DOLARIA ENTERPRISES PRIVATE LIMITED V. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(1)

SCA/19018/2021

AI Insights

The case involves Dolaria Enterprises Private Limited, which challenged the notice issued by the Assistant Commissioner of Income Tax under section 148 of the Income Tax Act, 1961, for reopening the assessment for the Assessment Year 2015-2016. The original assessment was completed under section 143(3) of the Act, and the reopening was based on the belief that a loss incurred in trading of derivatives was a speculation loss and should not have been set off against business income. The petitioner argued that all necessary disclosures were made during the original assessment, and the reopening was merely based on an audit objection, which is not a valid ground for reassessment. The court agreed with the petitioner, emphasizing that reopening based on a mere change of opinion without new tangible material is not permissible.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 756361 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 29-08-2022
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income tax v. Kelvinator of India Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: M R BHATT; KARAN SANGHANI; MUNJAAL BHATT
• Assessee Lawyers: TUSHAR HEMANI; VAIBHAVI PARIKH
• Keywords: Escaped assessment; F & O trading; Income tax reassessment; Mark to market loss; Speculation loss
• Section: 147; 148; 143(3); 142(1); 28; 43(5); 73(1)

Judgement Text

"C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 19018 of 2021 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA ========================================================== 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 or any order made thereunder ? ========================================================== DOLARIA ENTERPRISES PRIVATE LIMITED Versus THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(1) ========================================================== Appearance: MR TUSHAR HEMANI, SENIOR ADVOCATE WITH MS VAIBHAVI K PARIKH(3238) for the Petitioner(s) No. 1 for the Respondent(s) No. 1 MR MR BHATT, SENIOR ADVOCATE WITH MR KARAN SANGHANI WITH MR MUNJAAL BHATT FOR M R BHATT & CO.(5953) for the Respondent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 29/08/2022 Page 1 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1.Heard learned Senior Advocate Mr. Tushar Hemani with learned advocate Ms. Vaibhavi Parikh for the petitioner and learned Senior Advocate Mr. M.R. Bhatt with learned advocate Mr. Karan Sanghani with learned advocate Mr. Munjaal Bhatt for M.R. Bhatt and Co. for the respondent. 2.Having regard to the controversy involved in the present case which lies in a very narrow compass, with the consent of the learned advocates for the respective parties, the matter is taken up for final hearing. 3.Rule returnable forthwith. Learned advocate Mr. Karan Sanghani waives service of notice of rule on behalf of the respondent. Page 2 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 4.By this petition under Article 226 of the Constitution of India, the petitioner has challenged the notice dated 21.03.2021 issued under section 148 of the Income Tax Act, 1961 (For short “the Act”) for reopening of the assessment proceedings for the Assessment Year 2015-2016. 5.Brief facts of the case are as under : 5.1) The petitioner is engaged in trading of cotton as well as share trading. 5.2) The petitioner filed return of income on 30.09.2015 for the Assessment Year 2015-2016 declaring loss at Rs. (-)53,12,248/-. 5.3) Case of the petitioner was selected for scrutiny assessment vide notice dated 6.06.2017 under section 142(1) of the Act. Page 3 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 5.4) The petitioner vide letter dated 26.06.2017 furnished various details which were called for by the Assessing Officer. 5.5) Eventually the assessment was framed under section 143(3) of the Act vide order dated 24.11.2017 determining total income at Rs(-)36,20,770/-. 5.6) The respondent thereafter issued the impugned notice dated 21.03.2021 under section 148 of the Act seeking to reopen the assessment proceedings in case of the petitioner. Yet another notice came to be issued on 20.04.2021. 5.7) The petitioner filed return of income for the year under consideration and requested for reasons for reopening vide letter dated 30.04.2021. Page 4 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 5.8) The respondent supplied copy of reasons for reopening on 12.05.2021. The reasons recorded by the Assessing Officer for reopening the assessment under section 147 of the Act read as under : “Reasons for reopening of the assessment in the case of M/s.Dolaria Enterprises Pvt. Ltd. for A.Y. 2015-16 u/s 147 of the I.T.Act 1. Brief details of the assessee:In this case, the assessee is engaged in the business of trading of cotton and share trading. The assessee was filed its return of income for A.Y.2015-16 on 30.09.2015declaring total income of Rs. (-)53,12,248/- The same was processed u/ s. 143(1) of the Act and subsequently order u/s 143(3) of the Act was passed on 24.11.2017determining total income at Rs.(-)30,20,767/-. 2. Brief details of Information collected/received by the AO: On perusal of the assessment records for the year under consideration, it is found that the assessee has incurred loss of Rs.76,68,956/- on sale of F&O carried out during the AY 2015-16 and is loss from revenue from sale of shares. Further, it is noticed from the ledger account of Marwadi Shares and finance Ltd that the above loss was mentioned as mark to market Page 5 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 (MTM) loss giving effect of changes in F&O rate as on 31.03.2015. As such, F&O transactions carried out by assessee are speculation transactions and any loss incurred in F&O trading is a speculation loss which cannot be adjusted against current year's business income u/s 73(1) of the Act. Accordingly. the adjustment/ set off of F&O loss, being speculation loss, against current year's business income is required to be disallowed. However, the above loss is not shown separately under speculative loss but set off with business income. This has resulted in escaped assessment of business income of Rs.76,68,956/- 3. Analysis of information collected/received: As per section 73(1) of the Act any loss, computed in respect of a speculation business carried on; by the asses see, shall not be set off except against profits and gains, if any, of another speculation business. As per section 43(5) of the Act, \"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 for the purposes of this clause. (a) a contract in respect of raw Page 6 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 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 which may 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 [(ac)] of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; or (e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognised association, shall not be deemed to be a speculative transaction. As regards the meaning of the term \"speculation business\", Explanation 2 to section 28 of the Act states: \"Where speculative transactions carried on by an assessee are of such nature as to Page 7 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 constitute a business, the business (hereinafter referred to as \"speculation business\") shall be deemed to be distinct and separate from any other business.\" On perusal of the assessment records for the year under consideration, it is found that the assessee has incurred loss of Rs.76,68,956/- on sale of F&O carried out during the AY 2015-16 and is loss from revenue from sale of shares. Further, it is noticed from the ledger account of Marwadi Shares and finance Ltd that the above loss was mentioned as mark to market (MTM) loss giving effect of changes In F&O rate as on 31.03.2015. As such, F&O transactions carried out by assessee are speculation transactions and any loss incurred in F&O trading is a speculation loss which cannot be adjusted against current year's business income u/s 73(1) of the Act. Accordingly. the adjustment/ set off of F&O loss, being speculation loss, against current year's business income is required to be disallowed. However, the above loss is not shown separately under speculative loss but set off with business income. This has resulted in escaped assessment of business income of Rs.76,68,956/-. 4. Enquiries made by the AO as sequel to information collected/ received: The facts enumerated above have been found out on examination on the case records of the assessee and are self explanatory. Therefore, no further enquiry is required in this case. On the Page 8 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 basis of the same there are reasons to believe that the income chargeable to tax has escaped assessment. 5. Findings of the AO:During the examination of the assessment records, it is noticed that the mark to market (MTM) loss of Rs.76,68,956/-is not shown separately under speculative loss but set off with business income. The adjustment/ set off of F&O loss, being speculation loss, against current year's business income is required to be disallowed. Hence, it is found that an amount of Rs.76,68,956/- for the year under consideration has escaped assessment within the meaning of section 147 of the I.T. Act. 6. Basis of forming reason to believe and details of escapement of income: It has already been established in the preceding paras that the assessee has incurred loss of Rs.76,68,956/- on sale of F&O carried out during the AY 2015-16 and is loss from revenue from sale of shares. Further, it is noticed from the ledger account of Marwadi Shares and finance Ltd that the above loss was mentioned as mark to market (MTM) loss giving effect of changes in F&O rate as on 31.03.2015. As such, F&O transactions carried out by assessee are speculation transactions and any loss incurred in F&O trading is a speculation loss which cannot be adjusted against current year's business income u/s 73(1) of the Act. Page 9 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 Accordingly, the adjustment/ set off of F&O loss, being speculation loss, against current year's business income is required to be disallowed. However, the above loss is not shown separately under speculative loss but set off with business income. This has resulted in escaped assessment of business income of Rs.76,68,956/-. In view of the facts enumerated above it can reasonably concluded that the assessee is not eligible of adjustment/ set off of F&O loss, being speculation loss, against current year's business incomeand therefore the same requires to be added to the total income. Therefore, have reasons to believe that income chargeable to tax to the extent of Rs.76,68,956 has escaped the assessment within the meaning of section 147 of the I. T. Act and it is a fit case to issue notice u/s 148 of the Act. 7. Seventh paragraph will include escapement of income chargeable to tax in relation to any assets (including financial interest in any entity) located outside India: Not Applicable. 8. Applicability of the provisions of section 147/151 to the facts of the case: In this case a return of income was filed for the year under consideration and regular assessment u/s 143(3) was made on 24.11.2017. Since, 4 years from the end of the relevant year has not expired in this case, the only requirement to initiate proceedings u/s Page 10 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 147 is reasons to believe which has been recorded above (Para 5 & 6). It is pertinent to mention here that in this case an assessment was made as stipulated u/s 2(40) of the Act. However, as discussed in reason to believe in this case Income chargeable to tax has been escaped assessment by an amount of Rs. 76,68,956/- In view of the above facts, the provisions of clause (c) of explanation 2 to section 147 are applicable to facts of this case and the assessment year under consideration is deemed to be a case where income chargeable to tax has escaped assessment. In this case more than four years have been lapsed from the end of the assessment year under consideration. Hence necessary sanction to issue the notice u/s 148 has been obtained separately from Pr. Commissioner of Income Tax as per the provisions of section 151 of the Act.” 5.9) The petitioner raised objections against reopening vide letter dated 08.06.2021. 5.10) The respondent vide order dated 24.11.2021 rejected such objections raised by Page 11 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 the petitioner. 5.11) The respondent also issued notice dated 24.11.2021 under section 142(1) of the Act calling upon the petitioner to furnish various information in relation to reassessment proceedings. 5.12) Being aggrieved by the action of the respondent, the petitioner has preferred this petition. 6.Learned Senior Advocate Mr. Tushar Hemani for the petitioner submitted that assessment proceedings under section 143(3) of the Act was completed in case of the assessee company on 24.11.2017 determining total loss of Rs.30,20,767/- and subsequently case of the assessee company was sought to be reopened under section 147 of the Act. It was submitted that during the original assessment Page 12 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 proceedings the petitioner had supplied return of income, annual report and computation of income, details in respect of sale of shares, futures (derivatives) including details of purchase, sale and profit/loss. It was submitted that the petitioner had already given explanation as to why loss on account of sale of shares or unit which is settled otherwise than by the actual delivery or transfer should not be considered as speculation loss. The petitioner had also produced broker ledgers of the brokers in the books of the petitioner and justification for loss of Rs. 76,68,956/- incurred in trading of derivatives. 6.1) Learned advocate for the petitioner submitted that after having gone through all these materials, the Assessing Officer passed the assessment order determining the total income at Rs.(-)36,20,767/-. Page 13 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 6.2) Learned Senior Advocate Mr. Hemani for the petitioner submitted that an assessment framed under section 143(3) of the Act can be reopened beyond the prescribed period of four years from the end of relevant assessment year if and only income chargeable to tax has escaped assessment by reason or failure on part of the petitioner to make a return under section 139 of the Act or in response to the notice under sub-section(1) of section 142 or section 148 or there is failure on part of the assessee to disclose fully and truly all material facts necessary for assessment. 6.3) It was submitted that admittedly petitioner had supplied all necessary documents as were required by the Assessing Officer during the original assessment proceedings and therefore, there was no Page 14 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 failure on part of the petitioner to disclose fully and truly all material facts. 6.4) Learned Senior Advocate Mr.Hemani further submitted that notice can be issued under section 148 of the Act, if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment and there must be live link or close nexus between the material before the Assessing Officer and the belief he has formed regarding escapement of income. 6.5) Learned Senior Advocate Mr. Hemani submitted that case of the petitioner was selected for scrutiny assessment mainly for scrutinising the transactions in derivatives and the resultant profit/loss which issue was already examined by the Assessing Officer while framing the assessment. It was submitted that no new tangible material has Page 15 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 come in possession of the respondent after framing of the original assessment and therefore, reopening is merely based on the material already available on record. 6.6) It was submitted that in the present case, even on merits, loss incurred on Future and Options transactions cannot be treated as “speculative loss” and therefore, even on merits disallowance sought to be made by reopening the case is not permissible. 6.7) Learned Senior Advocate Mr. Hemani submitted that it appears that case of the petitioner has been reopened on the basis of audit objection raised by the audit party, however, it is a well settled law that an assessment cannot be reopened on audit objection. 6.8) Learned Senior Advocate Mr. Hemani Page 16 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 further submitted that as per section 151 of the Act, no notice shall be issued under section 148 of the Act after expiry of period of four years from the end of relevant assessment year unless the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner is satisfied on the reasons recorded by the Assessing Officer that it is a fit case for issue of such notice. However, in the present case there is no valid sanction from the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner for reopening the case of the petitioner beyond a period of four years from the end of relevant assessment year. 7.On the other hand learned Senior Advocate Mr. M.R. Bhatt for the Revenue submitted that the petition is filed at a pre-mature stage inasmuch as only notice under section 148 Page 17 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 read with section 147 of the Act has been issued and in the event the petitioner is aggrieved by reassessment, the petitioner has alternative efficacious remedy by way of appeal before the CIT(Appeal) and thereafter before the Tribunal. 7.1) Learned Senior Advocate Mr. Bhatt submitted that it was found that the assessee has incurred loss of Rs. 76,68,956/- on sale of F&O carried out during the Assessment year 2015-2016 and it was noticed from the ledger account of Marwadi Shares and Finance that the above loss was mentioned as mark to market (MTM) loss giving effect of changes in F&O rate as on 31.03.2015 and as such, F&O transactions carried out by assessee are speculation transactions and any loss incurred in F&O trading is a speculation loss which cannot be adjusted against current year’s business income u/s 73(1) of the Act Page 18 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 and therefore, the same is required to be disallowed. 7.2) Learned Senior Advocate Mr. Bhatt submitted that notice under section 148 of the Act was issued after following the due procedure of law mandated in the Act, after recording reasons as per the provisions of sub-section(2) of section 148 read with section 51 of the Act. It was submitted that it is true that the assessee has filed a copy of annual report and audited Profit & Loss account, balance sheet along with return of income where various information were disclosed, however, the requisite full and true disclosure of all the material facts necessary for assessment has not been made as noted in the reasons recorded for the reopening. Therefore, it is evident that the assessee has not disclosed fully and truly material facts necessary for assessment for Page 19 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 the year under consideration. It was therefore, submitted that there is escapement of income in view of the aforesaid facts which give jurisdiction to the Assessing Officer to reopen the assessment. 8.Considering the submissions made by the learned advocates on both the sides, it appears that the impugned notice under section 148 of the Act, 1961 is issued only on the ground that the it was noticed that the Mark to Market (MTM) loss of Rs. 76,68,956/- is not shown separately under speculative loss but set off with business income and therefore, there is escapement of income due to non-disclosure on part of the assessee fully and truly all material facts necessary for assessment. 9.On perusal of the record, it appears that the assessee has furnished details regarding Page 20 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 return of income, annual report and computation of income, brokers ledgers and ledgers of the brokers in the books of the petitioner and also has provided justification for loss of Rs. 76,68,956/- incurred in trading of derivatives. Eventually assessment was framed under section 143(3) of the Act wherein no addition was made in respect of loss of Rs. 76,68,956/- incurred in derivatives. 10. Further, the assessee company had also submitted copies of the contract notes which prove that the transactions entered into by the assessee company are eligible transactions of derivative trading and entered into on recognized stock exchange. 11. It is therefore, apparent that there is change of opinion by the Assessing Officer to reopen the assessment for the Assessment Year Page 21 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 2015-2016, more particularly, when the issue of Mark to Market (MTM) loss not shown separately under speculative loss is already considered during the assessment proceedings under section 143(3) of the Act, 1961. The Assessing Officer cannot have any jurisdiction to issue the notice under section 148 of the Act, 1961 for reopening the assessment for the year under consideration more particularly, when the assessment is sought to be reopened beyond a period of four years as held by the Supreme Court in case of Commissioner of Income tax v. Kelvinator of India Ltd. reported in 2010(2) SCC 723 as under: “2. A short question which arises for determination in this batch of civil appeals is, whether the concept of \"change of opinion\" stands obliterated with effect from 1st April, 1989, i.e., after substitution of Section 147 of the Income Tax Act, 1961 by Direct Tax Laws (Amendment) Act, 1987? xxxx Page 22 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 6. On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re- open the assessment. Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words \"reason to believe\" failing which, we are afraid, 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 reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re- assess. But re-assessment has to be based on fulfillment of certain pre- condition 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 Page 23 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 concept of \"change of opinion\" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re- open, 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 \"opinion\" in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words \"reason to believe\", Parliament re- introduced the said expression and deleted the word \"opinion\" on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No.549 dated 31st October, 1989, which reads as follows: \"7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression `reason to believe' in Section 147.--A number of representations were received against the omission of the words `reason to believe' from Section 147 and their substitution by the `opinion' of the Assessing Officer. It was pointed out that Page 24 of 25 C/SCA/19018/2021 JUDGMENT DATED: 29/08/2022 the meaning of the expression, `reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression `has reason to believe' in place of the words `for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same.\" 12. In view of foregoing reasons, considering the facts of the case impugned notice under section 148 of the Act, 1961 is not tenable in law and is accordingly quashed and set aside. 13. Rule is made absolute to the aforesaid extent. No order as to costs. (N.V.ANJARIA, J) (BHARGAV D. KARIA, J) RAGHUNATH R NAIR Page 25 of 25 "