2011 (7) TMI 728 - AT - Income Tax

MAT - non inclusion of profit on sale of investments - profit directed credited to the general reserve account - Reopening - notice u/s 148 - Validity of notice - Profit and gains of any business of insurance - Time limitation - Rule 5 of Schedule-I - held that - there is no provision in it for excluding from the book profits any profit accruing on account of sale of investments. Therefore, it can be said on a prima facie basis that income chargeable to tax has escaped assessment as understood under sub clause (i) of Clause-(c) of Explanation to Section 147. - minor errors in recording facts do not really alter the situation for the simple reason that the net effect is the same, namely, that profit on sale of investment had not been assessed to tax although it was liable to be taxed on a prima facie basis as per statutory provisions. Change of opinion - held that - what is the baffling in this case is that the adverse decision of the Tribunal was available with the assessee, but the same was not pointed out to the Assessing Officer in any manner whatsoever, i.e., either by way of a note in the return or by way of a letter in the course of original assessment proceedings. - Since the income escaped assessment on account of withholding of relevant information, it is held that the Assessing Officer was within his right to reopen the assessment. Regarding addition - The language of the statute is clear that no adjustment is required to be made to the accounts furnished to the Controller of Insurance in respect of profit on sale of investments - Tribunal in the case of the assessee itself is a binding precedent, which has to be followed - These investments are in the nature of stock in trade as the value thereof is adjusted in the books at the end of each year with a view to find out appreciation or depreciation therein - Appeal is dismissed

Issues Involved:
1. Jurisdiction to Reopen the Assessment
2. Inclusion of Profit on Sale of Investments in Total Income
3. Withdrawal of Interest Paid under Section 244A
4. Charging of Interest under Sections 234B and 234D

Issue-wise Detailed Analysis:

1. Jurisdiction to Reopen the Assessment:
The primary issue is whether the Assessing Officer (AO) had the jurisdiction to reopen the assessment under Section 147 of the Income Tax Act. The AO noted that the assessee did not include Rs. 505,33,63,209/- in its total income, representing profit on the sale of investments, which was directly credited to the general reserve account instead of routing it through the profit and loss account. This led to the conclusion that income chargeable to tax had escaped assessment. The AO referred to the Supreme Court's decision in Calcutta Discount Co. Ltd. v. ITO, emphasizing that passive disclosure is insufficient and it is the duty of the assessee to bring all material facts to the AO's notice. The reopening was thus based on the belief that income had escaped assessment, supported by the Delhi High Court's decision in Consolidated Photo & Finvest Ltd. v. ACIT, which clarified the conditions under which Section 147 can be invoked.

2. Inclusion of Profit on Sale of Investments in Total Income:
The assessee argued that the profit on the sale of investments was credited to the profit and loss account and not directly to the general reserve account. The assessee, governed by the Insurance Act, 1938, maintained that income from investments is part of the insurance business. However, the AO contended that the profit on the sale of investments should be included in the total income as it is not attributable to the insurance business. The CIT(A) upheld the AO's decision, stating that the amount could not be excluded from the book profits under Rule 5 of the First Schedule, and thus, the profit on the sale of investments was includible in the total income.

3. Withdrawal of Interest Paid under Section 244A:
The assessee challenged the withdrawal of interest paid under Section 244A. However, this issue is consequential to the primary issue of reopening the assessment and inclusion of profit on the sale of investments in the total income. The CIT(A)'s decision on this matter follows from the main ground of reopening the assessment.

4. Charging of Interest under Sections 234B and 234D:
Similarly, the assessee challenged the charging of interest under Sections 234B and 234D. These grounds are also consequential in nature, dependent on the outcome of the primary issue of reopening the assessment and inclusion of profit on the sale of investments.

Conclusion:
The Tribunal upheld the reopening of the assessment under Section 147, finding that the AO had reason to believe that income had escaped assessment. The Tribunal also agreed with the CIT(A) that the profit on the sale of investments should be included in the total income. Consequently, the issues regarding the withdrawal of interest under Section 244A and charging of interest under Sections 234B and 234D were also decided against the assessee. The appeal was dismissed in its entirety.

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