first contention that reassessment proceedings cannot be initiated if all particulars are furnished by assessee along with return. 6. On other hand, learned D.R. has heavily relied on order of learned CIT(A) and also contended that reassessment proceedings can be initiated within period of 4 years if there is escapement of income on basis of material or information available with Assessing Officer. question whether there is failure on part of assessee to disclose all relevant material facts will be relevant only where proviso to section 147 is applicable. Proceeding further, it was submitted by her that original return was processed under section 143(1) of Act, as per Board Circular and, therefore, Assessing Officer was not required to apply his mind to fact of case while processing return. Therefore, question of forming any opinion did not arise. Consequently, question of change of opinion also does not arise. She relied upon decision of Hon'ble Bombay High Court in case of Citibank N.A. (supra). She also relied on judgment of Hon'ble Bombay High Court in case of Dr. Amin's Pathology Laboratory v. P.N. Prasad, Jt. CIT [2001] 252 ITR 683, wherein it has been held that proviso to section 147 cannot be applied where return has been accepted under section 143(1)(a). She also relied on judgment of Hon'ble Calcutta High Court in case of Simplex Concrete Piles India (P.) Ltd. v. Dy. CIT [2002] 255 ITR 49 wherein it has been held that notice of re-assessment would be valid if prima facie it is shown that Assessing Officer had reason to believe that income had escape assessment. 7. Rival submissions of parties have been considered carefully in light of facts emerging from orders of lower authorities and case law cited before us. In our opinion, legal contention raised by learned counsel for assessee is without force. Perusal of provisions of section 147 reveals that only requirement for initiating reassessment proceedings is that Assessing Officer must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year. However, proviso to section 147 provides that after lapse of four years from end of assessment year, no action shall be taken under section 147 unless escapement of income is on account of failure on part of assessee to make all returns under section 139 or in response to 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. In present case, admittedly, notice has been issued within period of four years from end of assessment year, i.e., on 5-3-2003 and, therefore, proviso to section 147 cannot be applied to present case. Consequently, contention of assessee's counsel that reassessment proceedings cannot be initiated where all necessary facts have been shown in return cannot be accepted considering fact that notice was issued within four years from end of assessment year. Therefore, in our opinion, decision of Hon'ble Bombay High Court in case of Citibank N.A. (supra), relied upon by learned counsel for assessee cannot be applied to present case. 8. It may be mentioned at this stage that learned counsel for assessee has submitted in course of hearing that relevant facts have not been mentioned in above judgment and, therefore, it cannot be said that said judgment is applicable only where period of four years from end of assessment year has lapsed. According to him, this judgment is also applicable even where assessment is re-opened within period of four years. We have gone through said judgment and find from page-665 of report wherein Hon'ble Judges referred to affidavit filed by revenue. In that affidavit, it Hon'ble Judges referred to affidavit filed by revenue. In that affidavit, it was stated that reasons were recorded and CIT, Mumbai, had granted sanction under section 151 of Act. Though necessary facts were not mentioned in that judgment but fact regarding sanction under section 151 is relevant for our purpose. Sub-section (1) of section 151 provides where original assessment has been made under section 143(3), then notice under section 148 could not be issued after expiry of four years from end of relevant assessment year unless Chief Commissioner of Income-tax or Commissioner of Income-tax is satisfied that it is fit case for issue of such notice. Sub-section (2) of section 151 applies where assessment is not made under section 143(3). In such situation also, notice could not be issued after four years unless JCIT is satisfied that it is fit case of issue of notice. Thus, sanction under section 151 is required only where period of four years from end of relevant assessment year has expired. This inference is also fortified by fact that Their Lordships of Hon'ble Bombay High Court referred to certain judgments of Hon'ble Supreme Court and judgment of own Court which were decided with reference to section 147(a) of Act (prior to amendment). Section 147(a) was also applicable to those cases where reopening was made after expiry of four years from end of assessment year. This shows that Their Lordships of Hon'ble Bombay High Court were concerned with reassessment proceedings with reference to proviso to section 147, while in present case, we are concerned with case where notice has been issued within period of four years from end of relevant assessment year. Therefore, requirement of proviso to section 147 is not relevant in present case and, consequently, above decision cannot be applied to present case. 9. decision of Hon'ble Bombay High Court in case of Smt. Maniben Valji Shah (supra) relied upon by learned counsel for assessee is also distinguishable for reasons given hereafter. only question before Hon'ble Court was whether re-opening of assessment under section 147 of Act was invalid. In that case, original assessment was made under section 143(1) of Act and subsequently notice under section 148 was issued wherein it was mentioned that assessee had purchased flat of Rs. 2.50 lakhs for which no details were filed along with return and, therefore, in absence of such details, he proposed to re-open assessment under section 147 of Act to scrutinize investment made in flat purchased. Learned counsel for assessee referred decision of Hon'ble Supreme Court in case of Ganga Saran & Sons (P.) Ltd. v. ITO [1981] 130 ITR 1, for proposition that where all necessary facts are disclosed in original proceedings, then assessment could not be re-opened under section 147(a) of Act. He also referred to decision of Hon'ble Bombay High Court in case of Dr. Amin's Pathology Laboratory (supra) for said proposition. Hon'ble High Court held as under:Having heard Shri Desai, learned senior counsel for appellant as well as Shri Bhujale, learned counsel for respondent, it is admitted position that assessee had invested sum of Rs. 2,50,000 for purpose of purchasing flat and what was sought to be investigated was source of income. bare perusal of aforesaid notice dated 10-10-1991, clearly indicates that officer was wanting to know details with regard to source of funds with regard to purchase of said flat for sum of Rs. 2,50,000. Obviously, in above, there is no question of Assessing Officer having any basis to reasonably entertain belief that any part of income of assessee had escaped assessment and that such escapement was by reason of omission or failure on part of assessee to disclose fully and truly all material facts. Under aforesaid facts and circumstances, we find no merit in above appeal, hence, same stands dismissed, however, no order as to costs.' [Emphasis supplied] 10. Perusal of above clearly shows that Court decided issue in favour of assessee on ground that there was no basis for entertaining belief that no part of income had escaped assessment. other observations that there was no escapement by reason of omission or failure on part of assessee but to disclose fully and truly all material facts was by way of obiter inasmuch as - (i) notice was issued within four years from end of assessment year and consequently proviso to section 147 was inapplicable and (ii) Court referred its own judgment in case of Dr. Amin's Pathology Laboratory (supra), wherein it has been clearly held that proviso to section 147 applies only to cases were reopening is sought of assessments under section 143(3). condition regarding failure to disclose material facts is provided only in proviso and not where assessment is re-opened under main provisions of section 147. In view of clear verdict of Hon'ble Bombay High Court in its earlier judgment in Dr. Amin's Pathology Laboratory's case (supra), observations made by Court in later case regarding failure to disclose material facts are by way of obiter dicta and cannot be said to have precedent value in view of speaking order passed by Hon'ble Bombay High Court in case of Dr. Amin's Pathology Laboratory (supra). 11. In view of above discussion, first contention raised by assessee is hereby rejected. 12. second contention of learned counsel for assessee, in our opinion, is also without force. Change of opinion presupposes formation of opinion. In case where return is processed under section 143(1)(a), Assessing Officer was not required to scrutinize facts and figures in return filed by assessee as he was bound to accept return without adjustment as per amended provisions of section 143(1)(a) effective from 1- 6-1999. Therefore, question of forming opinion at stage of processing return did not arise. In course of hearing, assessee's counsel was informed about decision of Tribunal in case of ITO v. Honey Enterprises [2004] 89 ITD 301 (Delhi), wherein aforesaid view was taken. relevant portion of decision is being reproduced as under:There is no dispute about legal position that reassessment proceedings cannot be initiated on mere change of opinion and rather it is settled legal position. Whether there is change of opinion or not would depend on facts of each case. change of opinion presupposes existence of opinion formed by Assessing Officer in earlier proceedings. formation of opinion is positive act on part of Assessing Officer. Thus, opinion can be said to be formed where there is application of mind with reference to material on record and relevant provisions of statute. Therefore, if in earlier proceedings, no such opinion is formed and there is escapement of income, then it cannot be contended that reassessment proceedings are initiated on mere change of opinion. Mere assessment in routine manner would not lead to interference that opinion was formed by Assessing Officer in respect of all issues involved in assessment.' issues involved in assessment.' In view of above decision, it is held that theory of change of opinion does not apply to present case since there was no occasion for forming opinion under section 143(1)(a). Consequently, intimation of proceedings under section 147 of Act is upheld. 13. next issue arising from this appeal is whether loss of Rs. 1,12,88,130 incurred in business of shares on account of valuation of closing stock can be set-off against other incomes declared by assessee. 14. Briefly stated facts are that assessee-company was engaged in purchase and sale of shares and had incurred loss of Rs. 1,12,88,130 from such business. assessee had also declared income by way of dividend and interest amounting to Rs. 8,54,250 against which loss in shares was set-off and thus, nil income was returned. In course of assessment proceedings, assessee was asked to show cause why such loss should not be treated as speculation loss and consequently, same should not be allowed to set-off from other incomes declared by assessee. In reply, it was submitted by assessee that loss was not incurred on account of speculation loss but it was incurred merely on account of diminishing in value of investment at end of year. reduction in value of closing stock was due to following of mandatory method of valuing of its stock at cost or market value whichever is less. This explanation was rejected by Assessing Officer. He was of view that though assessee was not carrying on speculation business in terms of section 43(5) of Act, but business carried on by assessee was to be treated as deemed speculation business as per provisions of Explanation to section 73 of Act. He also opined that it was immaterial whether loss incurred on account of valuation of stock at end of year or on account of actual sale in year. According to him, valuation of closing stock is part and parcel of method of computing business income/loss and, therefore, loss even arising on account of valuation of stock would amount to business loss and consequently, has to be treated as speculation loss in terms of section 73 Explanation. Accordingly, he did not allow set-off against other incomes declared by assessee. Consequently, total income was determined at Rs. 8,61,949 after making certain adjustment to income of assessee. matter was carried in appeal before learned CIT(A) who has confirmed order of assessment made by Assessing Officer. Aggrieved by same, assessee is in further appeal before Tribunal. 15. learned counsel for assessee has contended before us that assessee was entitled to value closing stock of shares as per recognised principles of accounting, i.e., at stock or market value whichever is lower, since market value of shares had gone down, assessee valued shares at market value which resulted in business loss of Rs. 1,12,88,130. He drew our attention to statements of profit and loss account and details of purchase and sale of shares appearing at Pages 10 and 15 to 17 to point out that loss had been incurred mainly on account of valuation of closing stock at market value. According to him, such loss cannot be said to have incurred on account of purchase and sale of shares and, therefore, provisions of section 73 Explanation could not be invoked. Reliance was placed on decision of Tribunal in case of Nirman Holding (P.) Ltd. [IT Appeal No. 529 (Mum.) of 2001], which was delivered by Single Bench. full decision of Bench has not been furnished before us but has referred to catch notes given in BCA Journal. According to him, in that case, it was decided that loss on account of valuation of closing stock could not be considered as speculation loss under provisions of Explanation to section 73 of Act. It was also pointed out by him that this decision has been followed by Division Bench of Tribunal in case of Associated Capital Market Management (P.) Ltd., copy of which is not available with learned counsel for assessee. He merely pointed out Para- 3.4 of learned CIT(A) where such plea was taken by assessee. At this stage, Bench also informed assessee's counsel that this very issue has been decided by Calcutta Bench of Tribunal in case of Paharpur Cooling Tower Ltd. v. Dy. CIT [2003] 85 ITD 745, wherein it has been held that loss incurred on account of valuation of closing stock will have to be treated as speculation loss in terms of provisions of Explanation to section 73 of Act. learned counsel for assessee expressed his ignorance about this decision. On other hand, learned D.R. has supported orders of lower authorities. She also relied on decision of Mumbai Bench of Tribunal in case of Dy. CIT v. Aakrosh Investment & Leasing (P.) Ltd. [2004] 90 ITD 287, for proposition that loss from trading in shares has to be treated as speculation loss under section 73 read with Explanation thereto and consequently, could not be set-off against other income. 16. After considering rival submissions of parties, we do not find merit in submissions of learned counsel for assessee. There is no dispute of fact that assessee was engaged in business of trading in shares. There is also no dispute to legal position that assessee is entitled to value closing stock of shares at cost or market prices whichever is lower. However, real question is, whether where any loss is incurred in such business on account of valuation of stock, such loss could be set-off against any other income. In our opinion, answer is in negative in view of specific language of section 73 read with Explanation. provisions of Explanation to section 73 clearly provides that where any part of business of company consists in purchase and sale of shares of other companies, then such company shall, for purpose of this section, be deemed to be carrying on speculation business to extent to which business consists of purchase and sale of such shares. Section 73(1) also clearly provides that any loss computed in respect of speculation business carried on by assessee shall not be set-off except against profits and gains, if any, of another speculation business. So, if any loss is incurred in such business, then such loss cannot be set-off against any other income falling under any of heads under section 14 of Act. 17. contention of assessee that above Explanation would apply only when there is loss on sale of shares but would not apply where loss has been incurred on account of valuation of shares, in our opinion, is without force. As mentioned earlier, Explanation to section 73 of Act clearly provides that business of purchase and sale of shares carried on by assessee shall be deemed to be speculation business carried on by him. Admittedly, assessee was carrying on business of trading of shares and, therefore, assessee has to be treated as carrying on speculation business in shares by virtue of such deeming provision. If person is, undisputedly, carrying on business of selling any goods than, profits and loss from such business has to be computed in accordance with settled principles - (i) that business has to be computed in accordance with settled principles - (i) that value of stock-in-trade must be taken into consideration while computing true profits or losses of business carried on [CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC), Chainrup Sampatram v. CIT [1953] 24 ITR 481 at page 487 (SC), A.L.A. Firm v. CIT [1991] 189 ITR 285 at page 302 (SC)], (ii) that assessee is entitled to value stock-in-trade at cost or market value whichever is less [Chainrup Sampatram's case (supra) and CIT v. British Paints India Ltd. [1991] 188 ITR 44 at page 51 (SC)], and (iii) value of closing stock must be opening stock of succeeding year [Chainrup Sampatram's case (supra)]. 18. As result of above exercise, if there are losses in such business, then assessee, but for provisions of section 73, would be entitled to set- off such losses against other incomes by virtue of sections 70 and 71 of Act. Section 70 starts with words 'save as otherwise provided in this Act' and section 71 is subject to provisions of Chapter-VI. Section 73, falling in Chapter-VI, provides that any loss computed in respect of speculative business shall not be set-off except against profits of any other speculation business. Explanation to section 73 is deeming provision by which business of company in purchase and sale of shares is deemed to be speculation business. There are two exceptions with which we are not concerned in present case. combined reading of these provisions makes it clear that section 73 has overriding effect. Therefore, losses in business of trading of shares by company have to be treated as loss from speculation business and consequently, assessee would not be entitled to set-off against other incomes. Similar view is also taken by Calcutta Bench of Tribunal in case of Paharpur Cooling Tower Ltd. (supra). 19. In present case, admittedly, assessee is company which is carrying on business of trading in shares of other companies. It is also not case of assessee that its case falls within any of exceptions provided in Explanation to section 73 of Act. details furnished before us shows that assessee had purchased and sold shares in this year also though majority of shares remained unsold. Even assessee itself has considered and computed loss as business loss under section 28 of Act and set off same against other income, i.e., dividend under section 71 of Act. In our view, assessee cannot be permitted to blow hot and cold in same breath by saying that it is business loss under section 28 of Act but is not same for purpose of section 73. Therefore, in our considered opinion, loss incurred by assessee would have to be treated as loss from speculation business despite fact that such loss is on account of valuation of closing stock. 20. In view of above discussion, it is held that loss in business of shares incurred by assessee was loss from speculation business as per provisions of section 73 of Act and consequently, assessee was not entitled to set-off same against dividend income. order of learned CIT(A) is, therefore, upheld on this issue. 21. In result, assessee's appeal stands dismissed. *** KHAZANA HOLDINGS (P) LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX
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