Income Tax Appellate Tribunal (ITAT) Kolkata in a recent judgment has held that the assumption/belief for reopening of assessment u/s 148 without considering the relevant provisions and consequential reassessment order passed u/s 147 is bad in law

Case Details:
ITA No.1039/Kol/2011 AY : 2006-07
Mohan Jhangiani (Appellants) vs ACIT (Respondent)
Date of Order: 06-11-2015

Case Law Referred:
Devesh Metcast Ltd vs JCIT reported in (2011) 338 ITR 130 (Guj HC)
CIT vs Jaykrishna Harivallabhdas reported in (2000) 112 Taxman 683 (Guj HC)
CIT vs. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC)
CIT vs. Bhanji Lavji [1971] 79 ITR 582 (SC)
CIT, Central I vs M/s Kanoi Industries (P) Ltd (Calcutta HC)
ACIT vs ICICI Securities Primary Dealership Ltd (SC)
Parveen P. Bharucha vs DCIT (2012) 348 ITR 325 (Bom)

Brief Facts of the Case:
The appellant assessee was shareholder and director in three companies. The said companies in view of the fact that they were not engaged in the operations decided to wound up under easy exit/ simplified exit scheme of the Ministry of Corporate Affairs (MCA) under section 560 of the Companies Act, 1956 and consequently the name of the companies was struck off from the records of the Registrar of Companies (ROC).

The said exit scheme mandates that there should not be any asset or liability in the balance sheet and balance sheet should only contain share capital of the companies in the liabilities side represented by the accumulated losses in the asset side. Therefore as a consequence of the liquidation of the companies, shares held by the assessee got extinguished. Accordingly, the assessee claimed the indexed long term capital loss being carried forward to subsequent years. The detailed workings of the same had been filed along with the return of income by the assessee which was accepted by the department by completing assessment u/s 143(3).

Later assessment was reopened by issuance of notice u/s 148. In the reassessment proceedings, the Assessing Officer (AO) found that under exit scheme, the assessee had filed affidavits in the capacity of a director stating that the companies does not have any assets and liabilities and also filed indemnity bonds assuring to indemnify any person for any loss arising out of exit u/s 560 of the Companies Act, 1956. The AO observed as under:

With reference to section 2(47) of the act, it is seen that the case is not one of sale, exchange or relinquishment of the shares held by the assessee. Neither is it a case where the rights of the assessee have been extinguished, since his rights as investor are indemnified by himself, in his capacity of the erstwhile director. In view of the above, I hold that there has been no transfer as such. Consequently, no capital loss is to be computed or allowed. Since the said loss was not claimed to be set off against any other current incomes, the total income is assessed at Rs. 10,20,972/-.

CIT(Appeals) also upheld the re-opening of the assessment.

Before ITAT, the assessee argued that the belief of the AO that income has escaped assessment had no link with the relevant provisions of section 46(2) which should be looked into in the facts of the case. It was also contended that the reopening was bad in law as all the details were already on record before AO and there is no tangible material otherwise.

On the other hand, the Department argued that the assessee director had filed affidavit before ROC that there are no liabilities in the company. Hence it could be concluded that the assessee had received consideration for his extinguishment of rights in the shares which was not disclosed and hence the long term capital loss could not be allowed to be carried forward.

Important Excerpts from ITAT Judgment

We find that the provisions of section 46(2) of the Act are squarely applicable in the facts of the instant case. Hence the Learned AO had reopened the assessment without considering the provisions of section 46(2) of the Act and hence his basic formation of belief that income has escaped assessment fails. It is settled law that formation of belief by the Learned AO should have direct nexus with the provisions of the Act and in this case, it fails directly. We hold that non-consideration of the relevant provisions of the Act while forming a belief that income has escaped assessment is not permissible as per law. In this regard, the reliance on the decision of Gujarat High Court in the case of Devesh Metcast Ltd vs JCIT reported in (2011) 338 ITR 130 (Guj) is very well placed and is directly on the point .......

We find that the assessee had not received any consideration on his extinguishment of rights in shares held by him in the companies which went on liquidation. When the fact of liquidation is not disputed on record and there is no evidence brought on record as to whether any consideration was indeed received by the assessee on extinguishment of rights in shares, the assessee’s claim of long term capital loss needs to be allowed to carried forward to subsequent years. In this regard, reliance on the decision of Gujarat High Court in the case of CIT vs Jaykrishna Harivallabhdas reported in (2000) 112 Taxman 683 (Guj) is very well placed and is directly on the impugned issue .....

We also find that the Learned AO had originally completed the assessment u/s 143(3) of the Act and the details of computation of long term capital loss is part and parcel of the memo of income filed along with the return of income by the assessee Even though the reopening in this case was done within the period of 4 years, we find that there is absolutely no tangible material available with the Learned AO to come to a conclusion that income has escaped assessment. It only amounts to revisiting of the existing materials already available on record. It only amounts to change of opinion on which ground reopening is not permissible as per law.

..... we hold that the assumption of jurisdiction u/s 147 by the Learned AO, is based only on change of opinion; made without any tangible material that constituted new information, formation of belief for assumption of jurisdiction made without considering the relevant provisions of the Act and hence the reopening of assessment u/s 148 and consequential reassessment order passed u/s 147 is bad in law and accordingly the reassessment proceedings stand quashed.

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