IT : Opinion of DVO is per se not an information for purpose of reopening of an assessment

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[2014] 44 taxmann.com 321 (Delhi)

HIGH COURT OF DELHI

Mahashay Chunnilal

Deputy Commissioner of Income-tax*

SANJIV KHANNA AND SANJEEV SACHDEVA, JJ.

W.P. (C) NO. 7514 OF 2010

FEBRUARY 5, 2014

Section 142A, read with section 147, of the Income-tax Act, 1961 - Estimate by Valuation Officer in certain cases (Initiation of reassessment on basis of DVO's report) - Assessment years 2005-06 and 2006-07 - Whether opinion of DVO is per se not an information for purpose of reopening of an assessment - Held, yes - Whether, therefore, where assessee duly disclosed all material facts necessary for assessment, Assessing Officer merely on basis of report of DVO could not initiate reassessment proceedings taking a view that assessee had understated value of investment in construction of a building - Held, yes [Paras 20 & 24] [In favour of assessee]

FACTS

■		A search was carried out at assessee's premises in the course of which it was found that assessee had made investment in construction of a school building.
■		On the basis of documents seized and certain information sought from assessee, the Assessing Officer completed the assessment.
■		Subsequently, the Assessing Officer referred the matter to the DVO in order to ascertain amount invested in construction of school building.
■		On the basis of report of DVO, the Assessing Officer initiated reassessment proceedings taking a view that assessee had understated value of investment in construction of school building.
■		The assessee filed instant writ petition challenging validity of reassessment proceedings taking a plea that it had duly disclosed all material facts necessary for making the assessment and, thus, impugned reassessment proceedings were initiated on the basis of mere change of opinion which was impermissible in law.

HELD

■		The Assessing Officer at the time of original assessment was fully conscious and aware of the construction undertaken, the extent of construction and the expenditure declared/claimed. In case of doubt, he should have obtained valuation report before the assessment order was passed. He did not obtain the valuation report and completed the assessment, without making any addition on the said ground. The valuation report was received subsequently and became the sole ground for reopening of assessment. [Para 13]
■		Further, in the present case, the valuation report is per se tentative and vague. The valuation report of said nature requires some statement or an averment by the Assessing Officer as to what was the basis and why he should proceed on the valuation report, its contents and why he should rely on the same while recording reasons to believe. This in the present case is lacking and absent. [Para 16]
■		The contention of the revenue that the report submitted by the District Valuation Officer was material on the basis of which the reopening proceedings could be initiated in the facts of the present case is not sustainable. [Para 17]
■		It is well settled that the Assessing Officer has to apply his mind to any information in form of the valuation report and must form a belief thereon that there is escapement of income. The opinion of the DVO is per se not an information for the purpose of reopening of an assessment. The Assessing Officer has to apply his mind to the report of the DVO and only if on application of mind, if he forms a belief that there is escapement of income, he can seek to reopen the assessment. [Para 20]
■		For the report of the Valuation Officer to become a basis for the reopening, the Assessing Officer should have applied his mind to the report of the Valuation Officer. The Assessing officer has clearly not applied his mind to the report of the Valuation Officer. [Para 23]
■		In view of the above, it is held that the Assessing Officer has merely intended to revisit the concluded assessment and it is a clear case of change of opinion which is not permissible in law. The Impugned order is hereby set aside and the proceedings initiated pursuant to the impugned notice are hereby quashed. The writ petition is allowed [Para 24]

CASES REFERRED TO

Bawa Abhai Singh v. Dy. CIT [2002] 253 ITR 83/[2001] 117 Taxman 12 (Delhi) (para 14), Asstt. CIT v.Dhariya Construction Co. [2010] 328 ITR 515/[2011] 197 Taxman 202 (SC)(para 14), CIT v. Puneet Sabharwal [2011] 338 ITR 485/16 taxmann.com 320/[2012] 204 Taxman 16 (Delhi) (Mag.) (para 18),CIT v. Smt. Suraj Devi [2010]328 ITR 604/[2011] 197 Taxman 173 (Delhi) (Mag.) (para 18) and CIT v.Naveen Gera [2010] 328 ITR 516/[2011] 198 Taxman 93 (Delhi) (Mag.) (para 18).

Jainendra Maldahiyar and Amit Bhanot for the Petitioner. Abhishek Maratha, Anshul Sharma,Ruchir Mishra and Mukesh K. Tiwari for the Respondent.

JUDGMENT

Sanjeev Sachdeva, J. - The petitioner has filed the present petition challenging the order dated 23.08.2010 rejecting the objections filed by the petitioner against two notices, both dated 30.03.2010, under Section 148 of the Income Tax Act, 1961 seeking to re-assess the income of the petitioner for the assessment years 2005-06 and 2006-07.

2. The petitioner is a charitable trust and runs hospitals and schools.

3. The assessment for the assessment years 2005-06 and 2006-07 was originally completed under Section 153A/143(3) of the Income Tax Act, 1961 (hereinafter referred to, 'the Act').

4. For the assessment year 2005-06, the assessment was framed on 31.12.2008 at a loss of Rs.1,77,03,110/- and for the assessment year 2006-07, the assessment was framed on 31.12.2008 at a loss of Rs.1,53,90,490/-.

5. On 30.03.2010, i.e., before expiry of four years of the assessment year 2005-06 and 2006-07, notices were issued to the petitioner under Section 148 of the Act seeking to reassess the income of the Petitioner for the said assessment years. In reply to the said notices, the petitioner stated that the original return of income may be treated as returns filed in response to the notice under Section 148 of the Act. The Petitioner further requested for the supply of reasons to believe recorded for issuance of the said notices.

6. The following reasons were supplied for the respective assessment years:

Assessment Year 2005 - 06

'30.03.10. Reasons For Issuance of Notice Under Section 148 of The Income tax Act 1961 in the Case of M/S Mahashay Chunnilal Charitable Trust For The A.Y. 2005-06

The assessment under section 153(A)/143(3) of the I.T. Act 1961 was completed in this case on 31.12.2008 at assessed loss of Rs.1,77,03,110/-. The assessee had invested in Property "MDH School Building", Byadgi, District Haveri, Karnataka. The property was referred for valuation u/s 142(A) to the Valuation Officer, Bangalore.

The assessee was asked the following details as per questionnaire:

1.		At Sl. No.3 of the questionnaire-Copy of Return of Income for the A.Y.2005-06 with all Annexures as was filed u/s 139(1) of the I.T.Act.
2.		At Sl.No.17 of the questionnaire- Please file details of investments made and also confirm that the investments have been made in the specified assets mentioned in section 11(5) of the I.T.Act.

On perusal of record it is seen that assessee has not shown any amount of investments made during the year in school at Byadgi. The valuation of school at Byadgi by Valuation Officer in his report the property has been shown at Rs.36,26,490/- as against NIL shown by assessee. Therefore the investment of Rs.36,26,490/- has escaped assessment.

In view of the above, I have reason to believe that by reason of failure on the part of assessee to fully disclose investment in property No. "MDH School Building", Byadgi, Distt. Haveri, Karnataka, income to the tune of Rs.36,26,490/- has escaped assessment for the assessment year 2005-06.

Assessment Year 2006 - 07

30.03.10. Reasons For Issuance of Notice Under Section 148 of The Income tax Act 1961 in the Case of M/s .Mahashay Chunnilal Charitable Trust For The A.Y. 2006-07

The assessment under section 153(A)/143(3) of the I.T.Act 1961 was completed in this case on 31.12.2008 at assessed loss of Rs.1,77,03,110/-. The assessee had invested in Property "MDH School Building", Byadgi, District Haveri, Karnataka. The property was referred for valuation u/s 142(A) to the Valuation Officer, Hubli.

The Valuation Report of the said property has been received vide letter dt. 19.06.09 received in this office on 29.06.09. The valuation officer has worked out the value of the property at Rs.75,86,800/- against the declared value of Rs.24,41,776/- lakhs as shown in the balance sheet as on 31.03.06. Since the breakup of expenditure year wise was not submitted by the assessee, the Valuation Officer estimated the overall expenditure spent by the assessee in the proportionate amount in the ratio of 47.8% i.e. Rs.36,26,490/- in the F.Y.2004-05 relevant to A.Y.2005-06 and 52.2.%, i.e., Rs.39,60,310/- in the F.Y.2005-06 relevant to the A.Y.2006-07. On perusal of record the assessee has shown an amount of Rs.24,41,776/- in the assets side of balance sheet under the head 'School building' of Byadgi unit. Hence, as per books of the assessee and the information given by Valuation Officer in his report the property has been undervalued by the assessee by Rs.51,45,024/- (75,86,800/- Minus 24,41,776/-) in its return of income. The income of Rs.36,26,490/- has been held, on the basis of details filed by the assessee, to have escaped in the A.Y.05-06. Thus, the balance amount of Rs.15,18,534/- (51,45,024/- minus 36,26,490/-) has escaped assessment in this year.

Therefore, in view of the above, I have reason to believe that by reason of failure on the part of assessee to fully disclose investment in property No."MDH School Building", Byadgi, Distt. Haveri, Karnataka, income to the tune of Rs.15,18,534/- has escaped assessment for the assessment year 2006-07.'

7. The petitioner filed objections to the notices under Section 148 of the Act vide objections dated 10.05.2010. The objections filed by the petitioner were rejected vide impugned order dated 23.8.2010. The initiation of the proceedings by issuances of notices under Section 148 of the Act and the order dated 23.08.2010 is challenged by the Petitioner.

8. The petitioner had objected to the proposed reassessment primarily on the ground that if an assessment was framed under Section 153A pursuant to search then the assessment so framed was not an assessment under Section 143(3) and as such was beyond the purview of re-assessment under Section 147/148. The contention of the petitioner is that Section 147 refers to an assessment framed under Section 143(3) and not an assessment framed under Section 153A of the Act. The second objection raised by the petitioner was that the basis or reason for issuance of notices, primarily was the report of the Valuation Officer of the Income Tax Department and the report of the Valuation Officer per se cannot be a basis of issuance of notice under Section 148 of the Act. Another ground raised by the petitioner was that the entire material was before the assessing officer at the time of original assessment and the assessing officer had applied his mind to the same and hence issuance of notice amounted to change of opinion which was not permissible under law. The petitioner had further raised the objection the petitioner Trust, was registered under Section 12A of the Act and as such any income that was applied towards construction of the school building was an application of income towards charitable object and would be exempt from levy of income tax under Section 11 of the Act so there was no question of any escapement of income and even if the investment in the building were to be taken at a higher figure, it would amount to an application of income and would in any case be exempt from levy of tax.

9. Having heard learned counsels for the petitioner and the respondent we are of the view that the Writ Petition has merit and the reassessment proceedings initiated by the respondent are nor sustainable, for the reasons set out below.

10. The original assessment orders under Section 153A for both the assessment years 2005 - 06 and 2006 - 07 are identical in their wording except for the amount of loss assessed. For the purposes of record, we would refer to one of the two assessment orders. The assessment order framed under Section 153A for the assessment year 2005 - 06 reads as under:

"ASSESSMENT ORDER

A search & seizure action u/s 132 of the Income-tax Act was conducted on the premises of the assessee on 22.11.2006. Accordingly, notice u/s 153A was issued and duly served upon the assessee requiring him to file the return for the AY 2005-06.

The assessee filed return u/s 153A declaring loss of Rs.1,77,03,110/- on 17.03.2008. Notice u/s 143(2) & 142(1) dated 24/09/08 were served upon the assessee to file the requisite details. In response to statutory notices Mr. Pradeep Dhingra CA and Authorized representative of the assessee attended the proceedings and filed details and documents called for from time to time.

The assessee is a trust and the main objects are to establish hospital, clinic, laboratories for providing medical relief to needy and poor persons and also to establish educational institutions and other related objects. There is a hospital by the name of M/s. Mata Channan Devi Hospital and four schools Mata Dharam Pal Vidya Mandir, Shishu Vibhag, Mata Vidya Mandir (Bal Vibhag), MDH International School (LKG/UKG), MDH International School (I/VIII). Requisite documents were called for and produced for verification. After discussion, assessed at a loss of Rs.1,77,03,110/-. This order issues with the prior approval of Addl. Commissioner of Income-tax, Central Range-I, New Delhi."

11. The Deputy Commissioner of Income Tax while rejecting the objections has recorded that the documents relating to undisclosed income being invested in construction of school at Byadgi were found during the search and the assessing officer came to the conclusion that the value of the school declared by the assessee was less than the actual value and, therefore, during the assessment proceedings, the assessing officer referred the matter of valuation of the school to the District Valuation Officer (DVO).

12. Perusal of the assessment order above shows that the assessing officer while framing the said assessment at a loss Rs.1,77,03,110/- had issued notice to the assessee requiring the assessee to file the requisite details and documents from time to time. The assessing officer after perusal and verification of the documents had passed the assessment order.

13. The Assessing Officer at the time of original assessment was fully conscious and aware of the construction undertaken, the extent of construction and the expenditure declared/claimed. In case of doubt, he should have obtained valuation report before the assessment order was passed. He did not obtain the valuation report and completed the assessment, without making any addition on the said ground. The valuation report was received subsequently and became the sole ground for reopening.

14. A Division Bench of Delhi High Court in Bawa Abhai Singh v. Dy. CIT [2002] 253 ITR 83/[2001] 117 Taxman 12 (Delhi) had observed that valuation report received after assessment can constitute a valid basis for initiation of reassessment proceedings after 1989 amendment. It was held that information, however, must be more than mere rumour, gossip or a hunch and there should be some material which may be regarded as justification for action under Section 147. At this stage, meticulous examination is not required as in-depth enquiry has to be made, post issue of notice. The Assessing Officer must examine the information and realise its implications to determine whether the said facts or material can constitute basis for initiation of proceedings. Subsequent decision of the Supreme Court in Asstt. CIT v. Dhariya Construction Co.[2010] 328 ITR 515/[2011] 197 Taxman 202 observes and holds that the reasons to believe recorded by the Assessing Officer under Section 147 must disclose due application of mind by the Assessing Officer after he receives the valuation report and the valuation report should not become an automated exercise or a blind and undiscerning consequence. Application of mind by the Assessing Officer, who records reasons, should be demonstrable and satisfied. The valuation report is a starting point for application of mind and one can advert to the same, but the exercise and examination of the relevant aspects by the Assessing Officer should be palpable and perceivable.

15. In the present case, the valuation report is per se tentative and vague. It stands observed that State PWD plinth area rate after the year 1985 had not been published. No cost index was worked out or approved by the competent authority but cost indexes had been approved by the competent authority, Central Board of Direct Taxes (CBDT) every year for important places in the State of Karnataka. It is also stated that CBDT approved plinth area and cost index method were more authentic than PWD rates. At the same time, it was observed that since the standard weightage for labours and materials were given, the cost index at the specific place of construction could be worked out, if assessee produces bills and vouchers. In paragraph 8.0 it was mentioned that the assessee has not submitted any details of expenditure vouchers for purchased material, labour payment, transportation charges. It was stated that the plinth area rate of 01.01.1992 as base 100 was approved by the CBDT vide circular No. 1671 and as per instructions dated 13.12.1998 for working out basic cost of building. This cost has to be enhanced on the basis of weighted average cost index worked out of the locality based on then prevailing rate of men and materials and also bills/ vouchers produced by the assessee. On this basis, weighted average cost index was taken as 210 and by this method cost of construction of building on local market rate was arrived. The period of construction as per valuation report was between May,2004 to March,2006 and as per the break-up furnished, 47.8% of the construction cost was incurred in the financial year 2004-2006 and 52.2% of the expenditure was incurred in the financial year 2005-06.

16. The valuation report of this nature requires some statement or an averment by the Assessing Officer as to what was the basis and why he should proceed on the valuation report, its contents and why he should rely on the same while recording reasons to believe. This in the present case is lacking and absent.

17. The contention of the Revenue that the report submitted by the District Valuation Officer was material on the basis of which the reopening proceedings could be initiated in the facts of the present case is not sustainable.

18. In the case of CIT v. Puneet Sabharwal [2011] 338 ITR 485/16 taxmann.com 320/[2012] 204 Taxman 16 (Delhi) (Mag.), a Division Bench of this Court relying on the decision of CIT v. Smt. Suraj Devi[2010] 328 ITR 604/[2011] 197 Taxman 173 (Mag.) (Delhi) held that the primary burden of proof to prove understatement or concealment of income is on the revenue and it is only when such burden is discharged that it would be permissible to rely upon the valuation given by the DVO. It was further held that the opinion of valuation officer, per se, was not an information and could not be relied upon without the books of accounts being rejected which had not been done in that case. The Division Bench also referred to the decision in CIT v. Naveen Gera [2010] 328 ITR 516/[2011] 198 Taxman 93 (Delhi) (Mag.) to hold that opinion of the District Valuation Officer per se was not sufficient and other corroborated evidence was required.

19. The Supreme Court in the case of Dhariya Construction Co. (supra) observed:—

"Having examined the record, we find that in this case, the Department sought reopening of the assessment based on the opinion given by the District Valuation Officer (DVO). The opinion of the DVO per se is not an information for the purposes of reopening assessment under section 147 of the Income Tax act, 1961. The Assessing Officer has to apply his mind to the information, if any, collected and must form a belief thereon. In the circumstances, there is no merit in the civil appeal. The Department was not entitled to reopen the assessment."

20. The ratio discernible from the aforesaid decision is that the Assessing Officer has to apply his mind to any information in form of the valuation report and must form a belief thereon that there is escapement of income. The opinion of the DVO is per se not an information for the purpose of reopening of an assessment. The Assessing Officer has to apply his mind to the report of the DVO and only if on application of mind, if he forms a belief that there is escapement of income, he can seek to reopen the assessment under section 147 of the Act.

21. In the reasons recorded for the year 2005 - 06 the Assessing Officer has recorded that the valuation officer has worked out the value of the property at Rs.75,86,800/- against the declared value of Rs.24,41,776/- lakhs as shown in the balance sheet as on 31.03.06. The A.O. has further recorded that on perusal of record it is seen that assessee has not shown any amount of investments made during the year in school at Byadgi and that the valuation of school at Byadgi by Valuation Officer in his report the property has been shown at Rs.36,26,490/- as against NIL shown by assessee. The A.O. has thus recorded that the investment of Rs.36,26,490/- has escaped assessment.

22. In the reasons recorded for the year 2006 - 07 the Assessing Officer has recorded that the valuation officer has worked out the value of the property at Rs.75,86,800/- against the declared value of Rs.24,41,776/- lakhs as shown in the balance sheet as on 31.03.06. The A.O. has further recorded that on perusal of record the assessee has shown an amount of Rs.24,41,776/- in the assets side of balance sheet under the head 'School building' of Byadgi unit and that as per books of the assessee and the information given by Valuation Officer in his report the property has been undervalued by the assessee by Rs.51,45,024/- (75,86,800/- Minus 24,41,776/-) in its return of income. The A.O. has thus held that the income of Rs.36,26,490/- has been held, on the basis of details filed by the assessee, to have escaped in the A.Y.05-06 and that the balance amount of Rs.15,18,534/- (51,45,024/- minus 36,26,490/-) has escaped assessment in this year.

23. For the report of the Valuation Officer to become a basis for the reopening, the Assessing Officer should have applied his mind to the report of the Valuation Officer. The Assessing officer has clearly not applied his mind to the report of the Valuation Officer. Perusal of the Balance Sheet of the Assessee for the year ending 31.03.2005 shows that the Assessee has shown an amount of Rs. 21,95,849/- as an expenditure of capital nature on the Bayadgi Unit towards the School building. The Assessing Officer has taken the amount shown as nil. For the year ending 31.03.2006 the Assessee has shown an investment of Rs. 2,45,927/- as expenditure of capital nature on the Bayadgi unit and the value of the school building as on 31.03.2006 at Rs. 24,41,776/-. The reasons recorded are contradictory to the record.

24. In view of the above we are of the considered opinion that the assessing officer has merely intended to revisit the said concluded assessment and it is a clear case of change of opinion which is not permissible in law. The Impugned order dated 23.08.2010 is hereby set aside and the proceedings initiated pursuant to the two impugned notices dated 30.03.2010 are hereby quashed. The Writ Petition is allowed with no orders as to costs.

25. Since we have held that the Assessing Officer has not applied his mind to the valuation report and has simply accepted the same and made it the basis for reopening which is not permissible in terms of the law as laid down by the Supreme Court in Dhariya Construction Co. (Supra) and have quashed the reassessment. We have not gone into the plea raised by the Petitioner that as the assessment was framed under Section 153A pursuant to search, the assessment was beyond the purview of re-assessment under Section 147/148. The said question is left open.

No Costs.

IT: Where Assessing Officer being satisfied with explanation offered by assessee with regard to its claim that purchase/sale of shares offered to tax under head 'capital gain' was a result of investment activity passed assessment order under section 143(3) upon assessee and subsequently he reopened said assessment on plea that assessee had so manipulated its account that normal business profit in share trading was claimed as short-term capital gain so as to attract lower rate of tax, since very issue of taxability of sale of shares was considered by Assessing Officer during original assessment proceedings, entire proceeding for reopening assessment was based on change of opinion

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[2014] 44 taxmann.com 304 (Bombay)

HIGH COURT OF BOMBAY

Aroni Commercials Ltd.

Deputy Commissioner of Income-tax -2(1)*

MOHIT S. SHAH, CJ.
AND M.S. SANKLECHA, J.

WRIT PETITION NO. 137 OF 2014

FEBRUARY 11, 2014

Section 145, read with section 147, of the Income-tax Act, 1961 - Capital gains - Chargeable as (Business income v. Capital gains - Share dealing) - Assessment year 2008-09 - Assessee-company was engaged in business of financing, trading and investment in shares and securities - In return of income for assessment year 2008-09, it had disclosed income from business and profession besides disclosing short-term capital gain and long-term capital gain - Assessing Officer being satisfied with explanation offered by assessee with regard to its claim that purchase/sale of shares offered to tax under head 'capital gain' was a result of investment activity passed assessment order under section 143(3) upon assessee on 12-10-2010 - Subsequently Assessing Officer issued on assessee a notice under section 147 read with section 148 on 28-3-2013 for reassessment - He recorded reasons to effect that assessee had so written/manipulated its account that normal business profit in share trading was claimed as short-term capital gain so as to attract lower rate of tax - Assessee objected to reassessment proceedings contending that reopening was only on basis of change of opinion - Assessing Officer rejected objections raised by assessee - Very issue of taxability of sale of shares was a subject matter of consideration by Assessing Officer during original assessment proceedings leading to an order dated 12-10-2010 - Whether in given situation entire proceeding for reopening assessment had emanated only on account of change of opinion on part of Assessing Officer - Held, yes [Paras 14 and 19] [In favour of assessee]

Notifications & Circulars: Circular No. 4/2007, dated 15-6-2007

FACTS

■		The assessee-company was engaged in the business of financing, trading and investment in shares and securities. In the return of income filed for the assessment year 2008-09, it had disclosed income from business and profession besides disclosing short-term capital gain and long-term capital gain.
■		During the course of assessment proceedings, the Assessing Officer issued on the assessee a notice under section 143(2) on 17-8-2009 calling upon it to attend his office and produce the copies of the balance-sheet, profit and loss account, computation of income and audit report. He also asked the assessee to furnish details in respect of its activities.
■		Thereupon the assessee by its letter dated 9-7-2010 pointed out to the Assessing Officer that it was engaged in the business of financing, trading and investment in shares and securities. By communication dated 8-9-2010, it also explained in detail as to why its profit on sale of investment should be taxed as capital gain and not as profit and gains of business. Further by communication dated 13-9-2010, it furnished sample contract notes, Demat accounts and shareholding pattern of the companies to whom loans were advanced.
■		The Assessing Officer was satisfied with the explanation offered by the assessee with regard to its claim that purchase/sale of shares offered to tax under the head 'capital gain' was a result of investment activity. He passed the assessment order under section 143(3) upon the assessee on 12-10-2010.
■		Subsequently the Assessing Officer issued on the assessee a notice under section 147 read with section 148 on 28-3-2013 seeking to reopen the above assessment. He recorded the reasons to the effect that the assessee had so written/manipulated its account that the normal business profit in share trading was claimed as short-term capital gain so as to attract the lower rate of tax.
■		Thereupon the assessee filed the objections stating that the very issue viz. whether gain arising from sale/purchase of shares was assessable as capital gain or business profit had been examined by the Assessing Officer during the course of assessment and, therefore, the reopening was only on the basis of change of opinion.
■		The Assessing Officer by his order dated 20-11-2013 rejected the objections by holding that the reopening of the assessment was valid and justified. The reopening was not due to any change of opinion but on clear observation that the assessee did not carry out any business activity other than share trading. Further no details regarding computation of short-term capital gain or sample copies of the purchase/sale note were furnished during the assessment proceeding. Further the Assessing Officer passed the assessment order under section 143(3) read with section 147 upon the assessee on 19-12-2013.
■		On writ:

HELD

■		The Bombay High Court in the case of Asian Paints Ltd. v. Dy. CIT [2008] 296 ITR 90 has clearly laid down that when an assessment is sought to be reopened under section 148 and the objections of the assessee have been overruled by the Assessing Officer, then in such a case the Assessing Officer will not proceed further in the matter for a period of four weeks from the date of receipt of the order rejecting the objections of the assessee. [Para 4]
■		It is axiomatic that the law declared by the High Court is binding on all authorities functioning within its jurisdiction. It is not open to the Assessing Officer to feign ignorance of the law declared by the High Court and pass orders in defiance of the law laid down by it. It is averred in the petition that the Assessing Officer was informed at the hearing held on 10-12-2013 that the assessee is preparing a petition to challenge the reopening for the assessment year 2008-09 on identical grounds as done in earlier assessment year 2007-08 which is pending in the High Court and ad interim relief has also been granted restraining the revenue from proceeding with the assessment for the assessment year 2007-08. The passing of an order on 19-12-2013 by the Assessing Officer in undue haste and thereafter contending that in view of alternative remedy the writ petition should not be entertained does not appearbona fide. This undue haste in passing the impugned order dated 19-12-2013 is an attempt to overreach the Court and to thwart the assessee's challenge to the impugned order dated 20-11-2013 pending before the High Court. [Para 6]
■		In the above circumstances, the order dated 19-12-2013 passed by the Assessing Officer under section 143(3) read with section 147 was liable to be set aside. [Para 7]
■		The power of the Assessing Officer under sections 147 and 148 to reopen an assessment is classified into two:

(a)		Reopening of assessment within a period of four years from the end of the relevant assessment year and
(b)		Reopening of assessment beyond a period of four years from the end of the relevant assessment year.

■		The common jurisdictional requirement for reopening of assessment both within and beyond a period of four years has to be on the basis of reason to believe that income chargeable to tax has escaped assessment and the reasons for issuing a notice to reopen are recorded before issuing a notice. However, there is one additional jurisdictional requirement to be satisfied while seeking to reopen the assessment beyond the period of four years from the end of the relevant assessment year viz. that there must have been a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment during the original assessment proceedings. Thus the primary requirement to reopen any assessment is a reason to believe that income chargeable to tax has escaped assessment. However, as observed by the Supreme Court in the case of CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 in the context of sections 147 and 148 that reason to believe found therein does not give arbitrary powers to reopen an assessment. The concept of change of opinion is excluded/omitted from the words reason to believe. Thus a change of opinion would not be reason to believe that income chargeable to tax has escaped assessment. Besides the power to reassess is not a power to review. Further reopening must be on the basis of tangible material. [Para 11]
■		Therefore, the power to reassess cannot be exercised on the basis of mere change of opinion. If all facts are available on record and a particular opinion is formed, then merely because there is change of opinion on the part of the Assessing Officer notice under sections 147 and 148 is not permissible. The powers under sections 147 and 148 cannot be exercised to correct errors/mistakes on the part of the Assessing Officer while passing the original order of assessment. There is a sanctity bestowed on an order of assessment and the same can be disturbed by exercise of powers under sections 147 and 148 only on satisfaction of the jurisdictional requirements. Further the reasons for reopening an assessment have to be tested/examined only on the basis of the reasons recorded at the time of issuing a notice under section 148 seeking to reopen an assessment. These reasons cannot be improved upon and/or supplemented much less substituted by affidavit and/or oral submissions.
■		Moreover the reasons for reopening an assessment should be that of the Assessing Officer alone, who is issuing the notice, and he cannot act merely on the dictates of any another person in issuing the notice. Moreover the tangible material upon the basis of which the Assessing Officer comes to the reason to believe that income chargeable to tax has escaped assessment can come to him from any source. However, the reasons for the reopening have to be only of the Assessing Officer issuing the notice. At the stage of issuing notice under section 148 to reopen a concluded assessment, the satisfaction of the Assessing Officer issuing the notice is of primary importance. This satisfaction must be prima faciesatisfaction of having a reason to believe that income chargeable to tax has escaped assessment. At the stage of the issuing of the notice under section 148 it is not necessary for the Assessing Officer to establish beyond doubt that income indeed has escaped assessment. [Para 12]
■		The parties proceeded on the basis that the impugned notice dated 28-3-2013 seeking to reopen the assessment was a notice within a period of four years from the end of the relevant assessment year. The reason seeking to reopen the assessment is that the assessee had so written/manipulated its account that the normal business profit in share trading was claimed as short-term capital gain so as to attract the lower rate of tax. [Para 13]
■		During the assessment proceedings, the assessee had by a letter dated 9-7-2010 pointed out that it was engaged in the business of financing, trading and investment in shares and securities. Further by a letter dated 8-9-2010, the assessee has disclosed in detail as to why its profit on sale of investments should not be taxed as business profits but charged to tax under the head capital gain. In support of its contention, the assessee had also relied upon CBDT Circular No. 4/2007, dated 15-6-2007. It would, therefore, be noticed that the very ground on which the notice dated 28-3-2013 seeks to reopen the assessment was considered by the Assessing Officer while originally passing assessment order dated 12-10-2010. This by itself demonstrates the fact that notice dated 28-3-2013 under section 148 seeking to reopen assessment is based on mere change of opinion.
■		However, according to the revenue, the aforesaid issue now raised has not been considered earlier, as the same is not referred to in the assessment order dated 12-10-2010 passed for the assessment year 2008-09. Once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the Assessing Officer while completing the assessment. It is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. There can be no doubt in the instant case that the very issue of taxability of sale of shares under the head capital gain or the head profits and gains from business was a subject matter of consideration by the Assessing Officer during the original assessment proceedings leading to an order dated 12-10-2010. It would, therefore, follow that the reopening of the assessment by impugned notice dated 28-3-2013 is merely on the basis of change of opinion of the Assessing Officer from that held earlier during the course of assessment proceeding leading to the order dated 12-10-2010. This change of opinion does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment. [Para 14]
■		It was contended by the revenue that this is not a case of change of opinion, as the reopening is based on fresh tangible material, namely, audit report furnished by the internal audit department of the revenue. Neither the reasons furnished to the assessee disclose the material obtained from the audit report of the internal audit department of the revenue as the basis for reopening assessment, nor the order dated 20-11-2013 rejecting the assessee's objection state that the ground for reopening is the tangible material disclosed by the internal audit department of the revenue. The Bombay High Court in the case ofHindustan Lever v. R.B.Wadkar [2004] 268 ITR 332/137 Taxman 479 has held that the challenge to reopening of an assessment can only be resisted on the basis of the reasons recorded at the time of issuance of notice and no further reasons either orally at the bar or by filing of an affidavit can be considered to meet the challenge to reopening of an assessment. Therefore, it would not be permissible for the revenue to advance submissions on the basis of an audit report, which was not basis of the reasons recorded at the time of issuing notice under section 148. [Para 15]
■		Be that as it may, even if, one examines audit report dated 29-9-2011 from the internal audit department it would be noticed that the basis of the audit report is the interpretation/inference drawn by the auditors from the accounts submitted by the assessee to the department during the course of its assessment proceedings. The reasons as indicated in the audit report are similar to the reasons as set out in the grounds for reopening the assessment by the Assessing Officer. Neither the audit report, nor the grounds for reopening assessment disclose any tangible material for the purpose of reopening the assessment but relies upon opinion/inferences drawn by the internal audit department on existing material and these inferences/opinion differ from the one drawn by the Assessing Officer while passing assessment order dated 12-10-2010. This is not a case of any new fact being available by virtue of internal audit which could lead to a reasonable belief that income chargeable to tax has escaped assessment. [Para 16]
■		One of the grounds set out in the order dated 20-11-2013 for rejecting the assessee's objection on reopening the assessment was that the assessee had failed to furnish sample contract note, Demat account and shareholding pattern of the companies to whom loans were advanced. This ground is factually incorrect. In fact, the assessee by its letter dated 13-9-2010 had supplied the Assessing Officer with sample of contract note, Demat account statement and also share holding pattern of the companies to whom the loans were advanced. [Para 17]
■		Therefore, the entire proceeding for reopening the assessment had emanated only on account of change of opinion on the part of the Assessing Officer. [Para 19]
■		There was no reason for the Assessing Officer to have had a reasonable belief that income chargeable to tax has escaped assessment. Accordingly, the impugned notice dated 28-3-2013 issued under section 148 as well as the impugned order dated 20-11-2013 passed by the Assessing Officer rejecting the assessee's objection to reopen the assessment were liable to be set aside. [Para 20]

CASE REVIEW

Asian Points Ltd. v. Dy. CIT [2008] 296 ITR 90 (Bom.) (para 6); CIT v. Kelvinator of India Ltd.[2010] 320 ITR 561/187 Taxman 312 (SC) (para 11) and Hindustan Lever v. R.B.Wadkar [2004] 268 ITR 332/137 Taxman 479 (Bom.) (para 15) followed.

CASES REFERRED TO

Asian Paints Ltd. v. Dy. CIT [2008] 296 ITR 90 (Bom.) (para 4), CIT v. Gopal Purohit [2011] 336 ITR 287/[2010] 188 Taxman 140 (Bom.) (para 9), CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC) (para 11) and Hindustan Lever v. R.B. Wadker [2004] 268 ITR 332/137 Taxman 479 (Bom.) (para 15).

Percy Pardiwala and Atul K. Jasani for the Petitioner. P.C. Chhotaray for the Respondent.

JUDGMENT

M.S. Sanklecha, J. - Rule, returnable forthwith. By consent of the parties the petition is taken up for final disposal.

2. By this petition under Article 226 of the Constitution of India, the petitioner challenges the following:—

(a)		A notice dated 28 March 2013 under Section 148 of the Income Tax Act, 1961 ("the Act") seeking to reopen assessment for the Assessment Year ("A.Y".) 2008-09;
(b)		The order dated 20 November 2013 passed by respondent No.1-Deputy Commissioner of Income Tax ("Assessing officer") rejecting the petitioner's objection to reopening of assessment for A. Y. 2008-09;
(c)		The assessment order dated 19 December 2013 passed by the Assessing Officer under Section 143(3) read with Section 147 of the Act for A. Y. 2008-09.

3. At the very outset, Mr. Chhotaray, learned Counsel for the respondent-revenue raises a preliminary objection to the petition viz. that as an Assessment Order dated 19 December 2013 has already been passed, the issue of challenge to re-opening of assessment could be challenged by filing an appeal under the Act. Therefore, on this short ground alone, the petition be dismissed.

4. As against the above, Mr. Percy Pardiwala, learned Senior Counsel for the petitioner submits that the sequence of events in this case warrants this petition being entertained. It was by order dated 20 November 2013 that the Assessing Officer rejected the petitioner' objection to re-opening of assessment for A. Y. 2008-09 by notice dated 28 March 20103. This Court in Asian Paints Ltd. v. Dy. CIT [2008] 296 ITR 90has clearly laid down that when an assessment is sought to be reopened under Section 148 of the Act and the objections of the assessee have been over ruled by the Assessing Officer, then in such a case the Assessing Officer will not proceed further in the matter for a period of four weeks from the date of receipt of the order rejecting the objections of the assessee. In view of the above, it is submitted that the proceedings for reassessment itself could not be taken up for a period of four weeks from 22 November 2013 when the impugned order dated 20 November 2013 was served. Besides the Assessing Officer was informed at the hearing held on 10 December 2013 that the petitioners are in the process of challenging the reassessment proceeding for A.Y. 2008-09 in this Court. Moreover, on 18 December 2013 the Commissioner of Income Tax had been informed that the challenge to the order dated 20 November 2013 is posted for admission on 23 December 2013 in this Court. Inspite of the above, the Assessing officer has passed the assessment order dated 19 December 2013.

5. Mr. Chhotaray, the learned Counsel for the revenue on being confronted with the decision of this Court inAsian Paints Ltd.'s case (supra) submits that the aforesaid decision was not brought to the notice of the Assessing Officer. Therefore, not being aware of the decision of Asian Paints Ltd.'s case (supra) the Assessing Officer proceeded further in taking up the reassessment even though the period of four weeks from the date of the order dated 20 November 2013 over ruling the petitioner's objection had not expired. At this stage, we asked Mr. Chhotaray whether the Assessing Officer would withdraw his assessment order dated 19 December 2013 in view of the decision of Asian Paints Ltd.'s case (supra) being brought to his notice. However, Mr. Chhotaray expressed inability to withdraw the assessment order dated 19 December 2013.

6. It is axiomatic that the law declared by this Court is binding on all authorities functioning within the jurisdiction of this Court. It is not open to the Assessing Officer to feign ignorance of the law declared by this Court and pass orders in defiance of the law laid down by this Court. We do not accept this submission made on behalf of the revenue that the Assessing Officer was not aware of the decision of this Court inAsian Paints (supra). On the contrary, it appears that the order dated 19 December 2013 was passed only to make the entire proceeding pending before this Court redundant and to present the Court with a fait accompli. This is particularly so as the petitioner had on 18 December 2013 informed the Commissioner of Income Tax that a writ petition has been filed challenging the order dated 20 November 2013 in respect of A. Y. 2008-09 and is posted for admission on 23 December 2013. It is averred in the petition that the Assessing Officer was informed at the hearing held on 10 December 2013, that it is preparing a petition to challenge the re-opening for A. Y. 2008-09 on identical grounds as done in earlier Assessment Year namely A. Y. 2007-08 which is pending in this Court and ad interim relief has also been granted, restraining the revenue from proceeding with the assessment for A. Y. 2007-08. The passing of an order on 19 December 2013 by the Assessing Officer in undue haste and thereafter contending that in view of alternative remedy, the writ petition should not be entertained, does not appear bona fide. This undue haste in passing the impugned order dated 19 December 2013 is an attempt to overreach the Court and to thwart the petitioner's challenge to the impugned order dated 20 November 2013 pending before this Court.

7. In the above circumstances, we set aside the order dated 19 December 2013 passed by the Assessing Officer under Section 143(3) read with Section 147 of the Act for A. Y. 2008-09.

8. We shall now deal with the petitioner's challenge to re-opening of assessment for A. Y. 2008-09 by impugned notice dated 28 March 2013 and impugned order dated 20 November 2013 rejecting the petitioner's objection to its re-opening. Facts relevant to the above challenge are as under:—

(a)		On 30 September 2008, the petitioner filed its return of income for A. Y. 2008-09. In its computation of income the petitioner has disclosed income from business and profession at Rs.28.71 lacs besides disclosing short term capital gains at Rs.3.68 crores and long term capital gain at Rs.3.71 crores.
(b)		Thereafter, on 17 August 2009, a notice under Section 143(2) of the Act was issued to the petitioner calling upon the petitioner to attend the office of the Assessing Officer and produce the copies of the balance sheet, Profit and Loss Account, Computation of income and Audit report. On 27 August 2009, the petitioner filed particulars asked for and attended the hearing with the Assessing Officer on 28 August 2009.
(c)		During the course of the assessment proceedings, certain details were sought for from the petitioner particularly a note on the nature of its activities. By its letter dated 9 July 2010 the petitioner pointed out that it was engaged in the business of financing, trading and investment in shares and securities.
(d)		In response to a query made by the Assessing Officer during the hearing in course of assessment proceedings, the petitioner by communication dated 8 September 2010 explained in detail as to why its profit on sale of investments should be taxed as capital gain and not as profits and gains of business. In support reliance was placed upon the CBDT Circular No.4/2007 dated 15 June 2007 wherein parameters have been laid down for the purpose of making a distinction between shares held as investment and shares held as stock in trade. Further by communication dated 13 September 2010, the petitioner furnished sample contract notes, Demat Accounts and shareholding pattern of the companies to whom loans were advanced.
(e)		The Assessing Officer was satisfied with the explanation offered by the petitioner with regard to its claim that purchase/sale of shares offered to tax under the head capital gain was a result of investment activity resulting in assessment order dated 12 October 2010 for A. Y. 2008-09. By the above assessment order the income was determined at Rs.4.15 crores under the normal provisions of the Act and at Rs.7.82 crores under Section 115JB of the Act. In fact, the assessment order also disallowed certain expenses under Section 14A of the Act incurred in respect of the exempted income viz. long term capital gains as well as dividend income.
(f)		On 28 March 2013 the Assessing officer issued a notice under Section 148 of the Act to the petitioner seeking to reopen the assessment for A.Y. 2008-09 for the purposes of reassessment. On receipt of the notice, the petitioner sought the reasons for the re-opening of the assessment for A.Y. 2008-09. In response the Assessing Officer communicated the following reasons for reopening the assessment:—
		"It is observed that the assessee is only engaged in the business of share trading and regularly doing purchase and sale of shares. The assessee has manipulated the affairs in such a way that where scrip has been sold within twelve months, it is claimed as short term capital gains and taxed at a lower rate by applying section 111A.As assessee is engaged in share trading activity only, all income/receipts should be treated as business income including short terms capital gain. Reliance is also placed on the Board's Circular No.4 dated 15 June 2007.
		In view of the above, I have reason to believe that income chargeable to tax has escaped assessment for A.Y. 2008-09 by reason of the failure on the part of the assessee to disclose fully and truly the income under the correct head and all material facts necessary for the assessment of income, resulting in the income being assessed at low rate/claimed exempt. Accordingly, the assessment for A.Y. 2008-09 is re-opened by issue of notice u./s. 148 of the Income Tax Act, 1961."
(g)		On 19 November 2013, the petitioner filed its objection to the reasons for reopening of the assessment for A.Y. 2008-09. In particular, it was stated that the notice for re-opening was received by the petitioner only on 17 September 2013.Therefore, the notice was beyond 4 years from the end of the relevant assessment year. It was also pointed out that the very issue viz. of assessing gains arising from sale/ purchase of shares was assessable as capital gain or business profit had been examined by the Assessing Officer during the course of assessment. This was evident from the petitioner's letter dated 8 September 2010 to the Assessing Officer during the assessment proceeding leading to the assessment order dated 12 October 2010. In view of the above, it was submitted that the re-opening is only on the basis of change of opinion as there is no fresh tangible material which would warrant reopening of concluded assessment even within a period of 4 years from the end of the relevant assessment year.
(h)		On 20 November 2013, the Assessing officer passed an order (received by petitioner on 22 November 2013) titled "order removing objections" holding that reopening of the assessments by notice dated 28 March 2013 was valid. The order dated 20 November 2013 holds that 're-opening is not due to any change of opinion but on clear observation that the assessee did not carry out any business activity other than Share Trading'. Further no details regarding computation of short term capital gain or sample copies of the purchase/sale note were furnished during the assessment proceeding. In the circumstances, according to the Assessing Officer reopening of the assessment was valid and justified.

9. Mr. Percy Pardiwala, learned Senior Counsel in support of the petition submits as under:

(a)		The impugned order dated 20 November 2013, rejecting the petitioner's objection to notice dated 28 March 2013 under Section 148 of the Act is unsustainable. This is for the reason that reopening is being done on mere change of opinion which does not constitute a reason to believe that income chargeable to tax has escaped assessment. The very basis of the reasons for re-opening viz. the gains arising from purchase and sale of shares is taxable as business income and not as capital gain was examined during the course of assessment proceedings, leading to the assessment order dated 12 October 2010. This is evident from the petitioner's letter dated 8 September 2010 during Assessment proceedings. Thus, this notice for re-opening is only on account of change of opinion i.e. a different interpretation/view of facts which were already examined in the original proceedings leading to order dated 12 October 2010.
(b)		The impugned order dated 20 November 2013 rejecting the petitioner's objections to re-opening the assessment proceeds on a factually incorrect basis i.e. no sample copy of purchase/sale note or Demat statement was furnished by the assessee during the course of assessment proceeding. This, in spite of the fact that the petitioner by its letter dated 13 September 2010 had furnished copies of its De-mat Account as well as sale/ purchase note during the proceeding leading to the assessment order dated 12 October 2013; and
(c)		The Assessing Officer completely ignored the fact that in assessment proceedings for earlier years i.e. A.Y. 2005-06 and 2006-07 and even in the subsequent A.Y. 2009-10, the petitioner has been treated as investor in shares and not as trader in shares. In fact, attention was drawn to order dated 25 November 2011 for A. Y. 2009-10 where the petitioner had claimed a loss on short term capital account, it was not set off against business income. In fact, if the revenue had applied the same test which it now seeks to apply i.e. profit/loss on sale of shares is on account of business then a set off would be permissible of the capital loss against business profits and no tax would be payable. In the above circumstances, it was submitted that purchase/sale of shares as investments was to be taxed under the head 'capital gain' alone on the principle of consistency as held by this Court in CIT v. Gopal Purohit [2011] 336 ITR 287/[2010] 188 Taxman 140.

10. As against the above, Mr. Chhotaray, learned Counsel appearing for the respondent-revenue in support of the impugned notice dated 28 March 2013 and the impugned order dated 19 November 2013 submits as under:—

(a)		The issue whether income received on account of sale of shares is chargeable to tax as business income or not was not a subject matter of consideration during the assessment proceedings leading to the order dated 12 October 2010 in respect of A.Y. 2008-09. This is evident from the fact that the assessment order dated 12 October 2010 does not even advert to this issue. In the circumstances, as this issue is being considered for the first time, no question of change of opinion on the part of the Assessing Officer can arise. It was submitted that during the original assessment proceedings leading to order dated 12 October 2010, no opinion has been formed on this issue by the Assessing Officer;
(b)		The entire exercise for reopening assessment for A.Y. 2008-09 was on the basis of the audit objections dated 29 September 2011 received by Assessing officer from the Internal Audit Wing of the respondent. A copy of the Audit report dated 29 September 2011 was handed across the bar. It was submitted that this audit report has pointed out that the petitioner had manipulated its account in such a manner that the regular business of the assessee of trading in shares was hidden resulting in business income of trading in shares being taxed as capital gain arising out of investment. It was on the basis of the aforesaid material received from the audit that notice to reopen the assessment for assessment year 2008-09 was issued. This was the tangible material before the Assessing Officer which warranted reopening the assessment for assessment year 2008-09 even if it is assumed that all facts were available to the Assessing Officer during the assessment proceedings leading to Assessment Order dated 12 October 2010; and
(c)		Merely because the petitioner's claim for being charged to tax under the head 'capital gain' instead of the head "Profits and gains of business or profession had been accepted for earlier and subsequent years by the revenue it would not follow that for assessment year 2008-09 under consideration, the same has to be blindly accepted. It is submitted that each assessment year is separate assessment year. Therefore, in the present facts the Assessing Officer has reasonable belief that income chargeable to tax has escaped assessment and on the basis of the such belief is entitled to re-open the Assessment.

11. In this case we are dealing with the reopening of assessment completed by order dated 12 October 2010 under Section 143(3) of the Act. The law with regard to reopening of assessment is fairly settled by decisions of Courts. The power of the Assessing Officers under Sections 147 and 148 of the Act to reopen an assessment is classified into two :—

(a)		Reopening of assessment within a period of 4 years from the end of the relevant assessment year and
(b)		Reopening of assessment beyond a period of 4 years from the end of the relevant assessment year.

The common jurisdictional requirement for reopening of assessment both within and beyond a period of 4 years has to be on the basis of reason to believe that income chargeable to tax has escaped assessment and the reason for issuing a notice to reopen are recorded before issuing a notice. However, there is one additional jurisdictional requirement to be satisfied while seeking to reopen the assessment beyond the period of 4 years from the end of the relevant assessment year viz. that there must have been a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment during the original assessment proceedings. Thus the primary requirement to reopen any assessment is a reason to believe that income chargeable to tax has escaped assessment. However, as observed by the Supreme Court in the case of CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 in the context of Sections 147/148 of the Act that reason to believe found therein does not give arbitrary powers to reopen an assessment. The concept of change of opinion is excluded/omitted from the words reason to believe. Thus a change of opinion would not be reason to believe that income chargeable to tax has escaped assessment. Besides the power to reassess is not a power to review. Further reopening must be on the basis of tangible material.

12. Therefore the power to reassess cannot be exercised on the basis of mere change of opinion i.e. if all facts are available on record and a particular opinion is formed, then merely because there is change of opinion on the part of the Assessing Officer notice under Section 147/148 of the Act is not permissible. The powers under Section-147/148 of the Act cannot be exercised to correct errors/mistakes on the part of the Assessing Officer while passing the original order of assessment. There is a sanctity bestowed on an order of assessment and the same can be disturbed by exercise of powers under Sections 147/148 of the Act only on satisfaction of the jurisdictional requirements. Further, the reasons for reopening an assessment has to be tested/examined only on the basis of the reasons recorded at the time of issuing a notice under Section 148 of the Act seeking to reopen an assessment. These reasons cannot be improved upon and/or supplemented much less substituted by affidavit and /or oral submissions. Moreover, the reasons for reopening an assessment should be that of the Assessing Officer alone who is issuing the notice and he cannot act merely on the dictates of any another person in issuing the notice. Moreover, the tangible material upon the basis of which the Assessing Officer comes to the reason to believe that income chargeable to tax has escaped assessment can come to him from any source, however, reasons for the reopening has to be only of the Assessing Officer issuing the notice. At the stage of issuing notice under Section 148 of the Act to reopen a concluded assessment the satisfaction of the Assessing Officer issuing the notice is of primary importance. This satisfaction must be prima facie satisfaction of having a reason to believe that income chargeable to tax has escaped assessment. At the stage of the issuing of the notice under Section 148 of the Act it is not necessary for the Assessing officer to establish beyond doubt that income indeed has escaped assessment.

13. Keeping in view the above broad parameters of the jurisdiction of the Assessing Officer to reopen assessments completed under Section 143(3) of the Act, the impugned notice and order have to be examined. Counsel for the parties proceeded on the basis that the impugned notice dated 28 March 2013 seeking to reopen the assessment for A.Y. 2008-09 was a notice within a period of four years from the end of the relevant assessment year. Therefore, in such a case the test of failure to disclose truly and fully all material facts necessary for assessment during the original assessment proceedings does not arise for consideration. In the present facts the notice to reopen the assessment for A.Y. 2008-09 was issued on 28 March 2013 and the reasons seeking to reopen the assessment is that the petitioner had so written/ manipulated its account that the normal business profits in share trading was claimed as short term capital gain so as to attract the lower rate of tax.

14. We find that during the assessment proceedings the petitioner had by a letter dated 9 July 2010 pointed out that they were engaged in the business of financing trading and investment in shares and securities. Further, by a letter dated 8 September 2010 during the course of assessment proceedings on a specific query made by the Assessing Officer, the petitioner has disclosed in detail as to why its profit on sale of investments should not be taxed as business profits but charged to tax under the head capital gain. In support of its contention the petitioner had also relied upon CBDT Circular No.4/2007 dated 15 June 2007. (The reasons for reopening furnished by the Assessing Officer also places reliance upon CBDT Circular dated 15 June 2007). It would therefore, be noticed that the very ground on which the notice dated 28 March 2013 seeks to reopen the assessment for assessment year 2008-09 was considered by the Assessing Officer while originally passing assessment order dated 12 October 2010. This by itself demonstrates the fact that notice dated 28 March 2013 under Section 148 of the Act seeking to reopen assessment for A.Y. 2008-09 is based on mere change of opinion. However, according to Mr. Chhotaray, learned Counsel for the revenue the aforesaid issue now raised has not been considered earlier as the same is not referred to in the assessment order dated 12 October 2010 passed for A.Y. 2008-09. We are of the view that once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the Assessing Officer while completing the assessment. It is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. If an Assessing Officer has to record the consideration bestowed by him on all issues raised by him during the assessment proceeding even where he is satisfied then it would be impossible for the Assessing Officer to complete all the assessments which are required to be scrutinized by him under Section 143(3) of the Act. Moreover, one must not forget that the manner in which an assessment order is to be drafted is the sole domain of the Assessing Officer and it is not open to an assessee to insist that the assessment order must record all the questions raised and the satisfaction in respect thereof of the Assessing Officer. The only requirement is that the Assessing Officer ought to have considered the objection now raised in the grounds for issuing notice under Section 148 of the Act, during the original assessment proceedings. There can be no doubt in the present facts as evidenced by a letter dated 8 September 2012 the very issue of taxability of sale of shares under the head capital gain or the head profits and gains from business was a subject matter of consideration by the Assessing Officer during the original assessment proceedings leading to an order dated 12 October 2010. It would therefore, follow that the reopening of the assessment by impugned notice dated 28 March 2013 is merely on the basis of change of opinion of the Assessing Officer from that held earlier during the course of assessment proceeding leading to the order dated 12 October 2010. This change of opinion does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment.

15. It was contended by Mr. Chhotaray appearing for the revenue that this is not a case of change of opinion as the reopening is based on fresh tangible material namely audit report furnished by the internal audit department of the revenue. This material viz. audit report dated 29 September 2011 could never have been considered by the Assessing Officer while passing his assessment order dated 12 October 2010. We find that neither the reasons furnished to the petitioner disclose the material obtained from the audit report of the internal audit department of the revenue as the basis for reopening assessment nor the order dated 20 November 2013 rejecting the petitioner's objection state that the ground for reopening is the tangible material disclosed by the internal audit department of the revenue. This Court in the matter of Hindustan Lever v.R.B. Wadkar [2004] 268 ITR 332/137 Taxman 479 has held that the challenge to reopening of an assessment can only be resisted on the basis of the reasons recorded at the time of issuance of notice and no further reasons either orally at the bar or by filing of an affidavit can be considered to meet the challenge to reopening of an assessment. Therefore, it would not be permissible for Mr. Chhotaray to advance submissions on the basis of an audit report which was not basis of the reasons recorded at the time of issuing notice under Section 148 of the Act.

16. Be that as it may, even if, one examines audit report dated 29 September 2011 from the internal audit department it would be noticed that the basis of the audit report is the interpretation/inference drawn by the auditors from the accounts submitted by the petitioner to the department during the course of its assessment proceedings. The reasons as indicated in the audit report are similar to the reasons as set out in the grounds for reopening the assessment by the Assessing officer. Neither the audit report nor the ground for reopening assessment disclose any tangible material for the purpose of reopening the assessment but relies upon opinion/inferences drawn by the internal audit department on existing material and these inferences/opinion differ from the one drawn by the Assessing Officer while passing assessment order dated 12 October 2010. Tangible material would mean factual material and not inference/opinion on material already in existence and considered during the assessment proceedings. This is not a case of any new fact being available by virtue of internal audit which could lead to a reasonable belief that income chargeable to tax has escaped assessment. The internal audit report dated 29 September 2011 is an opinion/inference on facts i.e. the accounts and therefore, would not be tangible material to reopen an assessment.

17. One of the grounds set out in order dated 20 November 2013 for rejecting the petitioner's objection on reopening the assessment for A.Y. 2008-09 was that the petitioner had failed to furnish sample contract note, Demet account and shareholding pattern of the companies to whom loans were advanced. This ground is factually incorrect. In fact, the petitioner by its letter dated 13 September 2010 had supplied the Assessing officer with sample of contract note, Demet account statement and also share holding pattern of the companies to whom the loans were advanced. It therefore, follows that grounds for rejecting the petitioner's objection to reopen the assessment are contrary to the facts on record and therefore, cannot be sustained.

18. It was also urged by the petitioner that for the earlier assessment year as well as subsequent assessment year the petitioner has been treated as investor in shares and not as trader. This would be a submission on merits of the matter and normally would not have been dealt with it in a challenge to reopening of assessment. However, we are considering the same as the peculiar facts of this case would indicate the absence of reason to believe that income has escaped assessment. This is so, as much after the objection of the internal audit dated 29 September 2011 the Assessing Officer while passing the assessment order dated 25 November 2011 for A.Y.2009-10 had treated the petitioner's loss on sale of shares as loss on investment and classified it as short term capital loss and not as business loss. This was only because the revenue was conscious of the fact that if the capital gain/loss was to be treated as business loss for A.Y. 2009-10 (as is now contended by the revenue for A.Y. 2008-09) then in that event the petitioner would have an opportunity to set off its profit of Rs.75.60 lacs on account of profit and gain of business from the losses suffered on sale/purchase of shares of Rs.1.59 crores. In such a case no tax at all would be payable. The aforesaid order dated 25 November 2011 for A.Y. 2009-10 by the Assessing Officer continues to reflect the view of the Assessing Officer that the profits and gains on account on sale of shares arises out of the petitioner's investment in shares and is not taxable as business income. This Court in the matter of Gopal Purohit (supra) has taken a view that though the principle of res-judicata is not applicable to tax matters as each year is separate and distinct, nevertheless where facts are identical from year to year, there has to be uniformity and consistency in treatment. In view of the above, the fact that the revenue has been treating the profit on sale of shares as taxable under the head capital gain the same should be done in this year also in the absence of different facts.

19. On all the aforesaid grounds, we are of the view that the impugned notice dated 28 March2013 under Section 148 of the Act seeking to reopen the assessment for A.Y.2008-09 and the order dated 20 November 2013 rejecting the petitioner's objection to reopen the assessment for A.Y. 2008-09 are not sustainable in law. The entire proceeding for reopening the assessment for A.Y. 2008-09 had emanated only on account of change of opinion on the part of the Assessing Officer.

20. In view of the discussion in Paragraphs 3 to 7 herein above, we set aside the assessment order dated 19 December 2013. We also hold that there was no reason for the Assessing Officer to have had a reasonable belief that income chargeable to tax has escaped assessment. Accordingly, we set aside the impugned notice dated 28 March 2013 issued under Section-148 of the Act as well as the impugned order dated 20 November 2013 passed by the Assessing Officer rejecting the petitioner's objection to reopen the assessment for A.Y. 2008-09.

21. The petition is allowed. No order as to costs.

SKJ

*In favour of assessee

CST & VAT : When, with a view to recover dues, assessee-bank/NBFC sold vehicles owned by borrowers on default in repayment of loan, assessee acted as 'agent' of borrowed and fell within definition of 'dealer' and was liable to VAT

■■■

[2014] 44 taxmann.com 143 (Calcutta)

HIGH COURT OF CALCUTTA

Tata Motors Finance Ltd.

Assistant Commissioner of Sales Tax*

GIRISH CHANDRA GUPTA AND TARUN KUMAR DAS, JJ.

W.P.T.T. NOS. 24 OF 2010 AND 4 & 6 OF 2011

OCTOBER 8, 2013

Section 2(11) of the West Bengal Value Added Tax Act, 2003 - Dealer - Agents - With a view to recover dues, assessee-bank/NBFC sold vehicles owned by borrowers of vehicle loans on default in repayment of loan - Department regarded assessee-bank/NBFC as 'dealer' and liable to VAT - Assessee argued that vehicle was owned only by borrower and sale had been made under a power of attorney agreement and, therefore, they were not 'dealer' - HELD : Act does not make any distinction between a seller of its own goods or a seller of goods belonging to someone else - Assessee-bank/NBFC had obtained irrevocable Power of Attorney from borrowers for purpose of selling vehicles; thus, assessees had themselves reduced their position to that of an agent - Assessee's action on basis of Power of Attorney amounts to 'agent of borrowers', as : (a) assessee is a constructive trustee, (b) any amount received in excess of assessee's dues has to be held for benefit of borrower, (c) assessee has to take care to sell vehicle at a fair price, and (d) assessee stands in a fiduciary relationship - Assessee had a greater right to sell vehicle than right of a mere agent, but, fact of agency cannot be denied in view of facts and circumstances and also in view of Power of Attorney - Hence, assessees were agents/mercantile agents and covered within scope of 'dealer' under section 2(11)(d) [Paras 12 to 16] [In favour of revenue]

Words and Phrases : 'Mercantile Agent' (Para 14), Power of Attorney (Para 12), Agent (Para 13), as generally defined

Interpretation of Statutes : Ejusdem Generis (Paras 6 to 11), 'Means and Includes' (para 5)

FACTS

Facts

■		The assessee-bank/NBFC granted loans to persons intending to purchase vehicles against hypothecation of the vehicles by way of security under loan-cum-hypothecation agreements (hypothecation does not amount to sale).
■		Irrevocable power of attorney was also obtained from borrower nominating the lender to have the vehicle disposed of on behalf of borrower in case of default in repayment of the loan.
■		The VAT Department demanded VAT on sale of vehicle by assessee on default in payment of loan.

Assessee's Arguments

■		The lender does not become the owner of the vehicle at any time; only the borrower of the vehicle remains the owner.
■		In case of sale of the vehicle for recovery of the loan, the transfer of ownership is from the borrower to the new owner and the statutory motor vehicle transfer forms executed by the borrower are made over to the new owner.
■		The definition of dealer does not cover assessee, as meaning part covers only 'owner' and inclusion part does not persons like bank/NBFCs.
■		Further, NBFCs are not 'mercantile agent or factor' under definition of 'dealer'.

Revenue's Arguments

■

The sale of the vehicles by the bank is in course of its business under the Banking Regulation Act, 1949. Hence, 'bank' was a dealer.

Issue Involved

■

Whether in respect of disposal of the vehicle for recovery of the loan the assessee-bank/NBFC is liable for tax as dealers as per definition in section 2(11) ?

HELD

I. Interpretation of section 2(11) - section to be construed as a whole :

■		The section has to be construed strictly. If a person has not been brought within the ambit of the charging section by clear words, he cannot be taxed at all. The definition commences with the expression "'dealer' means …….." and thereafter proceeds to expand its coverage by using the expression "and includes……." By certain inclusions vide sub-clauses (a), (b), (c) and (d), which would not have otherwise fallen within the opening part of the definition. The use of the expressions "means" "and includes" in the definition makes it exhaustive. [Para 5 read with sub-paras 4 and 5 of para 2]
■		The section has to be construed as a whole and not piecemeal. It cannot be held that the definition of the word 'dealer' intended to cover only the owners of the goods. No such intention can be attributed to the legislature on a plain reading of the section. [Para 5]

II. Expression 'other body corporate' in section 2(11)(b) covers 'banks/NBFCs as well' :

■		The bodies and organizations indicated in sub-clause (b) were sought to be roped in irrespective of whether they sell or supply or distribute goods directly or otherwise whether in the course of business or not. Neither a liquidator nor a receiver can be expected to sell any goods as the owner thereof. The distinction sought to be made by the assessee as regards the owner and non-owner of the goods is not contemplated by the legislature. [Para 6]
■		The argument that the general phrase "other body corporate" in sub-clause (b) occurring after the words "Government", "local authority", "statutory body" and "trust", on the principle of ejusdem generis, includes only an entity of the same type as those specified earlier, was incorrect. There was no authority binding or otherwise to show that the natural meaning of the word used by the legislature can be ignored for the purpose of applying the theory of 'ejusdem generis' in construing an act. [Para 7]
■		The word used in clause (b) particularly the word "a trust" does not appear nor was shown to have anything in common with the preceding word "a statutory body." Similarly the word "body corporate" was not shown to have any common characteristic with the preceding word "trust". The theory of 'ejusdem generis' cannot be applied in construing sub-clause (b) of section 2(11). [Para 8]
■		It could not be accepted that the government or a local authority or a statutory body or a trust do not normally carry on business. Article 289 of the Constitution of India contemplates both trading and business activities by the government. The local authority or a statutory body or a trust cannot as such be under any disability from carrying on business. Therefore, banking or non-banking financial companies were covered by section 2(11)(b). [Para 9]
■		The assessee's argument that 'sub-clause (b) requires that the sale, supply or distribution must be for cash or for deferred payment or for commission, remuneration or other valuable consideration and, thus, a body corporate must sell its own goods for valuable consideration' is fallacious. The Act does not make any distinction between a seller of its own goods or a seller of goods belonging to someone else. [Para 10]
■		It cannot be argued that the vehicles are sold either by the bank or by the non-banking financing company otherwise than for valuable consideration. It may be true that the banking or non-banking financial corporations do not charge any commission or remuneration for sale of the hypothecated goods though there is no evidence in that regard. But the activity is not undertaken by them gratuitously. They undertake the activity of selling the hypothecated vehicles for the purpose of realizing the consideration which had already passed from them to the borrower. By selling the vehicles both the banking and non-banking financial companies realize their dues, which naturally includes profits. [Para 11]

III. Analysis of section 2(11)(d) - Factors, Brokers, Agents, etc. :

■		The assessee's arguments for the purpose of demonstrating that the hypothecate or the non-banking financial company is not an agent of the borrower were misconceived. Section 2(11)(d) cannot be construed on the basis of any particular meaning attributed to any particular word by any statute. The words on the contrary have to be construed in the ordinary sense since the act itself has not defined the meaning of those words. Therefore, the ordinary dictionary meaning has to be applied. Admittedly, both the bank and the non-banking financial corporations have obtained irrevocable Power of Attorney from the borrowers. It appears that such Power of Attorney has been obtained for the purpose of selling the vehicles. [Para 12]
■		There is, thus no scope to entertain any doubt as regards the fact that the assessees have themselves reduced their position to that of an agent. When they are acting on the basis of Power of Attorney it cannot lie in their mouth to say that they are not the agents of the borrowers. The lenders in exercise of their right as the hypothecatees sell the vehicles for the purpose of realization of their dues. But an element of agency is certainly involved in the facts of the case. An element of trust is also involved therein. An agent is a constructive trustee. Any amount received in excess of the dues of the agent has to be held by him for the benefit of the borrower. In the exercise of his right he has to take care to sell the vehicle at a fair price. Therefore, he stands in a fiduciary relationship with the borrower when he exercises his right to sell the vehicle. [Para 13]
■		The word 'mercantile agent' has been used in section 2(11)(d) in an ordinary sense of the term. The word 'mercantile' means 'relating to trade or commerce'. Therefore, the word 'mercantile agent' cannot but be construed to mean an agent relating to trade or commerce. It cannot be contended that the lenders in this case obtained the Power of Attorney for the purpose of an agency not related to trade or commerce. The word 'mercantile agent' has been succeeded by the expression 'by whatever name called'. [Para 14]
■		The hypothecatees indisputably have a greater right to sell the vehicle than the right of a mere agent. But the fact that the lender in this case is also an agent cannot be denied considering the facts and circumstances of the case and also in view of assessee's own submission that 'the sales of the vehicles were arranged on the strength and authority derived from the hypothecation agreement and the irrevocable Power of Attorney executed by the borrower'. [Para 15]
■		Hence, the submissions to contend that the assessees are not the agents, cannot be accepted. [Para 16]

IV. Conclusion

■

The assessee was liable to VAT. [Paras 17 to 20]

CASE REVIEW

State of West Bengal v. O.P. Lodha [1997] 105 STC 561 (SC) (para 16) followed.

Federal Bank Ltd. v. State of Kerala [2007] 6 VST 736 (SC) (para 18) and Government of Andhra Pradesh v. Corporation Bank [2006] 6 VST 755 (SC) (para 18) distinguished.

CASES REFERRED TO

Federal Bank Ltd. v. State of Kerala [2007] 6 VST 736 (SC) (para 3), State of West Bengal v. O.P. Lodha[1997] 105 STC 561 (SC) (para 16) and Government of Andhra Pradesh v. Corporation Bank [2007] 6 VST 755 (SC) (para 18).

J.P. Khaitan, Mrs. Nilanjana Banerjee (Pal), Ms. Soumitra Dutta and Avra Majumder for the Appellant. Jaydip Kar and Mrs. Seba Roy for the Respondent.

JUDGMENT

Girish Chandra Gupta, J. - All the three writ petitions were filed challenging a common judgment and order dated 16th April, 2010 passed by the learned West Bengal Taxation Tribunal. The learned Tribunal held as follows:—

"In view of the discussions contained hereinabove we hold that ICICI Bank is a dealer and covered by main part of the definition of the 'dealer' in the VAT Act, as the disputed sales are in course of its banking business and such sales were/are effected in exercise of its statutory right under the Banking Companies Regulations Act. Judgment of the Supreme Court in Federal Bank (supra) has practically settled the issue.

We also hold that other Non-Banking Financing Companies were/are dealers within the ambit of Clause (d) of Section - 2(11) as according to them, those were arranging sales of hypothecated vehicles on the strength and authority derived from the hypothecation agreements and the irrevocable power of attorneys executed by the borrowers. If these Non-banking Finance Companies were exercising hypothecatees' contractual right to sell pledged goods for realization of unpaid loan these Companies came within the scope of the main part of the definition of 'dealer'."

2. Mr. Khaitan, learned Senior Advocate appearing in support of all the writ petitions, made extensive arguments assailing the judgment of the learned Tribunal. He also submitted a written notes of argument. We deem it proper to set out the written arguments, in our judgement, in its entirety, which is as follows:—

'Brief Facts

1.		The petitioner in WPTT No.24 of 2010 is a banking company and the petitioner in WPTT NO.6 of 2011 is non-banking finance company ("NBFC"). The petitioners grant loans to persons intending to purchase vehicles against hypothecation of the vehicles by way of security under loan-cum-hypothecation agreements. Irrevocable power of attorney is also obtained from the borrower nominating the lender to have the vehicle disposed of on behalf of the borrower in case of default in repayment of the loan.
2.		It is not in dispute that the borrower is the owner of the vehicle at all times. Hypothecation of the vehicle in favour of the lender is specifically excluded from the definition of sale in section 2(39) of the West Bengal Value Added Tax Act, 2003 ("the Act"). The lender does not become the owner of the vehicle at any time. In case of sale of the vehicle for recovery of the loan, the transfer of ownership is from the borrower to the new owner and the statutory motor vehicle transfer forms 29 and 30 executed by the borrower are made over to the new owner.
		Issue
3.		The question which arises for determination is as to whether in respect of disposal of the vehicle for recovery of the loan the petitioners are liable for tax as dealers as per the definition in Section 2(11) of the Act.
		Principles of interpretation
4.		The section has to be construed strictly. If a person has not been brought within the ambit of the charging section by clear words, he cannot be taxed at all (Please see CWT v. Ellis Bridge Gymkhana [1998] 1 SCC 384 - Para 5 page 84 at 87 of compilation).
5.		The definition commences with the expression "'dealer' means …….." and thereafter proceeds to expand its coverage by using the expression "and includes……." By certain inclusions vide sub-clauses (a), (b), (c) and (d), which would not have otherwise fallen within the opening part of the definition. The use of the expressions "means" "and includes" in the definition makes it exhaustive (Please see Bharat Co. op Bank (Mumbai) Ltd., v. Co-op. Bank Employees Union [2007] 4 SCC 685 - Para 23- page 72 at 82 compilation. And for the same view - [1989] 1 SCC 164 - para 11; 1995 SUPP (2) SCC 348 - para 19; (2007) 5 SCC 281 - para 33; (2007) 5 SCC 730 - para 8. The contra view in 1993 Supp (3) SCC 361 - para 12 was rendered without noticing the prior decision in (1989) 1 SCC 164).
		Opening part of definition applies only to owners
6.		The opening part of the definition only covers persons who deal with the goods as owners i.e. persons who purchase goods in their own right and sell them as owners. Non-owners have been brought in by way of expansion under the sub-clauses appearing after the expression "and includes". If non-owners were covered by the opening part, there was no reason to expand the definition.
7.		The Tribunal fell into error in holding that the petitioners were covered by the opening part of the definition if the vehicle was caused to be sold by the petitioner NBFC in exercise of the hypothecatee's contractual right to sell pledged goods for realization of unpaid loan and by the petitioner bank in exercise of statutory right in course of banking business. The petitioners not being the owners of the vehicles, the opening part of the definition cannot cover them.
		Expanded definition in sub-clause (b) has no application
8.		Sub-clause (b) ropes in specified bodies/organizations which sell, supply or distribute goods but not in the course of business. Sale of goods by such bodies/organizations in the course of business would be covered by the opening part of the definition.
9.		The general phrase "other body corporate" in sub-clause (b) occurs after the words "Government", "local authority", "statutory body" and "trust". On the principle of ejusdem generis, the said general phrase includes only an entity of the same type as those specified earlier. The entities specified earlier do not normally carry on business or commercial activity. "Other body corporate" must be of the same type. The petitioners carry on business (of advancing loans) and are not "other body corporate" within the meaning of Section 2(11).
10.		It is also a requirement of sub-clause (b) that the sale, supply or distribution must be for cash or for deferred payment or for commission, remuneration or other valuable consideration. Thus, a body corporate must sell its own goods for valuable consideration. If the goods sold do not belong to the body corporate, it must receive valuable consideration for making the sale such as commission or remuneration. The petitioners are not the owners of the vehicles. The petitioners by causing sale of the vehicles belonging to their constituents do not render any service for commission, remuneration or other valuable consideration. The petitioners are not covered by sub-clause (b) as "other body corporate".
		NBFC is not factor or mercantile agent under sub-clause (d)
11.		The Tribunal fell into error in holding that the petitioner NBFC fell within the ambit of sub-clause (d) as factor or mercantile agent since the sales of the vehicles were arranged on the strength and authority derived from the hypothecation agreement and the irrevocable power of attorney executed by the borrower.
12.		A factor only buys or sells for a commission (Please see Black's Law Dictionary, 9th Edition - page 30 at 31 of compilation and Words and Phrases Legally Defined, 4th Edition - page 32 at 33 of compilation). The petitioner NBFC does not receive any commission and is not a factor.
13.		A mercantile agent to fall within the ambit of sub-clause (d) must be one—

(i)		who carries on the business of selling goods and
(ii)		who has in the customary course of business, authority to sell goods belonging to principals.

14.		For the purposes of sub-clause (d), the business of the mercantile agent, evidenced by volume, frequency, continuity and regularity of transactions, must be that of selling goods belonging to principals, such that it must be customary in the course of such business that the mercantile agent has authority to sell goods belonging to principals.
15.		The main activity of the petitioner NBFC, evidenced by volume, frequency, continuity and regularity of transactions is that of granting loans. The borrowers are not principals of the petitioner. It is not the business of the petitioner to sell goods belonging to the borrowers. The incident of sale of the vehicle arises only in the event of default by the borrower. Sale in case of default is caused by the petitioner NBFC not for any commission or remuneration but for recovery of the amount due to it. In the petitioner NBFC's first year of business there was no sale of any vehicle on account of borrower's default. In the next year the disposal proceeds constituted only 0.21% of the total loan disbursements. Such incidental activity is not evidenced by any volume, frequency, continuity or regularity so as to constitute business of selling of goods within the meaning of sub-clause (d). The context of sub-clause (d) does not permit the application of the definition of "business" in section 2(5) (Please see Whirlpool Corporation v. Registrar of Trade Marks [1998] 8 SCC 1 - paras 28 and 30 - page 34 at 45 of compilation and Printers (Mysore) Ltd. v. Asstt. Commercial Tax Officer [1940] 2 SCC 434 - para 18 - page 60 at 70 of compilation).
16.		The customary authority adverted to in sub-clause (d) must be an implied authority in accordance with the usages and customs of the business of selling gods (Please see P. Ramanatha Aiyar's Advanced Law Lexicon, 3rd Edition - page 26 at 29 of the compilation). If such implied authority exists, it will not make any difference if the same is also expressly granted by a written document.
17.		The petitioner NBFC does not have any implied authority to have the vehicle purchased by the borrower with the loan funds sold. The petitioner NBFC has a limited authority under the power of attorney specifically authorizing it to have the vehicle sold in case of default in repayment of the loan. The implied authority to sell as an agent referred to in Sub-clause (d) is altogether distinct and different from a pawnee's right to sell the thing pledged on giving the pawnor reasonable notice of sale under Section 176 of the Indian Contract Act, 1872.
18.		The judgment of the Supreme Court in State of West Bengal v. O. P. Lodha [1997] 105 STC 561 (SC), is not an authority for the proposition that any and every agent is liable to be treated as a dealer irrespective of the requirements of sub-clause (d) of Section 2(11).
19.		The judgment of the Supreme Court in Federal Bank Ltd. v. State of Kerala [2007] 6 VST 736 (SC), dealt with the amended definition of dealer in Section 2(viii) of the Kerala Act which included a bank or a financing institution. The only controversy before the Supreme Court in that case was as to whether the sale of pledged assets by the bank was in the course of banking business.
20.		The Supreme Court in Government of Andhra Pradesh v. Corporation Bank [2007] 6 VST 755 (SC), held that a bank selling gold pledged as security for the loan was not a dealer prior to the amendment of the definition in Section 2(1)(e) of the Andhra Act with effect from August 1, 1996 whereby banks were included.'

3. Mr. Kar, learned advocate appearing for the department disputed the submissions of Mr. Khaitan. He also relied upon the judgment in the case of Federal Bank Ltd. v. State of Kerala [2007] 6 VST 736 (SC) for the proposition that the sale of the vehicles by the bank is in course of its business under the Banking Regulation Act, 1949.

4. The question which falls for determination has been indicated in the written notes in paragraph 3 noticed above. Therefore, the question really is, as regards the true meaning and scope of the definition of the term 'dealer' provided in Sub-section 11 of Section 2 of the West Bengal Value Added Tax Act, 2003 (hereinafter referred to as the said Act) which reads as follows:—

"'dealer' means any person who carries on the business of selling or purchasing goods in West Bengal or any person making sales under section 14, and includes —

(a)		an occupier of a jute-mill or shipper of jute,
(b)		Government, a local authority, a statutory body, a trust or other body corporate which, or a liquidator or receiver appointed by a court in respect of a person, being a dealer as defined in this clause, who, whether or not in the course of business, sells, supplies or distributes directly or otherwise goods for cash or for deferred payment or for commission, remuneration or other valuable consideration,
(c)		A society including a co-operative society, club or any association which sells goods to its members or others for cash, or for deferred payment, or for commission, or for remuneration, or for other valuable consideration,
(d)		A factor, a broker, a commission agent, a del credere agent, an auctioneer, an agent for handling or transporting of goods or handling of document of title to goods, or any other mercantile agent, by whatever name called, and whether of the same description as hereinbefore mentioned or not, who carries on the business of selling goods and who has, in the customary course of business, authority to sell goods belonging to principals;"

5. The submissions appearing from paragraphs 4 and 5 of the written notes of argument are deemed to be correct for the purpose of disposal of these petitions. The submission in paragraph 6 of the written notes does not, however, appear to us to be a correct approach. We are of the opinion that the section has to be construed as a whole and not piecemeal. We are unable to agree with Mr. Khaitan that the definition of the word 'dealer' intended to cover only the owners of the goods. No such intention can be attributed to the legislature on a plain reading of the section quoted above. The finding of the Tribunal has been quoted above by us. Whether the finding is correct in the light of the submissions of Mr. Khaitan has to be examined herein.

6. The submission in paragraph 8 of the written notes is not correct according to us. The bodies and organizations indicated in Clause - (b) were sought to be roped in irrespective of whether they sell or supply or distribute goods directly or otherwise whether in the course of business or not. Neither a liquidator nor a receiver can be expected to sell any goods as the owner thereof. The distinction sought to be made by the learned Counsel as regards the owner and non-owner of the goods was, according to us, not contemplated by the legislature.

7. The submission contained in paragraph 9 of the written notes of argument is fallacious according to us. Our attention was not drawn to any authority binding or otherwise to show that the natural meaning of the word used by the legislature can be ignored for the purpose of applying the theory of 'ejusdem generis' in construing an act.

8. The word used in Clause - (b) particularly the word "a trust" does not appear nor was shown to have anything in common with the preceding word "a statutory body." Similarly the word "body corporate" was not shown to have any common characteristic with the preceding word "trust". The theory of 'ejusdem generis' cannot be applied in construing Clause - (b) of Sub-section 11 of Section 2 of the aforesaid Act.

9. We are also unable to accept the submission contained in paragraph 9 of the notes that the government or a local authority or a statutory body or a trust do not normally carry on business. Article 289 of the Constitution of India contemplates both trading and business activities by the government. The local authority or a statutory body or a trust cannot as such be under any disability from carrying on business. We are unable to agree with Mr. Khaitan that the banking or non-banking financial companies were not sought to be roped in by Clause -(b) of Sub-section 11 of the aforesaid Act.

10. The submissions contained in paragraph 10 of the written notes of argument are equally fallacious, according to us. We already have indicated above that, in our opinion, the act does not make any distinction between a seller of its own goods or a seller of goods belonging to someone else.

11. Mr. Khaitan cannot be expected to seriously argue that the vehicles are sold either by the bank or by the non-banking financing company otherwise than for valuable consideration. It may be true that the banking or non-banking financial corporations do not charge any commission or remuneration for sale of the hypothecated goods though we have no evidence in that regard. But the activity is not undertaken by them gratuitously. They undertake the activity of selling the hypothecated vehicles for the purpose of realizing the consideration which had already passed from them to the borrower. By selling the vehicles both the banking and non-banking financial companies realize their dues which naturally includes profits. We are, as such unable to agree with the submissions contained in paragraph 10 of the written notes set out above.

12. The submissions contained in paragraphs 11, 12, 13, 14, 15 16 & 17 of the notes, for the purpose of demonstrating that the hypothecatee or the non-banking financial company is not an agent of the borrower is misconceived according to us. Clause - (d) of Sub-section 11 of Section 2 of the aforesaid act cannot be construed on the basis of any particular meaning attributed to any particular word by any statute. The words on the contrary have to be construed in the ordinary sense since the act itself has not defined the meaning of those words. Therefore, the ordinary dictionary meaning has to be applied. Admittedly, both the bank and the non-banking financial corporations have obtained irrevocable Power of Attorney from the borrowers. It would appear from paragraph 11 of the written notes that such Power of Attorney has been obtained for the purpose of selling the vehicles. The meaning of the expression 'Power of Attorney' as per Oxford Dictionary is as follows:—

"the authority to act for another person in legal or financial matters".

13. There is, thus no scope to entertain any doubt as regards the fact that the petitioners have themselves reduced their position to that of an agent. When they are acting on the basis of Power of Attorney it cannot lie in their mouth to say that they are not the agents of the borrowers. We are, however, conscious of the fact that the lenders in exercise of their right as the hypothecatees sell the vehicles for the purpose of realization of their dues. But an element of agency is certainly involved in the facts of the case. An element of trust is also involved therein. An agent is a constructive trustee. Any amount received in excess of the dues of the agent has to be held by him for the benefit of the borrower. In the exercise of his right he has to take care to sell the vehicle at a fair price. Therefore, he stands, it may be argued, in a fiduciary relationship with the borrower when he exercises his right to sell the vehicle.

14. The word 'mercantile agent' has been used in Clause - (d) in an ordinary sense of the term. The word 'mercantile' according to Oxford Dictionary means 'relating to trade or commerce'. Therefore, the word 'mercantile agent' cannot but be construed to mean an agent relating to trade or commerce. We do not think, it can seriously be contended that the lenders in this case obtained the Power of Attorney for the purpose of an agency not related to trade or commerce. The word 'mercantile agent' has been succeeded in Clause - (d) by the expression 'by whatever name called'.

15. The hypothecatees indisputably have a greater right to sell the vehicle than the right of a mere agent. But the fact that the lender in this case is also an agent cannot be denied considering the facts and circumstances of the case and the submission contained in paragraph 11 that "the sales of the vehicles were arranged on the strength and authority derived from the hypothecation agreement and the irrevocable Power of Attorney executed by the borrower".

16. We are, as such of the opinion that the laborious submissions to contend that the petitioners are not the agents, cannot be accepted. In the case of State of West Bengal v. O. P. Lodha [1997] 105 STC 561, the Apex Court considered the definition of the word 'dealer' appearing from the Bengal Finance Sales Tax Act, 1941 which was as follows:—

"'dealer' means any person who carries on the business of selling goods in West Bengal or of purchasing goods in West Bengal or of purchasing goods in West Bengal in specified circumstances or any person making a sale under Section 6D and includes the Central or a State Government, a local authority, a statutory body, a trust or other body corporate which, or a liquidator or receiver appointed by a court in respect of a person defined as a dealer under this clause who, whether or not in the course of business sells, supplies or distributes directly or otherwise, for cash or for deferred payment or for commission, remuneration or other valuable consideration.

Explanation 1. — A co-operative society or a club or any association which sells goods to its members is a dealer.

Explanation 2. — A factor, a broker, a commission agent, a del credere agent, an auctioneer, an agent for handling or transporting of goods or handling of document of title to goods or any other mercantile agent, by whatever name called, and whether of the same description as hereinbefore mentioned or not, who carries on the business of selling goods and who has, in the customary course of business, authority to sell goods belonging to principals is a dealer."

17. From a comparison of the definition of the word 'dealer' from the aforesaid act and the Bengal Finance Sales Tax Act 1941 it would appear that the definition appearing in the aforesaid act is substantially the same. Their Lordships in paragraph 8 of the judgment opined as follows:—

'In my judgment, the scheme of the Act leaves no room for doubt that an agent who sells goods on behalf of somebody else cannot escape the liability to pay sales tax on the sales made by him for and on behalf of others merely because, he was selling goods on behalf of others. The charge under section 6B has been imposed directly upon him by the broad definition of "dealer".'

18. We agree with Mr. Khaitan that the judgement in the case of Federal Bank Ltd. (supra) and the judgment in the case of Government of Andhra Pradesh v. Corporation Bank [2007] 6 VST 755 (SC) may be distinguishible but that does not make any difference. In the case of Federal bank Ltd., Their Lordships opined that "The sale of pledged ornaments falls within the course of Banking business under the 1949 Act." This finding was used by the Tribunal in the impugned judgment. We have indicated our reasons why the submissions advanced by Mr. Khaitan cannot be upheld. The conclusion arrived at by the learned Tribunal is, according to us, unexceptionable and is therefore affirmed by us.

19. In the result the petitions are dismissed.

20. Parties shall however, bear their own costs.

VINEET

*In favour of revenue.

--
Regards,

Pawan Singla , LLB

M. No. 9825829075

Participation in assessment proceedings ratified jurisdictional issue; block assessment held valid

May 6, 2014[2014] 44 taxmann.com 407 (Madras)

IT: Where in pursuance of search conducted at premises of another person, a notice was issued calling upon assessee to file his return, in view of fact that assessee had responded to notice, filed return, participated in block assessment proceedings and suffered an assessment, he was not justified in raising a contention at later stage before Tribunal that block asses

Punjab Stainless Steel Industries

May 06 2014

SC upholds Delhi HC ruling that proceeds generated from scrap sales should not be included in 'total turnover' for Sec 80HHC deduction purpose

courtesy:taxsutra

ITAT DELHI - Income Tax

ASSTT COMMISSIONER OF INCOME TAX AND DEPUTY COMMISSIONER OF INCOME TAX Versus M/s SARAYA INDUSTRIES LTD

Validity of assessment u/s 153C r.w. section 153A of the Act – Incriminating documents - Held that:- The common satisfaction was recorded by the AO for initiation of proceedings u/s 153C of the Act in respect of the 19 parties - action u/s 133A of the Act was taken at the premises of the assessee on the same date - Various documents were found and seized - Statements of various persons including Shri R.K. Miglani were also recorded u/s 132(4) / 133A of the Act - UPDA is a registered society formed by the distilleries of UP for its welfare to jointly take up their cause with various authorities on different issues - the very basis for initiation of the proceedings u/s 153C against the parties remained the incriminating documents found at the residence of Shri Miglani and also from the office of UPDA - The documents mentioned in the satisfaction note are annexure A-1, A-2, in common and B-2, B-3 in the case of the assessee - on perusal of these documents, it could not be understood as to how the case of the assessee stands on different footing than the other 18 assessees in the cases of most of whom the Tribunal on the basis of the same satisfaction note has held the proceeding initiated in those case u/s 153C as invalid - In those cases also Annexures A-1 to A-10 were the subject matter, on consideration of which the Tribunal came to the conclusion that invocation of section 153C was not valid as no incriminating documents belonging to the assesee were found.

The documents were not found from the possession of the present assesee nor these are in the handwriting of the assessee or its employee(s) - These were found from the possession of Shri R.K. Miglani and UPDA, there is no evidence of any receipt or payment of cash in respect of which addition was made - The word 'belonging' may be understood in the sense of ownership or something little lesser than ownership but of course more than mere reference of assesee on a documents found and seized from the possession of others without any corroboration - The documents noted in satisfaction to proceed u/s 153C do not make reference to any receipt or payment of cash and are not of any incriminating nature.

There is no reference to any amount paid or received and as such the document is not relevant even in the context of satisfaction note recorded by the AO – the documents do not belong to various parties referred to in the document – the documents were not found from the possession of the assesee nor these documents are in the handwriting of the assessee or its employees – the documents marked as Annexure A-1, A-2, B-2 and B-3, the subject matter of the satisfaction recorded by the AO to initiate proceedings u/s 153C against the present assessee do not belong to the assessee to justify initiation of proceedings u/s 153C of the Act against the assessee – Decided in favour of Assessee

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Chartered Accountant Finance

Tuesday, May 6, 2014

[aaykarbhavan] Judgments and Information [3 Attachments]

Participation in assessment proceedings ratified jurisdictional issue; block assessment held valid

May 06 2014

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