IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 17401 of 2011 FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE VIJAY MANOHAR SAHAI and HONOURABLE MR.JUSTICE N.V.ANJARIA ================================================================
1 Whether Reporters of Local Papers may be allowed to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the judgment ?
4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ?
5 Whether it is to be circulated to the civil judge ?
================================================================ PRIYANKA GEMS Petitioner(s) Versus DY COMMISSIONER OF INCOME TAX Respondent(s) ================================================================ Appearance:
MR TEJ SHAH, ADVOCATE for the Petitioner(s) No. 1 MR SUDHIR M MEHTA, ADVOCATE for the Respondent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE VIJAY MANOHAR SAHAI and
HONOURABLE MR.JUSTICE N.V.ANJARIA
Date : 09/08/2012 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE VIJAY MANOHAR SAHAI)
1. Learned counsel for the parties stated that though this matter is listed for admission and since the affidavits have been exchanged, the writ petition may be finally decided on merit today. We have accepted the request and taken the writ petition for final hearing today.
2. Rule. Mr. Sudhir M. Mehta, learned counsel for the respondent waives service of Rule.
3. The short question which arises for consideration in this writ petition is `whether after expiry of 4 years the Assessing Officer can re-open the assessment on the ground that income chargeable to tax had escaped assessment, in spite of the fact that query raised by the Assessing Officer was replied by assessee, and thereafter, the Assessing Officer passed an assessment order under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as `the Act’ for short’).
4. The petitioner is a partnership firm engaged in manufacturing and export of diamonds. The petitioner filed original return of income for the assessment year 2005- 06 declaring a total income of Rs.4,04,7,190/- during the assessment proceedings under section 139(1) of the Act. Thereafter, notices under section 143(2) and section 142(1) were issued to the assessee on 19.11.2007 to the assessee, calling for various details including details of loans obtained from various banks with the nature of security pledged and details of assets purchased during the assessment year on which depreciation has been claimed. Explanation was also sought with regard to disallowance of expenses, being capital in nature, on account of provision for exchange difference of PCFC loan of Rs.73,77,337/- and Rs.1,62,26,848/- of PSCFC loan.
5. Alongwith reply dated 12.12.2007, the petitioner also submitted sanction letters from various officers. Thereafter, the Assessing Officer was satisfied, and passed the assessment order under section 143(3) of the Act. After expiry of 4 years period, on 30.03.2011, notice under section 148 of the Act was issued to the petitioner, by which the Assessing Officer informed the petitioner that income chargeable to tax in respect of Assessment Year 2005-06 has escaped assessment within the meaning of section 147 of the Act, and therefore, he proposes to re-open the original assessment.
5.1 The Additional Commissioner of Income Tax by communication dated 19.11.2007 sought certain details on the aspect of contracts entered into by the assessee for foreign exchange, relevant part of which is extracted hereunder, “You have incurred loss of Rs.25,22,207/- during the year on cancellationof forward contracts entered by you for foreign exchange, and have shown same as business loss. However, when details were called for following modus operandi was found In this regard.
I. Foreign exchange contracts are purchased for figures say of 1 lac, 2 lac or 1 million dollar with delivery period of some future date.
II. No document showing actual export/import for which payment is to be received/made is enclosed, when entering into such contract ie. they are not based on specific export/import outstanding.
III. Mostly these contracts are cancelled without actual purchase/sale of foreign currency ie. no utilization of those contracts against export receipts/import payments. Loss or profit are booked in books of accounts.
IV. Sec.43(5) of the I.T. Act, 1961 defines `Speculative transaction’. “Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts: Provided that of the purposes of this clause:
(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or
(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or
(c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss whichmay arise in the ordinary course of his business as such member; (or)
(d) an eligible transaction in respect of trading in derivatives referred to in clause 2(ac) of section 2 of the Securities contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange; shall not be deemed to be a speculative transaction.
.......
On perusal of the profit and loss account, it is observed that a sum of Rs.50337554.96 has been credited as income on account of exchange difference. However, on perusal of break up of provision in Schedule-E (Liabilities and provisions) to the balance- sheet, it is observed that the sum includes Rs.7377337/- on account of provision for exchange difference of PCFC loan and Rs.16226848/- towards provision for exchange difference on PSCFC loan. Both the expenses, being of capital nature, i.e. towards repayment/liability of loan amount, deduction is not available. You are directed to explain why this should not be disallowed.”
5.2 The assesse replied by his letter dated 12.12.2007 in which he explained and answered the queries raised and details sought for. Thereafter, the assessment order came to be passed by the Assessing Officer. On perusal of the assessment order, which is on record, it could be noticed that the issue of foreign exchange contract was liberally construed and discussed in paragraph No. 10 of the assessment order, which is reproduced hereunder, “10. During the year assessee has booked total forward contract for foreign exchange amounting to US$ 30500000/-. Out of this, the assessee has used only US$ 21336278.12, and remaining US$9163721.88 has been cancelled. The assessee has incurred loss of Rs.25,22,207/-. These forward contracts are not booked against any specific export and were not used in business as utilized, but all were ultimately cancelled without effecting delivery of foreign exchange. Specific features of these contracts are as under and all of them have been settled without delivery i.e. just by squaring up accounts.
I. Foreign exchange contracts are purchased for figures say of 1 lac, 2 lac or 1 milliion dollar with delivery period of some future date.
II. No document showing actual export/import for which payment is tobe received/ made is enclosed, when entering into such contract i.e. they are not based on specific export/import outstanding.
III. Mostly these contracts are cancelled without actual purchase/sale of foreign currency i.e. no utilization of those contracts against export receipts/import payments. Loss or profits are booked in books of accounts.
IV. Sec.43(5) of the I.T. Act, 1961 defines `Speculative transaction’. “Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts; subject to provisions appended to the sections treating certain transactions not to be a speculative transaction.
10.1 It is clear from above that transaction does not fall in any of the exception mentioned in the above clause. Clause (a) is for raw material or merchandise where such business is of manufacturing or trading of that raw material or merchandise, whereas you are manufacturer and trader of cut & polished diamonds. Similarly, clause (b) is for trader/investor of shares, clause (c) is for member of forward market or stock exchange and clause (d) is for trading in derivative as defined in clause (ac) of Section 2 of the Securities Contracts (regulation) Act, 1956 carried out in recognized stock exchange.”
Ultimately, the additions and disallowables made in the assessment order including on account of foreign exchange contract loss treated as speculative loss which was discussed in the body of the order.
6. In the above context, the grounds for reopening and the reasons recorded may be required to be considered. The reasons recorded dated 28.03.2011 reopening of assessment under section 147 came to be supplied to the assessee by the authority by a forwarding letter dated 26.08.2011. The reasons for reopening the case under section 147 of the Act given by the Deputy Commissioner of Income Tax, Surat are as under:
“On verification of the balance sheet revealed that following amounts were shown as provision under schedules-E. Current liabilities and provisions being exchange difference debited to profit and loss account on PSCFC loan and PCFC loan.
1. Provisions for exchange difference on PCFC loan Rs. 73,77,337/-
2. Provisions for exchange difference on PSCRC loan Rs.1,62,26,848/-
As the above expense of Rs.2,36,04,185/- being capital nature i.e. towards repayment/liabilities of loan amount, deduction was not admissible under any of the provisions of the Act arriving at the profit and gain of business. The said expenses required to be disallowed and added to the total income for the purpose of income tax which was not done. This resulted in under assessment of Rs.2,36,04,185/-, tax effect on which works out to Rs.1,14,87,690/-.
Thus, there is reason to believe that the income chargeable to tax to the extent of Rs.1,14,87,680/- has escaped assessment for A.Y. 2005-06. Accordingly, this case falls within the purview of provisions of Sec.147 of the I.T. Act. Therefore, Notice U/s.148 is issue in this case for A.Y. 2005-06.”
7. Thereafter, the petitioner on 12.09.2011 raised several objections against the reasons for reopening of assessment order passed under section 147 of the Act and requested the Assessing Officer to drop the proceedings.
8. We have heard Mr. Deepak Shah, learned counsel for the petitioner and Mr. Sudhir Mehta, learned counsel for the respondent.
9. After receiving the notice, the petitioner filed objection under section 148 of the Act, which was rejected by the Assessing Officer on 09.11.2011. The petitioner has challenged the order of the Assessing Officer dated 09.11.2011, as well as notice issued under section 148 of the Act for the assessment year 2005-06 by filing this writ petition.
10. Learned counsel for the petitioner has urged that there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the relevant year, and therefore, in view of the first proviso to section 147, the notice issued after four years was without jurisdiction, and no action could be taken against the petitioner beyond the period of four years.
11. Mr. Sudhir Mehta has urged that in the original assessment order the Assessing Officer has not given any reason explaining the provisions for exchange difference on PCFC loan, being exchange difference on PSCFC loan. Therefore, he urged that income chargeable to tax has escaped assessment, and the Assessing Officer was justified in the re-opening the assessment in view of the explanation 1 to section 147 of the Act.
12. It is not disputed by learned counsel for the Revenue that the original assessment order is sought to be re-opened after the expiry of period of four years from the end of the relevant assessment order, i.e. 2005-06. From the record it is shown that the provisions for exchange difference on PCFC loan and provisions for exchange difference on PSCFC loan were mentioned in the balance sheet of the petitioner. The Assessing Officer has raised specific queries with regard to the aforesaid two items, which were replied by the assessee along with other necessary evidence. The Assessing Officer had considered the reply to the queries given by the petitioner. If he has not made any mention about the reply in the said assessment order, it will not make the assessment order illegal nor the Court can infer that the income chargeable to that has escaped assessment and the assessee has failed to disclose material facts necessary for assessment.
13. The Apex Court in the case of Commissioner of Income Tax Delhi Vs. Kelvinator of India Ltd. (320 ITR 561) held :
“Prior to the Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under two conditions. Viz, if (a) assessee to make a return under section 139 for any assessment year to the ITO or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable in his possession reason to believe that income chargeable to tax had escaped assessment for any assessment year. The fulfilment of the said conditions along conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 with effect from 1.4.1989 those conditions are given a go-by and only one condition has remained, vis, where the Assessing Officer has reason to believe that income has escaped assessment, the section confers jurisdiction to re-open the assessment. Therefore, post 1-4-1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words 'reason to believe,. Failing which section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of 'mere change of opinion; which cannot be per se the reason to re-open. One 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 the re-assessment has to be based on fulfillment of certain pre-conditions and if the concept of 'change of opinion' is removed as contended on behalf of the department, then in the garb of re-opening the assessment, review would take place. One must treat the concept of 'change of opinion' as in-built test to check abuse of power by the Assessing Officer. Hence, after 1-4-1989, the Assessing Officer has power to re-open, provided there is 'tangible material' to come to conclusion that there is escapement of income from assessment. Under the Direct Tax Laws (Amendment) Act, 1987, the Parliament not only deleted the words 'reason to believe' but also inserted the word 'opinion' in section 147. However, on receipt of representations from the companies against omission of the words 'reason to believe; the Parliament re-introduced the said expression and deleted the word 'opinion' on the ground that it would vest arbitrary powers in the Assessing Officer.”
14. In view of the aforesaid decision, the law is clear that it is not open to the Assessing Officer to change his opinion unless there is some new tangible material available with the Assessing Officer, on the basis of which he has reason to believe that income chargeable to tax has escaped assessment. It is not open to the Assessing Officer to change his opinion so as to review his original assessment order. That is not permissible. So far as the argument of learned counsel for the Revenue that Explanation 1 to section 147 would apply to the facts of this case, and therefore, the Assessing Officer was justified in re-opening the assessment is concerned, we have gone through Explanation 1 to section 147 of the Act, and we find that the argument of learned counsel for the Revenue has no substance. The provision of Explanation 1 cannot apply to the facts of this case as the Assessing Officer has made specific queries from the assessee which were replied by the assessee along with evidence. The reply of the queries given by the assessee had been considered by the Assessing Officer. Merely because of the fact that it has not been mentioned by the Assessing Officer in the original assessment order, it could not be treated to be the income chargeable to tax having escaped assessment and material evidence after due diligence could not be discovered by the Assessing Officer.
15. For the aforesaid reasons, we are of the considered opinion that the reasons given by the Assessing Officer for re-opening the assessment are wholly illegal, and based on change of opinion. Therefore, the notice issued under section 148 of the Act is liable to be set aside, and the order passed by Assessing Officer, whereby objection of the petitioner was rejected by the Assessing Officer, is also quashed. In the result, the order passed by Assessing Officer dated 09.11.2011, as well as the notice dated 30.03.2011 under section 148 of the Income Tax Act, 1961, are quashed.
16. Accordingly, the petition succeeds and is allowed. Rule is made absolute.
(V.M.SAHAI, J.) (N.V.ANJARIA, J.) sndevu