2008 (5) TMI 354 - AT - Income Tax

Limitation period for assessment or reassessment u/s 147 - completion of assessment after 4 years from the end of the assessment year u/s 153 - Validity of reassessment - Income Escaping Assessment - 'reason to believe' - Disallowances of Loss - Penalty levied u/s 271(1)(c) - furnishing inaccurate particulars of income and concealment of income - reassessment proceedings for the disallowance of loss as capital loss. Limitation period for assessment or reassessment u/s 147 - Completion of assessment after 4 years from the end of the assessment year u/s 153 - HELD THAT - In our opinion section 147 is only an enabling provision empowering the AO to reopen the assessment of income that had escaped assessment and rest of things are provided in the following sections 148 to 153 of the Act. Though we agree with what the learned counsel of the assessee Shri S.N. Soparkar says that it is not the case where there was failure on the part of the assessee, either to file return as required under section, 139 or 142(1) or 148 or even to disclose fully and truly all material facts necessary for the assessment and therefore the time limit of 4 years would apply, but we do not any merit in his contention that as per the proviso to section 147, no action of making of reassessment could be taken under this section after expiry of four' years from the end of relevant assessment year. His submission that under the scheme of the Act an assessment made under section 147 of the Act is a separate code has no force in view of the decision of R. Dalmia's case 1999 (2) TMI 4 - SUPREME COURT and Special Bench decision in Raj Kumar Chawla's case 2005 (1) TMI 334 - ITAT DELHI-F . Section 147 provides for assessment of the escapement of income and the enumerations as provided in Explanation 2 are items of deemed escapement. These are not part of procedure for assessment. For making an assessment for escaped income, there are various stages. Initially an opinion is to be formed vis-a-vis Explanation 2, then a notice for reopening the assessment is to be issued under section 148, and a time limit is to be seen as provided in section 149 for issuing the notice, section 150 deals with 'provisions for cases where assessment is in pursuance of an order of the appeals etc.,' section 151 deals with 'sanction for issue of notice', section 152 deals with rates of tax to be charged on escaped the assessment and certain other specific provisions and lastly, the assessment is to be made within time limit provided under section 153 for completion of assessment or assessment'. In our opinion therefore there is no merits in the case of the assessee on the additional ground raised and is accordingly rejected. We accordingly hold that the proviso to section 147 does not have the effect of curtailing the limitation period for passing the order u/s 147 as prescribed u/s 153(2). Validity of reopening of assessment - Income Escaping Assessment - 'reason to believe' - AO was justified in issuing notice u/s 147? - In the case of the assessee, the notice u/s 147 was issued which is, well within the period of four years from the end of the relevant assessment year. Therefore, the only condition to be satisfied for reopening the assessment is that there should be a reason to believe that income has escaped assessment. The words 'reason to believe' would mean that the AO should have initially ascertained the fact of the wrong claim and his that conclusion, if it constituted sufficient reason, cannot be overridden by the subsequent decision of the CIT(A) upholding the disallowance on a different ground. On material available on record, the AO was of the belief that income had escaped assessment as capital loss claimed by the assessee company had been allowed as deduction against the business income. AO was therefore justified in issuing notice u/s 147. This ground is therefore rejected. Disallowance on loss - speculative loss or not - HELD THAT - Assessee had not explained either before the CIT(A) and also before us as to the position of the date of purchase of the scrip being after the date of its sale. This is a clear indication of the fact the transaction was settled without delivery and was in the nature of speculation. The loss incurred thereon was therefore as speculative loss and was required to be disallowed, in any case. Contention of the assessee that in the other assessment years the appellant company has not earned any income by way of investments proves that the main business is that of loans and advances, has rightly been rejected by the CIT(A) by stating 'Even if no income has been earned, the amount of transactions in dealing in shares and the investment in shares is much higher as compared to transactions of loans and advances. Specifically in the assessment year under consideration, the investment and the extent of transactions in shares is far in excess of transaction in loans and advances.' Assessee's case, therefore, does not fall in any of the exceptions in the Explanation to section 73 of the Act. Loss in trading of the shares therefore has rightly been treated as speculative loss. We accordingly reject assessee's appeal on this issue. Levy of penalty u/s 271(1)(c) - furnishing inaccurate particulars of income and concealment of income - assessee debited the capital loss to the P L Account - In our opinion, a mere rejection of assessee's claim for loss that too on a different ground by the appellate authority and, therefore, cannot, in any case, be equated with concealment. The Addl. CIT v. Delhi Cloth General Mills Co. Ltd. 1984 (1) TMI 10 - DELHI HIGH COURT in similar circumstances deleted the penalty observing that the mere fact that a claim for expenditure stands disallowed does not, by itself lead to the inference that the assessee had furnished inaccurate particulars in regard to that item. Similarly, in the case of J.K. Jajoo v. CIT 1989 (8) TMI 59 - MADHYA PRADESH HIGH COURT observed that But from the mere fact that a claim for certain expenditure is rejected, it cannot be held that the claim for expenditure made by the assessee was false or inaccurate to his knowledge or was as a result of gross negligence. We may examine the issue from a, different angel also - We should also keep in mind that penalty proceedings u/s 271 are to be initiated in the course of any proceedings under the Act, either by Assessing Officer or CIT(A) or the CIT. Here in the present case they were initiated by the AO and were initiated in the cause of reassessment proceedings for the disallowance of loss as capital loss. That ground of disallowance was not accepted by the CIT(A) as correct and therefore the entire edifice crumbles and falls down, the penalty initiated on that ground cannot fructify and, therefore, cannot also be levied. The CIT(A) upheld the disallowance on a different ground but penalty cannot be levied or justified on this new ground, as for that, the initiation has to be on that ground and that too by the CIT(A) who made the order of disallowance by upholding the disallowance on a different ground. Therefore, we hold that in this case no penalty can be levied. In our opinion the assessee had not concealed the particulars of income nor furnished inaccurate particulars of its income. The explanation offered by the appellant is not without any basis and foundation and was substantiated and can be considered as bona fide and accordingly acceptable. The penalty levied u/s 271(1)(c) is therefore deleted. In the result, the quantum appeal is dismissed and the penalty appeal is allowed.

Summary

Issues Involved:
1. Reopening of Assessment under Section 147 of the Income-tax Act, 1961
2. Validity of Reassessment after Four Years
3. Treatment of Loss on Sale of Securities
4. Applicability of Explanation to Section 73
5. Levy of Penalty under Section 271(1)(c)

Detailed Analysis:

1. Reopening of Assessment under Section 147 of the Income-tax Act, 1961
The assessee argued that the reopening of the assessment under Section 147 was unjustified as the original assessment was completed under Section 143(3) and all necessary details were provided during the original assessment. The reassessment was initiated merely on a second look at the same facts. The Tribunal held that the Assessing Officer had reason to believe that income had escaped assessment, which justified the reopening. The reopening was within the four-year period from the end of the assessment year, as required by law.

2. Validity of Reassessment after Four Years
The primary issue was whether the proviso to Section 147 curtailed the limitation period for passing the reassessment order under Section 147, as prescribed under Section 153(2). The Tribunal concluded that the proviso to Section 147 does not curtail the limitation period for passing the reassessment order. The proviso restricts the initiation of reassessment proceedings after four years unless there is a failure on the part of the assessee to disclose fully and truly all material facts. The Tribunal relied on various judicial precedents, including the Gujarat High Court's decision in Praful Chunilal Patel, to support this interpretation.

3. Treatment of Loss on Sale of Securities
The Assessing Officer treated the loss on the sale of securities as a capital loss, arguing that the securities were held as investments. The assessee contended that the securities were held as stock-in-trade and the loss should be treated as a business loss. The CIT(A) agreed with the assessee that the loss was on trading account but held it to be speculative. The Tribunal upheld this view, noting that the transactions in shares far exceeded those in loans and advances, indicating that the principal business was not granting loans and advances. Therefore, the loss was correctly treated as speculative.

4. Applicability of Explanation to Section 73
The Tribunal examined whether the Explanation to Section 73 applied to the assessee's case. The Explanation deems a company engaged in the business of purchase and sale of shares to be carrying on a speculation business unless its principal business is banking or granting loans and advances. The Tribunal found that the assessee's principal business was not granting loans and advances, as the investment in shares was significantly higher than in loans and advances. Consequently, the loss from share trading was deemed speculative.

5. Levy of Penalty under Section 271(1)(c)
The Assessing Officer levied a penalty for concealment of income under Section 271(1)(c), arguing that the assessee had claimed a capital loss as a business loss to avoid taxes. The CIT(A) upheld the penalty, but the Tribunal disagreed. The Tribunal noted that the assessee had disclosed all material facts and the claim was bona fide. The explanation offered by the assessee was accepted by the CIT(A) as a business loss, though later treated as speculative. The Tribunal concluded that merely disallowing the claim on a different ground did not amount to concealment or furnishing inaccurate particulars. Therefore, the penalty was deleted.

Conclusion:
The Tribunal dismissed the quantum appeal, confirming the treatment of the loss as speculative under Explanation to Section 73, but allowed the penalty appeal, deleting the penalty imposed under Section 271(1)(c). The reassessment was upheld as valid, and the proviso to Section 147 was interpreted not to curtail the limitation period for passing the reassessment order.