Reopening of assessment is not justified if Loss on sale of Shares is considered as business loss instead of Speculation Loss during the original assessment.

Reassessment Notice for Reclassifying Business Loss as Speculation Loss Set Aside

Issue: Whether a reassessment notice issued under Section 148 of the Income-tax Act, 1961, to reclassify a business loss as a speculation loss under Section 73 is valid when the issue was already considered during the original assessment proceedings.

Facts:

The assessee, engaged in the business of buying and selling shares, declared a business loss in their return for the assessment year 2013-14.
The Assessing Officer (AO) completed the assessment under Section 143(3), accepting the declared loss.
After four years, the AO issued a reassessment notice under Section 148, citing the Explanation to Section 73, which deals with speculation losses.
The AO claimed that the loss should have been considered a speculation loss and not a business loss.

Decision:

The High Court held that the reassessment notice was invalid and set it aside.
The court noted that the reason for reopening did not allege any failure on the assessee’s part to disclose material facts fully and truly.
The applicability of Section 73 was already considered during the original assessment proceedings.
The Supreme Court upheld the High Court’s decision and dismissed the SLP filed against it.

Key Takeaways:

This case clarifies that reassessment cannot be used to re-examine an issue that was already considered and decided during the original assessment proceedings.
The AO cannot reopen an assessment based on a different interpretation of the same facts or law, especially when there is no new information or evidence.
This decision protects taxpayers from unnecessary reassessments and ensures that AOs have a valid reason for reopening an assessment, such as new information or evidence that was not available earlier.

Supreme Court of India

Assistant Commissioner of Income-tax

BSIFS P. Ltd.

SANJIV KHANNA, CJ.
and Sanjay Kumar, J.

SPECIAL LEAVE PETITION (CIVIL) Diary No. 59843 of 2024

JANUARY 31, 2025

N. Venkatraman, A.S.G., Raj Bahadur Yadav, AOR, Rajendra Singh Rana, Khushal Kolwar, Kartikeya Asthana and Udit Dedhiya, Advs. for the Petitioner.

ORDER

1. Delay condoned.

2. We do not find any good ground and reason to interfere with the impugned judgment and, hence, the special leave petition is dismissed.

3. Pending application(s), if any, shall stand disposed of.

HIGH COURT OF BOMBAY

BSIFS (P.) Ltd.

Assistant Commissioner of Income-tax

K.R. SHRIRAM AND Dr. Neela Gokhale, JJ.

WRIT PETITION NO. 2080 OF 2023

FEBRUARY 27, 2024

Section read with sections 147 and 148, of the Income-tax Act, 1961 – Losses – In speculation business (Reassessment) – Assessment year 2013-14 – Assessee was engaged in business of purchase and sale of shares – It filed return declaring certain loss – Assessing Officer finalized assessment under section 143(3) by assessing total loss at a certain amount – Assessing Officer issued on assessee a notice under section 148 seeking to reopen aforesaid assessment after expiry of four years from end of relevant assessment year for reasons that as per Explanation to section 73 loss arrived to assessee on account of purchase and sale of shares would have been considered as speculation loss instead of business loss and he had reason to believe that certain income had escaped assessment within meaning of Explanation 2 below section 147 – Whether since reason recorded did not even make an allegation that there was failure to truly and fully disclose material facts and applicability of section 73 was a subject of consideration during original assessment proceedings, notice issued under section 148 deserved to be set aside – Held, yes [Paras 10, 11 and 13] [In favour of assessee]

Ms. Dinkle Hariya and Ms. Simoni Chouhan for the Petitioner. Akhileshwar Sharma for the Respondent.

ORDER

1. Petitioner filed on 29th November 2013 a return of income for Assessment Year (“AY”) 2013-2014 declaring loss of (-) Rs. 44,72,95,065/-. The assessment was finalized under section 143(3) of the Income-tax Act, 1961 (“the Act”) on 23rd March 2016 by assessing total loss at (-) Rs. 39,74,03,230/-.

2. Subsequently, Petitioner received a notice dated 30th March 2021 under section 148 of the Act that there was reason to believe Petitioner’s income chargeable tax for AY 2013-2014 has escaped assessment. By a communication dated 30th June 2021, Petitioner received the reasons recorded for reopening.

3. The reasons read as under :

“Issues as per reasons recorded for reopening

The return of income for the A.Y. 2013-14 was e-filed on 29-11-2013 declaring total loss at (-) Rs. 44,72,95,065/-. The assessment was finalized u/s 143(3) of the Act on 23-3-2016 by assessing total loss at (-) Rs. 39,74,03,230/-.

2. As per explanation of section 73 of the Income-tax Act, 1961, where a company other than a company whose gross total income consists mainly of income chargeable under the heads “Interest on securities”, “Income from House property”, “Capital Gains” and “Income from other sources” engaged in the business of purchase and sale of shares of other companies, shall be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. Further, speculation loss should be carried forward to four years only and should be set off only and only against speculation income.

3. In the case of the assessee company the assessee is engaged only in the business of purchase and sale of shares. Thus as per proviso mentioned above, the gains or losses arrived on account of purchase and sale of shares shall be considered as speculation gain or loss. Thus the losses arrive to the extent of Rs. 15,59,21,835/- on account of purchase and sale of shares would have been considered as speculation loss instead of business loss as follows :

	Net loss as per profit and Loss account –	9,91,00,163/-
	[(50,08,87,680/- (21,02,40,592 +38,97,47,251)]
	Add:Financial Exp.(in he ratio of 9.91/18.0) [Financial expenses=(13,65,56,408-4,67,24,490)]	4,94,57,462/-
	Add: other expenses and employee benefit	73,64,210/-
	expenses (in the ratio of 9.91/18.0 of 1,33,75,961)
	Speculation Loss	15,59,21,835/-

In view of the above, I have reason to believe that escaped assessment amounts to or likely to amount to Rs. 1,00,000/- or more for A.Y. 2013-14 within the meaning of explanation 2 below sec. 147 of the I.T. Act.

3. In view of the above, you may submit your response with supporting documents (if any) on the above mentioned issues to undersigned electronically in ‘E-proceedings’ facility through your account in e-Filling website (www.incometaxindiaefiling.gov.in) at your convenience on or before 15/07/2021.”

4. Ms. Hariya submitted, at the outset, that since a notice under section 148 of the Act dated 30th March 2021 was issued after the expiry of four years from the end of relevant assessment year and assessment under section 143(3) of the Act has already been completed, the proviso to Section 147 of the Act shall apply inasmuch as reopening is not permissible unless there has been failure on the part of Assessee to truly and fully disclose the material facts necessary for assessment. Ms. Hariya submitted that there is not even an allegation in the reasons recorded that there was any failure on the part of Petitioner to truly and fully disclose all material facts necessary for its assessment for the relevant assessment year, on which ground alone as held in Crompton Greaves Ltd. v. Asstt. CIT, the notice should be quashed and set aside. Though Crompton Greaves Ltd. (supra) holds that if the factum of failure to disclose can be culled down from the reasons in support of the notice seeking to reopen assessment, that will certainly not be fatal to the assumption of jurisdiction under sections 147 and 148 of the Act. It is also correct that the reasons do not specifically state that there was any failure on the part of Petitioner to disclose fully and truly all material facts. In any case, on reading the entire reasons, there is no cogent and clear indication that infact there was failure on the part of Assessee to disclose fully and truly all material facts necessary for its assessment.

5. Ms. Hariya further submitted that in the order dated 11th February 2022 rejecting the objections filed by Petitioner to the notice under section 148 of the Act, the AO has admitted that it was a subject matter of consideration during the assessment proceedings, but has tried to brush it aside by saying that the subject matter of Section 73 of the Act was simply touched upon, but this issue was neither questioned nor verified by the AO during the course of original assessment proceedings. Ms. Hariya also submitted that the applicability of Section 73 of the Act was the subject of consideration during the assessment proceedings and relied upon copy of a letter dated 29th February 2016 in which in the last paragraph it is recorded as under :

“So in the light the above facts and various judicial pronouncements, it is submitted that the assessee has rightly consider the loss in derivatives as well as share business loss as normal business loss and in this case Section 73 of the Income-tax Act is not applicable.”

6. Therefore, the submission of Mr. Sharma that there is no discussion in the assessment order regarding paragraph 73, cannot be accepted in view of the judgment of this Court in Aroni Commercials Ltd. v. Dy. CIT (Bom.), wherein it is held that once a query is raised during the assessment proceedings and Assessee has replied to it, it follows that the query raised was a subject of consideration of the AO while completing the assessment. It is also not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. Therefore, the reopening of the assessment, in our view, is merely on the basis of change of opinion of the AO from that held earlier during the course of assessment proceedings and this change of opinion does not constitute justification and/or reason to believe that income chargeable to tax has escaped assessment.

7. Ms. Hariya further submitted that the reopening has been based on audit objections and the AO had strongly objected to the audit query and in response had filed a detailed reply in support of his action of allowing the claim. This has not been denied in the affidavit-in-reply. Ms. Hariya states all these three grounds submitted are in the alternative and under all the three grounds the notice dated 30th March 2021 impugned in this petition has to be quashed and set aside.

8. Mr. Sharma submitted that even though Petitioner’s letter dated 29th February 2016 states that Section 73 of the Act was not applicable, there were no notices issued under section 142(1) of the Act raising any query under section 73 of the Act and there is no discussion in the assessment order either about this issue.

9. Ms. Hariya responded in rejoinder that if such a query was not raised during the hearings conducted during the assessment proceedings, why would an Assessee refer to the applicability of Section 73 of the Act. Ms. Hariya submitted that almost nine hearings took place before the assessment order dated 23rd March 2016 was passed. Even after the letter dated 29th February 2016 was submitted during the hearing on 29th February 2016, two more hearings took place and the AO did not question Assessee as to why he has referred to Section 73 of the Act when it is not even discussed.

On this we would agree with Ms. Hariya that an Assessee would not have referred to applicability of Section 73 of the Act in the letter dated 29th February 2016 unless a query was raised during the assessment proceedings.

10. The fact that a notice under section 148 of the Act has been issued after expiry of four years from the end of the assessment year and the fact that assessment order under section 143(3) of the Act dated 23rd March 2016 has been passed, cannot be disputed. Therefore, the applicability of the proviso to Section 147 of the Act also cannot be and is not disputed. The reasons recorded to believe that there is escapement of income from assessment does not even make an allegation that there was failure to truly and fully disclose material fact. On this ground alone, in our view, the notice issued under section 148 of the Act impugned in the petition has been quashed and set aside.

11. Moreover, the fact that Section 73 of the Act was a subject matter of consideration during the assessment proceedings, also cannot be disputed. This is because in the order dated 11th February 2022 rejecting Petitioner’s objections, there is an admission that Section 73 of the Act was discussed during the assessment proceedings. Moreover, in the letter dated 29th February 2016, Assessee has elaborately discussed as to why Section 73 of the Act is not applicable. In fact, in the said letter even the explanation of Section 73(4) of the Act has also been extracted. Therefore, it is clear that the applicability of Section 73 of the Act was a subject of consideration during the assessment proceedings and as held by Aroni Commercials Ltd. (supra), once a query is raised during the assessment proceedings and Assessee has replied to it, it follows that the query raised was a subject of consideration of the AO while completing the assessment and it is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. It would, therefore, follow that the reopening of assessment is merely based on the basis of change of opinion which does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment.

12. Moreover, as held in Indian & Eastern Newspaper Society v.CIT the Income-tax Officer must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has come to his notice, he can reasonably believe that income had escaped assessment. The basis of his belief must be the law of which he has now become aware. The opinion rendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. The true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income-tax Officer. In the petition, there is a specific averment that the AO had strongly objected to the audit query and had filed detailed reply in support of his action of allowing the claim. There is no denial in the affidavit-in-reply. On the contrary, in the affidavit-in-reply, it is simply stated that it is matter of record, factual and formal in nature, therefore, no comments are offered.

13. In the circumstances, for reasons recorded above, in our view, the petition has to be allowed which we hereby do in terms of prayer clauses (a) and (b), which read as under :

“(a)		that this Hon’ble Court may be pleased to issue under Article 226 of the Constitution of India an appropriate direction, order or a writ, including a writ in the nature of ‘Certiorari’, calling for the records of the case and after satisfying itself as to the legality thereof quash and set aside the notice dated 30-3-2021 issued by the First Respondent under section 148 of the Income-tax Act, 1961, being Ex. – ‘I’ hereto;
(b)		that this Hon’ble Court may be pleased to issue under Article 226 of the Constitution of India an appropriate direction, order or a writ, including a writ in the nature of ‘Certiorari’, calling for the records of the case and after satisfying itself as to the legality thereof quash and set aside the communication dated 11-2-2022, Ex. – ‘N’ herein, issued by the Third Respondent, purportedly dealing with the objections raised by the Petitioner against the initiation of the reassessment proceeding by the First Respondent.”

14. Petition disposed