2013 (1) TMI 598 - HC - Income Tax

Validity of notice u/s 148 Reopening of assessment - Escaped assessment Speculation loss - Assessee had claimed loss from speculative transaction - Transactions for trading in gold and silver futures on commodities exchange MCX Held that - It is trite law that the notice for reopening must stand or fail on the basis of reasons recorded by the A.O. for issuing such a notice. The case of the assessee was that by virtue of clause (a) of sub-section (5) of section 43, the same would not be treated as speculative transaction. It is not the case of the A.O. in the reasons recorded for reopening the assessment that for any particular reason such claim under clause (a) was not acceptable. A transaction of hedging to fall under clause (a), there are certain conditions to be fulfilled. However, we are afraid such a contention cannot be accepted for two reasons. Firstly, any attempt on the part of the Assessing Officer now to fall back on the conditions required to be satisfied for application of clause (a) would amount to change of reasons recorded for reopening. Secondly, any such inquiry would be wholly a fishing inquiry - In favour of assessee

Issues Involved:
1. Validity of reopening completed assessments.
2. Classification of transactions under Section 43(5) of the Income Tax Act, 1961.
3. Alleged change of opinion by the Assessing Officer.
4. Impact of MCX being recognized as an exchange only from 22-5-2009.
5. Examination of hedging losses under clause (a) or clause (d) of Section 43(5).

Detailed Analysis:

1. Validity of Reopening Completed Assessments:
The petitioner challenged the reopening of assessments for the years 2007-08 and 2008-09. The court noted that the assessments were previously completed after scrutiny. The Assessing Officer issued notices to reopen these assessments within four years from the end of the relevant assessment years. The court emphasized that for reopening within four years, it is not necessary to prove that the income escaped assessment due to the assessee's failure to disclose fully and truly all material facts. However, the reopening should not be based on a mere change of opinion, as held in CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561.

2. Classification of Transactions under Section 43(5):
The core issue was whether the losses from hedging transactions claimed by the petitioner fell under clause (a) or clause (d) of Section 43(5). The petitioner argued that the transactions were hedging losses under clause (a), which covers contracts entered into to guard against loss through future price fluctuations in respect of actual delivery of goods. The Assessing Officer, however, treated these transactions as speculative under clause (d), which pertains to trading in derivatives on recognized stock exchanges.

3. Alleged Change of Opinion by the Assessing Officer:
The petitioner contended that the Assessing Officer had formed an opinion on the hedging losses during the original assessments and that reopening the assessments would constitute a mere change of opinion. The court found that the original assessment orders did not address the hedging losses and that no queries were raised by the Assessing Officer regarding these claims during the assessment proceedings. Therefore, the court concluded that the reopening was not based on a change of opinion.

4. Impact of MCX Being Recognized as an Exchange Only from 22-5-2009:
The Assessing Officer's reasons for reopening included the fact that MCX was recognized as a stock exchange only from 22-5-2009. Consequently, the transactions in question, conducted before this date, were considered speculative and not covered under clause (d) of Section 43(5). The court noted that the petitioner had not claimed these transactions as derivatives trading under clause (d) but as hedging under clause (a). Therefore, the recognition date of MCX was irrelevant to the petitioner's claim.

5. Examination of Hedging Losses under Clause (a) or Clause (d):
The court highlighted that the Assessing Officer's reasons for reopening were based on the incorrect assumption that the transactions fell under clause (d). The court stated that the petitioner's transactions should be examined under clause (a), which pertains to hedging contracts. The court found that the Assessing Officer had not provided any reasons to reject the claim under clause (a) and that the reopening notice was based on a misconception.

Conclusion:
The court concluded that the reopening notices were invalid as they were based on incorrect reasons and a misunderstanding of the applicable provisions. The court quashed the notices for reopening the assessments for both years. The court did not address the additional contention regarding the assessment year 2008-09, where the Assessing Officer had rejected the books and independently computed the income, leaving this question open for future consideration.

← Previous Next →