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TMI Blog2015 (9) TMI 757X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is clearly without any factual basis. The assumption that the Assessee had not credited the profits in question to the Profit and Loss Account is also, admittedly, factually incorrect. Thus, the reasons which led the AO to form a belief that income of the Assessee had escaped assessment are admittedly based on palpably incorrect assumptions. It is well established that reasons to believe that income had escaped assessment is a necessary precondition for the AO to assume jurisdiction.There was no basis for the AO to assume that the Assessee had not credited the profits from the sale of investments, which are alleged to have escaped assessment in its Profit and Loss account. It cannot be disputed that the exemption claimed by the AO in respect of the profit on sale/redemption of investments was duly disclosed and the AO had also opined on the merits of the taxability of profits on sale/redemption of investments. The income from profit on sale/redemption of investments is now sought to be taxed as income which had escaped assessment. This, in our view, clearly represents a change in the opinion with regard to the taxability of the income in question. It is well settled that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Appellate Tribunal and, accordingly, the following question of law is framed as the third question:- (3) Whether the AO had assumed jurisdiction under Section 147 of the Act on account of change in opinion as to the and whether the Income Tax Appellate Tribunal was correct in law in upholding the assumption of jurisdiction under Section 147 of the Act Background 3. The relevant facts necessary to address the aforesaid issues are briefly stated as under:- 3.1 The Appellant Company is a subsidiary of General Insurance Corporation of India and is engaged in the business of General Insurance comprising of Fire, Marine and Miscellaneous Insurance Business. According to the Assessee, it invests its policy holder s funds as per the statutory guidelines provided under The Insurance Act, 1938 and IRDA (Investment) Regulations, 2000. 3.2 The AO computed the assessable income at ₹ 35,87,12,674 but since the adjusted book profits were higher at ₹ 3,91,45,35,826, the AO passed an assessment order dated 30th January, 2006 for the Assessment year 2004-05 assessing the tax payable at ₹ 30,09,30,018 under section 115JB of the Act. 3.3 The Assessee cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and, therefore, the AO had the jurisdiction to issue a notice under Section 148 of the Act. Insofar as the merits of the addition were concerned, CIT(A) upheld the addition of ₹ 505.33 crores to the total income of the Assessee. The CIT(A) held that: (i) in absence of a specific statutory provision, the Assessee could not be granted exemption merely on basis of the CBDT Circular No. 528 dated 16th December, 1988 explaining the provisions of the Finance Act 1988; (ii) CBDT Circular being contrary to the legal position is not binding; and (iii) once income is credited to the Profit and Loss Account no adjustment to the same was permitted as per Rule 5 of the First Schedule of the Income-Tax Act, and that the Tribunal had held so in the Assessee s own case for AY 1990-91 (in ITA No. 2998/Del/93). 3.8 The Assessee appealed against the aforesaid order of CIT(A), before the Tribunal, inter alia, contending that the AO had initiated the reassessment proceedings solely on the basis of a change of opinion , which was not permissible. The Assessee also urged that the reasons to believe recorded by the AO were based on erroneous factual assumptions that the assessee was carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reassessment on the ground that the Assessee had not brought the decision of the Tribunal in respect of Assessment Year 1991, which was against the Assessee, to the knowledge of the AO. The Tribunal held that such an issue should have been brought to the notice of the Assessing Officer specially, failing which it can be held that special circumstances exist by way of facts on record so as to lead to the conclusion that the Assessing Officer had reason to believe that income had escaped assessment . The Tribunal was of the view that since relevant information had been withheld from the AO, it was within the powers of the AO to reopen the assessment. Submissions 5. Mr Syali, learned counsel appearing on behalf of the Assessee contended that the validity of reopening of assessment must be tested on the reasons provided by the AO and the reopening of assessments cannot be sustained on additional grounds provided subsequently. He argued that once it was clear that the reasons as indicated by the AO for issuing notice under Section 148 of the Act were found to be palpably erroneous; the reopening of the assessment could not be sustained. He submitted that it was not ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... caped assessment. 9. A bona fide reason to believe that income has escaped assessment is a necessary pre-condition that clothes the AO with the power to reopen the assessment, which has otherwise attained finality. The reasons to believe must have a direct nexus and a live link with the formation of an opinion by the AO that taxable income of an Assessee has escaped assessment. In Commissioner of Income-Tax v. Chintoo Tomar : (2015) 54 Taxmann.com 160 (Delhi) , a Division Bench of this Court had observed as under: reason to believe predicates a belief which is founded and induced by existence of palpable or cogent material or information. Reason to suspect cannot amount to reason to believe. As it is the beginning of the inquiry, having a prima facie opinion is sufficient; and irrebuttable conclusive evidence or finding is not required. But the prima facie formation of belief should be rational, coherent and not ex facie incorrect and contrary to what is on record. 10. In the present case, the reasons recorded by the AO for issuance of notice under Section 148 of the Act are quoted as under:- Under the prescribed statutory provisions only the profits an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness. The business of General Insurance is regulated and there is no allegation that the regulatory authority has found the Assessee to be in default of any provisions of The Insurance Act, 1938. The learned counsel for the Revenue also did not dispute that the AO s assumption that the Assessee was carrying on two streams of business was incorrect. Thus, this reason to believe that the Assessee s income had escaped assessment is clearly without any factual basis. 12. The assumption that the Assessee had not credited the profits in question to the Profit and Loss Account is also, admittedly, factually incorrect. Thus, the reasons which led the AO to form a belief that income of the Assessee had escaped assessment are admittedly based on palpably incorrect assumptions. It is well established that reasons to believe that income had escaped assessment is a necessary precondition for the AO to assume jurisdiction. Clearly, it would be difficult to sustain that this precondition is met if such reasons to believe that income of an Assessee has escaped assessment are based on palpably erroneous assumptions. The reason to believe must be predicated on tangible material or information. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to believe had escaped assessment and which occasioned the AO to reopen the assessment under Section 147 of the Act is sustained. In the present case, the AO has not sought to tax any other income but the income, which the AO believed had escaped assessment, that is, profits from sale of investments. The point in issue involved in the present case is whether the reopening could be sustained on grounds other than those which led the AO to believe that income has escaped assessment. This Court was not convinced with this issue in the decisions referred above. 16. The next issue to be addressed is whether the AO would have jurisdiction to examine the question as to the taxability of the profits and gains from sale of securities as it is contended that the AO had already expressed his opinion in that regard in the initial assessment. According to the Assessee, the decision of the AO to tax profits and gains from sale of investments, amounts to a change of opinion, which is impermissible under Section 147 of the Act. 17. By virtue of Section 44 of the Act, the income of an insurance company is to be computed in accordance with the Rules contained in the First Schedule of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits and gains of any insurance business is computed in accordance with the rules contained in the first Schedule to the Act. In Rule 5 of this Schedule, profits and gains of any business of insurance, other than life insurance, are taken to be balance of profits disclosed in the annual accounts furnished to the Controller of Insurance subject to certain adjustments. One of the adjustments provided therein is in respect of an amount either written off or reserved in the account to meet depreciation or loss on the realization of investment, which is allowed as deduction. Similarly, any sum taken credit for in the accounts of appreciation of or gain on the realisation of investments is taken as part of the profits and gains of the business. With a view to enable the General Insurance Corporation and its subsidiaries to play a more active role in capital markets for the benefit of policy holders, it is proposed to provide for exemption of the profits earned by them on the sale of investments. As a corollary, it is proposed to provide that the losses incurred by the General Insurance Corporation on the realization of investment shall not be allowed as deduction in computing the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the realization of investments and or gains on the realization of investments could have been deleted from clause 5(b). Since, the whole clause 5(b) is deleted, all the profit on investments whether by way of appreciation or gains on the realization of investments shall be exempted from taxation and at the same time all type of losses on investments whether by way of depreciation or loss on the realization of investments are to be disallowed. Once depreciated value of investment is written off, no loss would be incurred by the assessee on realization of these investments. Therefore, it is quite logical and also in consonance with the deletion of clause 5(b) that any loss booked by the assessee company on depreciation in value of investment should not be allowed. (emphasis added) 20. It is at once clear from the above that the AO had expressed its firm opinion that profits and gains on realization of investments were exempt from taxation. Admittedly, such profits had been included by the Assessee in its Profit Loss Account, which was subjected to scrutiny in the assessment proceedings. 21. It is also not disputed that the Assessee had appended a note expressly exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of mere change of opinion , which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review ; he has the power to reassess. But reassessment has to be based on fulfilment of certain preconditions and if the concept of change of opinion is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of change of opinion as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is tangible material to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words reason to believe but also inserted the word opinio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, which is the appropriate remedy. The said power can be exercised if the order passed by the Assessing Officer was erroneous and prejudicial to the interests of the Revenue. The error and mistake made by the Assessing Officer/Revenue in the present case is that it did not resort to and exercise the power under section 263 of the Act but erringly selected to exercise the power of reopening under section 147 of the Act. Exercise of the said power under section 147 of the Act is faulty and flawed, as jurisdictional preconditions are not satisfied. 24. In view of the aforesaid, we find considerable merit in the contention of the Assessee that the AO did not have the jurisdiction to tax the profits and gains from sale/realization of investments under Section 147 of the Act. The first and the third questions of law are, therefore, answered in favour of the Assessee and against the Revenue. In view of our decision that the AO could not assume jurisdiction to reopen the assessment under Section 147 of the Act, it is not necessary to address the second question of law, which relates to the taxability of profits on sale of investments on merits. 25. The appeal is allowed. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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