2022 (1) TMI 432 - HC - Income Tax

Validity of reopening of assessment u/s 147 - reasons as furnished to assess can be looked into for testing the validity of reassessment proceedings - long term capital loss disallowed as transaction was not regarded as transfer within the meaning of Section 47(iv) and (v) - as argued reasons as furnished do not bear the date, signature and approval of the authority specified u/s 151 - HELD THAT - In this case, one set of reasons was provided to petitioner and when objected to by petitioner, respondents justify the reopening by producing an undated and unsigned reasons which was never furnished to petitioner at any point of time prior thereto. We have considered both the reasons and we do observe that the reasons as furnished to petitioner vide letter dated 28th September 2020 and the reasons as reproduced in the order dated 17th May 2021 rejecting petitioner s objections, are different. In the first set of reasons as furnished with letter dated 28th September 2020, it is stated that the long term capital loss cannot be disallowed as the transaction is not regarded as transfer within the meaning of Section 47(iv) and 47(v) since preference shares were acquired from Greatship India Ltd. Of course, the reasons also does not record that any income has escaped the assessment because it does not state the loss has arisen because of redemption of preference capital but indicate that the loss has arisen since preference shares were acquired from the flagship company. A capital loss can never arise on the acquisition of shares but only on the transfer or sale of shares. In the second set of reasons as reproduced in the order rejecting the objections, it is stated that petitioner has sold preference shares resulting into long term capital loss. As noted in the earlier part of this order, petitioner has not sold the preference shares but the shares were redeemed by Greatship India Ltd. and since on redemption there was a transfer of shares due to extinguishment of rights therein the capital loss was claimed in the return of income. In our view, without appreciating or understanding the correct facts notice has been issued under Section 148 of the Act and that itself is enough for us to conclude that the jurisdictional conditions are not satisfied before the issuance of notice under Section 148 - impugned notice and the order have to be quashed and set aside. Petition is, therefore, allowed

Summary

Issues:
1. Jurisdiction of reopening assessment under Section 148 of the Income Tax Act 1961.
2. Validity of reasons for reopening assessment.
3. Interpretation of Section 47(iv) and Section 47A of the Act regarding transfer of capital asset.
4. Compliance with jurisdictional conditions for issuance of notice under Section 148.

Analysis:

Issue 1: Jurisdiction of reopening assessment under Section 148
The petitioner challenged the notice seeking to reopen the assessment for A.Y. 2015-2016 under Section 148, arguing that the proceedings were based on a mere change of opinion and lacked new tangible material. The petitioner contended that the notice was without jurisdiction as the issue had been examined in detail during the regular assessment proceedings. The High Court noted that the jurisdictional Assessing Officer had reasons to believe that income had escaped assessment, focusing on the disallowance of a long-term capital loss. The court emphasized that the Assessing Officer did not need to explicitly reference every query raised during assessment in the order and upheld the jurisdiction to reopen the assessment.

Issue 2: Validity of reasons for reopening assessment
The court examined the reasons furnished to the petitioner and found discrepancies between the initial reasons and those reproduced in the order rejecting objections. It highlighted that the reasons provided to the petitioner did not align with the actual transaction of redemption of preference shares, indicating a lack of understanding of the facts. The court concluded that the jurisdictional conditions were not satisfied before issuing the notice under Section 148, leading to the quashing of the notice and the order rejecting objections.

Issue 3: Interpretation of Section 47(iv) and Section 47A
The court analyzed the applicability of Section 47(iv) in the context of the redemption of preference shares. It determined that the provisions of Section 47(iv) did not apply to the transaction as the shares were extinguished upon redemption, leading to the conclusion that the capital loss claimed was allowable. The court referenced relevant case law to support its interpretation of the sections.

Issue 4: Compliance with jurisdictional conditions
The court emphasized the importance of complying with jurisdictional conditions before issuing a notice under Section 148. It noted that only the reasons furnished to the assessee could be considered for testing the validity of reassessment proceedings. The court highlighted the discrepancies in the reasons provided to the petitioner and the lack of new tangible material post regular assessment proceedings, reinforcing its decision to quash the notice and the order rejecting objections.

In conclusion, the High Court allowed the petition, quashing the notice dated 17th March 2020 seeking to reopen the assessment for A.Y. 2015-2016 and the order rejecting objections dated 17th May 2021. The detailed analysis of jurisdiction, reasons for reopening, interpretation of relevant sections, and compliance with jurisdictional conditions formed the basis of the court's decision.