2012 (4) TMI 53 - AT - Income Tax

Reopening - Set off of business loss ignoring the provisions of section 90(2) - held that - From the prescription of section 71, it is palpable that there is no bar in allowing set off of loss under the head Profits and gains of business or profession against income under the head Income from other sources . This section applies to all assesses, whether resident or non-residents, so long as income of non-resident assesses is computed under the provisions of the Act. The present assessee has also chosen to be covered under the Act. It is seeking loss under the head Profits and gains of business or profession to be set off against Income from other source . There is hardly any difficulty in holding that the Assessing Officer was not justified in taxing Income from other sources amounting to Rs. 12.57 crore without allowing its set off against the business loss of Rs. 48.80 crore. - Decided in favor of assessee. Regarding reassessment - it is abundantly clear that where an assessment order is passed u/s 143(3), no action can be taken under this section after the expiry of four years from the end of the relevant assessment year unless any income chargeable to tax escaped assessment by reason of failure on the part of the assessee inter alia to disclose fully and truly all material facts necessary for his assessment - The reassessment has been initiated on the score that the loss so declared by the assessee was liable to be considered as Capital gain and not Business income and hence its set off was not permissible against income from other sources - It is a trite law that change of opinion cannot be a reason to reopen the completed assessment - Appeal is allowed

Issues Involved:
1. Rejection of the appellant's claim of set-off of business loss against other income.
2. Initiation of reassessment proceedings under section 147.

Issue-Wise Detailed Analysis:

1. Rejection of the appellant's claim of set-off of business loss against other income:

The appellant, a non-resident foreign company, filed its return of income declaring a total loss of Rs. 36.22 crore, primarily from the sale of shares, which was categorized under 'Profits and gains of business or profession'. The appellant sought to set off this business loss against dividend income and interest on income tax refund, categorized under 'Income from other sources'. The Assessing Officer (AO) did not allow the carry forward of the unabsorbed business loss, leading to the initiation of reassessment proceedings.

The AO, relying on a subsequent ruling in the case of Fidelity Northstar Fund, opined that the profits from the sale of shares should be taxable under 'Capital gains' and not 'Business income'. Consequently, the AO held that the business loss could not be set off against income from other sources as per section 71(3) of the Income-tax Act, 1961.

However, the Hon'ble Bombay High Court had previously ruled that the ruling in Fidelity Northstar Fund could not displace the binding character of the Advance Ruling rendered in the appellant's own case, which held that the gains from the sale of shares were business profits. The AO, faced with this judgment, had to accept that the loss from the sale of shares was 'Business loss'. Nevertheless, the AO contended that since the appellant had no Permanent Establishment (PE) in India, the business loss could not be set off against income from other sources.

The Tribunal held that as per section 90(2) of the Act, the appellant had the option to be governed by the provisions of the Act or the Double Taxation Avoidance Agreement (DTAA), whichever was more beneficial. The appellant chose to be governed by the Act, which allowed the set-off of business loss against income from other sources. The Tribunal concluded that the AO was not justified in taxing the income from other sources without allowing the set-off of the business loss. Hence, the assessment order was overturned to this extent, and the appellant's claim was allowed.

2. Initiation of reassessment proceedings under section 147:

The original assessment was completed under section 143(3) on 28.02.2006. The AO issued a notice under section 148 on 31.03.2010, beyond the four-year limit from the end of the relevant assessment year, without any failure on the part of the appellant to disclose fully and truly all material facts necessary for assessment.

The Tribunal noted that the AO's initiation of reassessment proceedings was based on a subsequent ruling in another case (Fidelity Northstar Fund) and not due to any failure by the appellant to disclose material facts. The Tribunal emphasized that the binding nature of the Advance Ruling in the appellant's own case could not be overridden without following the prescribed procedure for modification.

Moreover, the Tribunal highlighted that the reassessment was initiated on a mere change of opinion without any tangible material indicating escapement of income. The Hon'ble Supreme Court in CIT v. Kelvinator of India Ltd. had held that reassessment based on a mere change of opinion is not permissible. Consequently, the Tribunal quashed the initiation of reassessment proceedings and set aside the impugned order on merits.

Conclusion:

The appeal was allowed in favor of the appellant, with the Tribunal ruling that the set-off of business loss against income from other sources was permissible under the Act, and the initiation of reassessment proceedings was unjustified and time-barred.

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