AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (9) TMI 757
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.... Court admitted this appeal and framed the following questions of law for consideration:- (1) Whether the Income Tax Appellate Tribunal was correct in law in upholding the addition on account of income arising on sale of investments in spite of the fact that no addition on account of grounds mentioned in the reasons to believe has been sustained? (2) Whether the Income Tax Appellate Tribunal was correct* in law in holding that the income earned on sale/redemption of investment is chargeable to tax?" At the outset, the learned Senior Counsel appearing for the Revenue submitted that the present appeal also raises the issue whether the AO's decision to tax income arising on sale of investments was the result of change in opinion and whether the same is permissible. It is not disputed that the above issue arise from the impugned order passed by the Income Tax Appellate Tribunal and, accordingly, the following question of law is framed as the third question:- "(3) Whether the AO had assumed jurisdiction under Section 147 of the Act on account of change in opinion as to the and whether the Income Tax Appellate Tribunal was correct in law in upholding the assumption of jurisdiction un....
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....exempt in view of the omission of Rule 5(b) of the First Schedule of the Act. The AO, however, was not satisfied with the said response and, accordingly, passed an order dated 25th January, 2007 reassessing the income of the Assessee by including the sum of Rs. 505.33 crores in the total taxable income. 3.6 The Appellant filed an appeal, before the CIT (A), against the said order of reassessment, inter-alia, challenging both the assumption of jurisdiction to reopen the assessment as well as including of profit on sale/redemption of investment in the total income. 3.7 By an order dated 16th August, 2007, the CIT(A) upheld the reassessment order dated 25th January, 2007. In so far as the issue of assumption of jurisdiction is concerned, the CIT(A) held that the AO had recorded adequate reasons to believe and, therefore, the AO had the jurisdiction to issue a notice under Section 148 of the Act. Insofar as the merits of the addition were concerned, CIT(A) upheld the addition of Rs. 505.33 crores to the total income of the Assessee. The CIT(A) held that: (i) in absence of a specific statutory provision, the Assessee could not be granted exemption merely on basis of the CBDT Circular....
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....ing the Previous Year 2003-04 was not taxable. 3.10 The Tribunal did not accept the submissions made by the Assessee and rejected the appeal. 4. Before the Tribunal, it was conceded by the Revenue that the reasons recorded by the AO for issuing notice under Section 148 of the Act were erroneous. Concededly, the profit and loss on sale of investments had been credited to the Profit & Loss Account and not entered directly to the General Reserve Account as assumed by the AO. The second reason provided by the AO for reopening the assessment was that the Assessee was carrying on two streams of business; (1) non-life insurance business and (2) business in shares and securities as a public financial institution. Concededly, this assumption was also erroneous. However, the Tribunal upheld the reassessment on the ground that the Assessee had not brought the decision of the Tribunal in respect of Assessment Year 1991, which was against the Assessee, to the knowledge of the AO. The Tribunal held "that such an issue should have been brought to the notice of the Assessing Officer specially, failing which it can be held that special circumstances exist by way of facts on record so as to lead t....
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....s related to the question whether other incomes could be taxed where the income that was alleged to have escaped assessment and which had occasioned a notice under Section 148 of the Act had not been assessed or the assessment, if made, had not been sustained. Reasoning and Conclusion 8. It is now well established that the powers under Section 147 of the Act of an AO can be invoked only in cases where the AO has reason to believe that the income chargeable to tax has escaped assessment. It has been held in several decisions that reason to believe must be based on tangible material and cogent facts; the powers under Section 147 of the Act cannot be exercised merely on suspicion or on an apprehension that the income of an Assessee has escaped assessment. 9. A bona fide reason to believe that income has escaped assessment is a necessary pre-condition that clothes the AO with the power to reopen the assessment, which has otherwise attained finality. The reasons to believe must have a 'direct nexus' and a 'live link' with the formation of an opinion by the AO that taxable income of an Assessee has escaped assessment. In Commissioner of Income-Tax v. Chintoo Tomar: (2015) 54 Taxmann.....
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.... "profit on sale of investment" without routing it through the profit and loss account of the corresponding year. Thus the income of Rs. 5,05,33,63,209'- has escaped assessment within the meaning of section 147 of the I.Tax Act, 1961 during the previous year relevant to the assessment year under consideration ." 11. As indicated hereinbefore, it is not disputed that the reasons that led the AO to reopen the assessment were factually incorrect. It is not disputed that the Assessee was carrying on only one business - General Insurance Business, which is regulated under The Insurance Act, 1938. Indisputably, the insurers cannot carry on any business other than the insurance business or any prescribed business. The business of General Insurance is regulated and there is no allegation that the regulatory authority has found the Assessee to be in default of any provisions of The Insurance Act, 1938. The learned counsel for the Revenue also did not dispute that the AO's assumption that the Assessee was carrying on two streams of business was incorrect. Thus, this reason to believe that the Assessee's income had escaped assessment is clearly without any factual basis. 12. The assumpt....
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....axy Laboratories Ltd. (supra) and Software Consultants (supra) are, in our view, inapplicable to the facts pertaining to the issues involved in the present case. As rightly pointed out by Mr Sawhney, the said decisions relate to the jurisdiction of the AO to tax other income - being income other than the income which the AO has reason to believe has escaped assessment and has occasioned issuance of notice under Section 148 of the Act - that has escaped assessment and comes to the notice of the AO during the course of the proceedings initiated under Section 147 of the Act. This Court had held that other income chargeable to tax could be assessed only once the income which the AO had reason to believe had escaped assessment and which occasioned the AO to reopen the assessment under Section 147 of the Act is sustained. In the present case, the AO has not sought to tax any other income but the income, which the AO believed had escaped assessment, that is, profits from sale of investments. The point in issue involved in the present case is whether the reopening could be sustained on grounds other than those which led the AO to believe that income has escaped assessment. This Court was n....
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....roceedings relevant to the Assessment Year 2004-05, the Assessee claimed a deduction in respect of a sum of Rs. 3,57,54,000/- on account of amount written off in respect of depreciated investments. The Assessee contended that the deletion clause (b) of Rule 5 did not affect the deduction claimed as the same had been debited to the Profit & Loss Account and was not representing any loss on realization of investments. In support of its contention, the Assessee relied on paragraph seventeen of the Memorandum explaining the provisions of the Finance Act, 1988 which reads as under:- "17) Under the existing provisions of section 44 of the Income Tax Act, the profits and gains of any insurance business is computed in accordance with the rules contained in the first Schedule to the Act. In Rule 5 of this Schedule, profits and gains of any business of insurance, other than life insurance, are taken to be balance of profits disclosed in the annual accounts furnished to the Controller of Insurance subject to certain adjustments. One of the adjustments provided therein is in respect of an amount either written off or reserved in the account to meet depreciation or loss on the realization of i....
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....emorandum quoted by the assessee is concerned, firstly the Memorandum is not law and secondly this explains the basic idea behind an amendment and does not give the exact effect of an amendment. Therefore, in general term it has been explained that when profit on sale of investment is not being taxed, loss on the realisation of investment will not be deducted. However, while applying provision of a particular clause or section we have to see its effect in totality. Had the intention of legislature been that only loss on the realisation of investments is to be disallowed, there was no need of deleting the whole clause 5(b) and only the phrase "or loss on the realization of investments" and "or gains on the realization of investments" could have been deleted from clause 5(b). Since, the whole clause 5(b) is deleted, all the profit on investments whether by way of appreciation or gains on the realization of investments shall be exempted from taxation and at the same time all type of losses on investments whether by way of depreciation or loss on the realization of investments are to be disallowed. Once depreciated value of investment is written off, no loss would be incurred by the as....
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....1987, reopening could be done under the above two conditions and fulfilment 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 goby and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April, 1989, power to reopen 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 reopen assessments on the basis of " mere change of opinion", which cannot be per se reason to reopen. We 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 reassessment has to be based on fulfilment of certain preconditions and if the concept of " change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review....