DARSHIT ASHOKBHAI ZINZUWADIA V. ASSISTANT COMMISSIONE OF INCOME TAX CIRCLE 2(1), RAJKOT

SCA/19068/2018

AI Insights

The case involves two writ applications filed by Hareshbhai Mathurbhai Zinzuwadia and Darshit Ashokbhai Zinzuvadia, challenging the notices issued by the Assistant Commissioner of Income Tax for reopening their income tax assessments for the assessment year 2015-16. The notices were based on the grounds that the petitioners had transferred capital assets received as gifts into a partnership firm as capital contributions, which were liable for capital gains tax under Section 45(3) of the Income Tax Act, 1961. The petitioners argued that the assets were stock in trade and not capital assets, and thus not subject to the provisions of Section 45(3). The court, after examining the submissions and evidence, concluded that the reopening of the assessments was valid and justified.

• Counselvise Citation: [2021] 140 COUNSELVISE.COM (IT) 771531 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 08-09-2021
• Assessment Year: misc
• Other Referred Cases: Sunil Siddharthbhai Vs. CIT [156 ITR 509 (SC)]
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: MANISH BHATT
• Assessee Lawyers: B S SOPARKAR; MAUNA BHATT
• Keywords: Capital Contribution; Capital Gain; Income tax reassessment; Stock-in-Trade
• Section: 147; 148; 45(3); 141

Judgement Text

"C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 19093 of 2018 With R/SPECIAL CIVIL APPLICATION NO. 19068 of 2018 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE J.B.PARDIWALA Sd/- and HONOURABLE MR. JUSTICE ILESH J. VORA Sd/- ============================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? No 2 To be referred to the Reporter or not ? Yes 3 Whether their Lordships wish to see the fair copy of the judgment ? No 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? No ============================================= HARESHBHAI MATHURBHAI ZINZUWADIA Versus ASSISTANT COMMISSIONE OF INCOME TAX CIRCLE 2(1), RAJKOT ============================================= Appearance: MR B S SOPARKAR(6851) for the Petitioner(s) No. 1 MRS MAUNA M BHATT(174) for the Respondent(s) No. 1 ============================================= CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE ILESH J. VORA Date : 08/09/2021 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE ILESH J. VORA) Page 1 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 1. As the common questions of law and fact arise in the captioned writ applications with respect to different assessees for the same year i.e. A.Y. 2015-16, were heard analogously and are being disposed of by this common judgment and order. 2. By these writ applications under Article 226 of the Constitution of India, the writ applicants seek to challenge the legality and validity of the Notice dated 28.03.2018 issued by the respondent under Section 148 read with Section 147 of the Income Tax Act, 1961 (‘the Act’ for short), seeking to reopen the writ applicants’ income tax assessment for the A.Y. 2015- 16. 3. Brief facts giving rise to filing present writ applications are as follows:- SCA No.19093/2018 (Hareshbhai Mathurbhai Zinzuvadia):- 3.1 The writ applicant being an individual assessee filed his return of income on 23.09.2015 declaring total income at Rs.3,73,32,220/-. The return of income was processed under Section 141 of the Act and no scrutiny assessment was undertaken. SCA No.19068/2018 ( Darshit Ashokbhai Zinzuvadia):- 3.2 The writ applicant being an individual assessee filed his return of income on 23.09.2015 declaring total income at Rs.1,14,20,050/-. The return of income was processed under Section 141 of the Act and no scrutiny assessment was Page 2 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 undertaken. 3.3 In both the cases, the Assessing Officer reopened the assessment under Section 147 of the Act by issuing impugned Notice dated 28.03.2018 under Section 148 of the Act for the A.Y. 2015-16. The reasons for reopening were furnished to both the assessee. Both the assessee raised various objections vide letter dated 04.06.2018 and 11.06.2018 respectively and the same came to be disposed of by the Revenue vide order dated 28.08.2018. 3.4 In both the cases, the assessment is sought to be reopened on the ground that, the applicants have transferred the capital asset received by them in the form of gift, to the partnership firm M/s. Radhika Jewelers by way of capital contribution at the market rate and therefore, they are liable for capital gain under Section 45(3) of the Act. 4. Being aggrieved by the disposal of the objections against the Notice for reopening of the assessment, the writ applicants are before this Court by filing present writ applications. 5. We have heard Mr. Saurabh Soparkar, the learned Senior Counsel assisted by Mr. Bandish S. Soparkar, the learned counsel for the writ applicants and Mr. Manish Bhatt, the learned Senior Counsel assisted by Mrs. Mauna M. Bhatt, the learned Standing Counsel appearing for the revenue. 6. In assailing the impugned notice issued under Section 148 of the Act, the learned Senior Counsel Mr. Soparkar appearing for the writ applicants urged the following submissions :- Page 3 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 (i) That, Mr. Ashok Zinzuvadia was the proprietor of M/s. Radhika Jewelers, engaged in the business of gold, gold ornaments etc. and had opening stock of gold ornaments etc. valued at Rs.48,54,09,686/- as on 01.04.2014. Out of total stock, Mr. Ashok Zinzuvadia gifted 135701.065 gms gold ornaments, valued at Rs.14,48,64,958/- to his brother Haresh Zinzuvadia and also gifted 27076.450 gms. gold ornaments to his son Darshit Zinzuvadia, valued at Rs.2,63,64,173/-. Thereafter, the proprietary concern M/s. Radhika Jewelers was converted into a partnership firm w.e.f. 01.07.2014 by introducing 10 partners including Mr. Ashok Zinzuvadia, his son Darshit Ashok Zinzuvadia and his brother Haresh Zinzuvadia. Both the writ applicants being the partners of the firm, their gold stock gifted by Ashok Zinzuvadia was transferred to the partnership firm by way of capital contribution at Rs.36,74,97,249/-. (ii) In the aforesaid background, the learned Senior Counsel referring to the reasons recorded, submitted that, the assessment is sought to be erroneously reopened on the ground that, as both the writ applicants are said to have transferred their capital assets received in the form of gift to the partnership by way of capital contribution at the market rate, they are liable for capital gain under Section 45(3) of the Act. In this context, the learned Senior Counsel submitted that the reasons recorded are completely erroneous in law, so far as the applicability of Section 45(3) of the Act is concerned. He urged that, Section 45(3) of the Act has no application at all in the facts of the present case. Referring to Section 45(3) of the Act, he submitted that, Section 45(3) of the Act is applicable when a capital asset is introduced by a partner towards credit in the capital account of the firm. In the present case, what is introduced is stock in trade and not Page 4 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 capital assets. The learned Senior Counsel drawing the attention to the certificate of registration under the Gujarat Value Added Tax (“VAT” for short) Act and the rules thereunder, submitted that, both the writ applicants are traders in gold and gold ornaments and they have been regularly trading in the gold and gold ornaments, therefore, the gifted gold was treated as stock in trade by both the writ applicants and the same was brought in the books of both the writ applicants before introducing as capital in the firm, which clearly establishes that, they have transferred their stock in trade to the partnership firm, which cannot be taxed under Section 45(3) of the Act as the stock in trade was not a capital asset to the writ applicants. In such circumstances, the learned Senior Counsel vehemently submitted that, the reasons recorded for reopening lacks validity and are completely erroneous in law and therefore, the impugned Notice has been issued without jurisdiction as the condition precedent for reopening the assessment under Section 147 of the Act is not satisfied. (iii) It was further submitted that, while recording the reasons, the AO has not applied his independent mind to form a belief that the capital gain as referred has escaped assessment. In this context, it was submitted that, the reasons for reopening having been borrowed from the observations and findings recorded by the then AO while passing the order in case of partnership firm M/s. Radhika Jewelers, wherein, additions were made on protective basis in the hands of the firm and thereafter, the impugned notice under Section 148 of the Act has been issued. Thus, the AO has not applied his mind independently so as to reach to a conclusion that income has escaped assessment and therefore, the assumption of jurisdiction by the AO on borrowed satisfaction is Page 5 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 impermissible in law and on that ground, notice is bad in law and requires to be set aside. (iv) Strong reliance is being placed on a decision rendered by the Apex Court in a case of Sunil Siddharthbhai Vs. CIT [156 ITR 509 (SC)], to submit that, introduction is an asset by a person by way of capital contribution to a partnership firm on an occasion of his induction as a partner of that firm, though amounting to transfer, is not such transfer as to give rise to a capital gains exigible to capital gain’s tax since no consideration is received. 7. In such circumstances referred to above, Mr. Soparkar prays that the reopening of the assessment is without jurisdiction and hence, the impugned notice deserves to be quashed and set aside. 8. On the other hand, Mr. Manish Bhatt, the learned Senior Counsel appearing for the revenue reiterating the stand adopted by the respondent in the affidavit in reply as well as the order disposing of the objections, submitted that the action taken by the AO is just, legal and proper and does not warrant any interference. He would urge that, in the present case, the return of income was processed under Section 143 (1) of the Act and no assessment under Section 143 (3) of the Act has been framed and therefore, the only pre-requisite to reopen the assessment is that, there must be a reason to believe that the income chargeable to tax has escaped assessment and therefore, the AO has rightly formed a rational belief that both the writ applications had transferred the capital assets received by them in the form of gift to the partnership firm by way of capital contribution at the market Page 6 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 rate and therefore, such transactions would be hit by the provisions of Section 45(3) of the Act. Thus, when the scrutiny assessment has not taken place, the sufficiency of reasons cannot be gone into at this stage. 9. It was further contended by the learned Senior Counsel for the revenue that the gifted stock introduced by both the petitioners in the firm as capital contribution is not reflected as stock in trade in the trading account for the A.Y. 2015-16 and therefore, the entire premise of challenge to reopening that the gifted stock was stock in trade and not a capital asset falls on ground. The factum of stock in trade as claimed by the writ applicants itself is a highly disputed question of fact and the same cannot be gone into by this Court in exercise of writ jurisdiction. 10. It was further submitted by the learned Senior Counsel for the revenue that the decision of Sunil Siddharthbhai (supra) relied upon by the writ applicants is not applicable to the facts of present case as Section 45(3) has been introduced in the Income Tax Act, 1961 by the Finance Act, 1987 w.e.f. 01.04.1988. Thus, the profits or gains arising from the transfer of a capital asset by the partners to a firm by way of capital contribution shall be chargeable to tax. 11. In such circumstances referred to above, Mr. Manish Bhatt, the learned Senior Counsel for the revenue prays that there being no merit in the writ applications, those be dismissed. 12. Having heard the learned counsel appearing for the respective parties and having gone through the material on record, the only question that falls for our consideration is that, whether Page 7 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 the revenue is justified in reopening the assessment for the year under consideration ? 13. In order to appreciate the issue raised in both the writ applications, it is relevant to refer to the reasons recorded for reopening, which reads as under:- Reasons recorded:- “2. Brief facts of the case are that initially Shri Ashok Kumar M. Zinzuvadia was the proprietor M/s. Radhika Jewelers upto 30.06.2014. As per claim of Shri Ashok Kumar Proprietor the said concern M/s. Radhika Jewelers was converted into the partnership firm w.e.f. 01.07.2014 by introducing 10 partners in which name of Shri Ashok M. Zinzuvadia is included. The AO passed order in the case of firm M/s. Radhika Jewelers, Rajkot for the A.Y. 2015-16 under Section 143(3) on 30.12.2017 and it is held that M/s. Radhika Jewelers is a new firm which is not a on going concern of the assessee as claimed by him. Hence, the AO considered the assets which are brought into the said firm as transfer of the assets, on which capital gain is chargeable considering the fair market value of assets on 01.07.2014 as full value of consideration the profit in the hands of partners of the firm. In the said scrutiny assessment following additions have been made on protective basis in the hands of the firm M/s. Radhika Jewelers. I. Capital gain assessed on transfer of stock : 43,41,73,329/- ii. Capital gain assessed from transfer of shop (show room) : 2,95,09,518/- ------------------ 46,36,88,847/- As per said assessment order, substantial additions are required to be made in the hands of the following partners of the above firm: I. Shri Ashok Kumar M. Zinzuvadia ii. Shri Haresh M. Zinzuvadia iii. Shri Darshit A. Zinzuvadia 3. Above issues are discussed as under:- It is observed that the assessee has shown the valuation of the stock in the partnership firm at Rs.77,75,10,150/- as on 01.07.2014 through capital account of the following partners: Page 8 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 Sr. No. Name of the partner Value of the stock Remarks 1 Shri Ashok Kumar M. Zinzuvadia 343330821/- Shri Ashok Kumar M. Zinzuvadia was proprietor of M/ s. Radhika Jewelers upto 30.06.2014 2 Shri Harsh M. Zinzuvadia 367497429/- Brother of said proprietor 3 Shri Darshit A. Zinzuvadia 66682080/- Son of said proprietor Total value of stock as on 01.07.2014 777510150/- It is seen that in the grab of transfer of business of going concern, the assessee has inflated the value of stock from Rs. 34,33,30,821/to 77,75,10,150/-. This stock has been brought in the partnership firm by way of capital contribution by the above 3 mentioned partners. In such case, the provision of section 45(3) are attracted and the value recorded in the books of the firm is treated as full value of sale consideration for the purpose of computing capital gain. According, the capital gain is worked out at Rs. 43,41,79,329 (77,75,10,150 34,33,30,821). The same has been taxed in the hands of the firm M/s. Radhika Jewellers on protective basis and consequential actions will be taken in the hands of respective partners to tax the same on substantive basis. It is pertinent to note that as on 01.04.214, there was opening stock of Rs. 485490388/with Shri AShokkumar M Zinzuwadia. Out of this, Shri Ashok M. Zinzuwadia gifted stock of Rs. 26364173 to his son Shri Darshit Ashokkumar Zinzuwadia and he also gifted the stock of Rs. 144864958/to his brother Shri Hareshbhai M Zinzuwadia, on 10.04.2014. Later on both these donees became partners in partnership firm M/s. Radhika Jewellers (w.e.f. 01.07.2014) and they have introduced the same stock (i.e. Gifted Stock) at market price in the said partnership firm as their capital contribution. Details of same are as under:- Sr. No. Name of the partner Value of gift date of gift Transfer value as on 01.07.2014 Different being capital gain 1 Shri Darshit A. 2,63,64,173/- 66682080/- 4,03,17,907/- Page 9 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 Zinzuvadia 10.04.20 14 2 Shri Haresh M. Zinzuvadia 14,48,64,958/- 10.04.20 14 367497429/- 22,26,32,291/- 3 Shri Ashok Kumar M. Zinzuvadia 34,33,30,821/- 343330821/- Nil Total value of stock as on 01.07.2014 --- 777510150/- 26,29,50,198/- In view of above, it is very much clear that both the above persons have transferred the capital assets received by them in 1 the form of gift to partnership firm by the way of capital contribution at the market rate and ~ therefore, they are liable for capital gain u/s. 45(3) of the Income Tax Act, 1961. In view of above, it is clear that capital on the transfer of gold to the firm comes to Rs. 26,29,50,198/in the hands of the following partners of the firm: Shri Darshit A. Zinzuwadia 4,03,17,907/- Shir Hareshbhai M. Zinzuwadia 22,26,32,291/-. In the light of above discussion it is seen that the assessee has suppressed the income to the extent of Rs. 22,26,32,291/-. Therefore I have reason to believe that the assessee has concealed the income to the extent of Rs. 22,26,32,291/during the year, which is an escaped assessment within the meaning of section 147 of the Income Tax Act 1961. Hence it is a fit case for issuing notice u/s. 148. A photo copy of the assessment order relating to firm M/s. Radhika Jewellers, Rajkot for the AY: 2015-16 is enclosed herewith for your reference. Issue notice u/s. 148 of the Income Tax Act, 1961.” 14. Before adverting to the rival contentions raised on either side, it is important to bear in mind that, Section 147 of the Act substituted w.e.f. 01.04.1989, empowered the AO to assess or reassess income chargeable to tax if the AO has reason to believe that income for any assessment year has escaped assessment. To confer the jurisdiction under Section 147 of the Act, two conditions have to be fully satisfied i.e. (i) the AO must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment and (ii) if Page 10 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 the reopening of assessment was after 4 years from the end of the relevant assessment year, the AO must also have reason to believe that such escapement had occurred by reason of either omission or failure on the part of the assessees to disclose fully or truly all the material facts necessary for his assessment of that year. 15. In the present case, we have taken note of the following undisputed facts. (i) On 01.04.2014, Mr. Ashok Zinzuvadia, the proprietor of M/s. Radhika Jewelers had opening stock of Rs.48,54,90,388/-. (ii) On 10.04.2014, Mr. Ashok Zinzuvadia gifted stock of Rs.14,48,64,958/- to his brother -writ applicant Mr. Haresh Zinzuvadia and also gifted stock of Rs.2,63,64,173/- to his son – writ applicant Mr. Darshit Zinzuvadia. (iii) Later on, both the writ applicants being the brother and son respectively of Mr. Ashok Zinzuvadia became partners in the partnership firm M/s. Radhika Jewelers (w.e.f. 01.07.2014) and they introduced their capital asset in the said partnership firm as their capital contribution. 16. In view of the aforesaid, the assessment is sought to be reopened on the ground that, the writ applicants being partners of the partnership firm transferred their capital assets received by them in the form of gift to the partnership firm by way of capital contribution at a market rate and therefore, they are liable for capital gain to the extent of Rs.26,29,50,198/- (Haresh Zinzuvadia – Rs.22,26,32,691/- + Darshit Zinzuvadia Rs.4,03,17,907/-), under Section 45 (3) of the Act. 17. On the other hand, it is contended by the writ applicants that, Page 11 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 the provisions of Section 45 (3) of the Act get attracted only in a case where the capital asset is introduced by the partners towards credit in the capital account of the firm, whereas, in the facts of the present case, both the writ applicants have introduced their stock in trade. Thus, the introduction of stock in trade to the firm cannot be said to be a capital asset and no liability would be attracted under Section 45(3) of the Act. 18. In the facts of the present case, it has been submitted that, both the writ applicants are engaged in business of gold and gold ornaments and have introduced their stock in trade received as a gift to the partnership firm as their capital contribution and therefore, they cannot be taxed under Section 45(3) of the Act. Section 45(3) of the Act has been introduced in the Act by Finance Act, 1997 w.e.f. 01.04.1988. Section 45(3) states that, “the profits or gains from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner of member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.” 19. There need not be a debate with regard to the proposition of law as laid in the case of Sunil Siddharthbhai (supra), that where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of asset within the terms of Section 45 of the I.T.Act, 1961 because an exclusive interest of the partner in personal asset is reduced, on their entry into the firm, into a share interest. The Supreme Court further held that Page 12 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 consideration, which a partner acquires on making over a personal asset to the firm as his contribution to its capital cannot fall within the terms of Section 48 and as that provision is fundamental to the computation machinery, incorporated in the scheme relating to the determination of the charge provided in Section 45 of the Act, such a case must be regarded as falling outside the scope of capital gain taxation altogether. 20. However, the Supreme Court also observed therein that the determination of the appeal on the assumption that, the partnership firm in question is a genuine firm and not the result of sham and unreal transaction, and that the transfer by the partner of his personal asset to the partnership firm represents a genuine intention to contribute to the share capital of the firm for the purpose of carrying on the partnership business would not be proper. If the transfer of personal asset by the assessees to a partnership firm in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to income tax on a capital gain, it will be open to the income tax authority to go behind the transaction and examine whether the transaction of creating the partnership firm is genuine or sham transaction and , even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represent a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing, but device or ruse to convert the personal asset into money substantially for the benefit of the assessees while evading tax on capital gain. The income tax officer will be entitled to consider all the relevant indicia in this regard, whether the partnership is Page 13 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 formed between the assessees and his wife and children or substantially limited to them, whether personal asset is sold by the partnership firm soon after it is transferred by the assessees to it, whether the partnership firm has no substantial or real business or the record shows that there was no real need of partnership firm for such capital contribution from the assessees. All these and other pertinent considerations may be taken into consideration when the income tax officer enters upon a scrutiny of the transaction for in the task of determining whether the transaction is sham or illusory or device or ruse he is entitled to penetrate the veil covering it and ascertain the truth. 21. The claim of the writ applicants is that, they are engaged in the trading of gold and gold ornaments and hold the VAT registration and are maintaining day to day accounts of their business. It is their specific case that, the gifted stock received from Mr. Ashok Zinzuvadia was treated stock in trade and have transferred it to the partnership firm and therefore, stock in trade is not capital asset. 22. In the aforesaid context, the question that falls for our consideration is, whether the writ applicants were engaged in trading business of gold and gold ornaments before the partnership firm came into existence ? 23. Upon perusal of the order disposing of the objections against the reopening of the proceedings, it appears that, the AO has taken into consideration the fact that the alleged stock in trade introduced in the firm on 01.07.2014 of Rs.36,74,97,429/- has not been reflected in the trading account of both the writ applicants for the A.Y. 2015-16. It was Page 14 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 further observed by the AO while rejecting the objections that, in the capital account, there is no credit of the value of the gift received from Mr. Ashok Zinzuvadia. Both the writ applicants failed to submit the balancesheet as on 01.07.2014 and 30.06.2014 respectively, as a result of which, considering the huge mismatch in the stock introduced in the firm and stock received as a gift, by reasoned order, the objections came to be rejected. 24. Upon perusal of the documentary evidence, it appears that, at the time of filing the writ applications as well as at the time of filing the objections against reopening, both the writ applicants failed to submit their stock register (product ledger) and the same was submitted for the first time with Affidavit in Rejoinder, without any explanation as to why the same had not been submitted at the time of filing of the present petitions. 25. After careful examination of the ledger product (stock register), annual return under VAT Act, profit and balance account and other documentary evidence produced before us, we are convinced that there was cogent and overwhelming material before the AO to initiate proceedings under Section 147 of the Act. We take notice of the followings:- (I) In both the cases, the writ applicants were employees of the proprietary concern M/s. Radhika Jewelers and their salary had been debited in the books of accounts of the firm (page 43); (ii) Upon bare perusal of the copy of ledger product, it appears that on 10.04.2014, there was entry of the gifted stock. Thus, prior to the alleged gift, in absence of opening balance of the stock, it prima facie appears that the assesse as such did not Page 15 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 enter into any transaction of buying and sale. (iii) We are unable to find the entry of gift in the balance sheet, as observed by the revenue while disposing of the objections. (iv) In view of Nil opening balance, the annual return under the VAT (at page 34) showing the annual turnover for the whole year becomes suspicious as no monthly sales have been mentioned or reflected from it. (v) Both the assessees had their investments in land and mutual funds etc. and have shown expenses in the account towards the school fees etc. (vi) For the preceding year i.e. A.Y. 2013-14 & 2012-13, the assessees failed to show that they are traders in gold and gold ornaments; (vii) The inter-se gift transaction is amongst the family members i.e. the like son and brother respectively; 26. In view of the aforesaid facts, it cannot be said that the reasons for reopening are merely based on the observations made by the AO while framing the assessment of the partnership firm vide order dated 31.12.2017. It is pertinent to note that, against the assessment order dated 31.12.2017, the firm is in appeal before the appellate authority and the appeal is still pending. Thus, while recording the reasons, the AO has considered the relevant facts like issue of stock in trade, the way in which the stock of proprietary concern came to be gifted to the family members by proprietor Mr. Ashok Zinzuvadia. It could be said that there was proper application of mind on the part of the AO while recording the reasons for reopening. When the return of income of both the assessees was processed under Section 143(1) of the Act and not under Section 143 (3) of the Act, the AO is justified in arriving at the Page 16 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 conclusion that the income has escaped assessment. It has been held by the Apex court in the case of Central Provinces Manganese Ore Company Ltd. [(1991) 191 ITR 662 (SC)]; Rajesh Jhaveri [(2008) 14 SCC 208], that the word “reason” in the phrase “reason to believe” in Section 147 would mean cause or justification. If the AO has cause or justification to know or suppose that income has escaped assessment, he can be said to have reason to believe that income has escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. 27. Our attention has been invited to a decision of the Apex Court in the case of Sunilbhai Vs. Commissioner of Income Tax (AIR 1996 SC 368). In that case, the appellant assessee was a partner in M/s. Suvas Trading Company and had introduced his shares as capital asset in the firm as capital contribution and during the assessment proceedings, the Commissioner of Income Tax was of the view that the difference between the market value of the shares and cost of acquisition of the shares was liable to be taxed in view of Section 45 of the Act. The assessees appealed to the Income Tax Appellate Tribunal. The Appellate Tribunal allowed the appeal and set aside the order of the ITO and thereafter, reference was made to the High Court on the question of law. The High Court answered the question in favour of the revenue and against the assessees. The assessees challenged the same before the Apex Court. In the present case, no assessment proceedings had taken place. Thus, in view of the observations made by the Apex Court in the case of Sunil Siddharthbhai (supra), the issue of stock in trade is required to be examined for which the AO is convinced that the amount has escaped assessment. Page 17 of 18 C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 28. In view of the aforesaid, we are convinced that there was tangible material before the AO to initiate the proceedings U/s. 147 of the Act. In our view, the AO is justified in reopening the assessment of both the assessees and it cannot be said that the impugned Notice is without jurisdiction or contrary to Section 147 of the Act. 29. For the foregoing reasons, we are convinced that no case is made out by the writ applicants for interference. In the result, both the writ applications fail and are hereby rejected. Notice stands discharged in both the writ applications. The interim relief granted earlier stands vacated. Sd/- (J. B. PARDIWALA, J) Sd/- (ILESH J. VORA,J) SUCHIT Page 18 of 18 "