THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 15.09.2015
+ ITA 174/2013
ORIENTAL INSURANCE COMPANY ..... Appellant
versus
COMMISSIONER OF INCOME TAX, DELHI ..... Respondent
Advocates who appeared in this case:
For the Appellant : Mr M.S. Syali, Senior Advocate with Mr
Mayank Nagi and Mr Harkunal Singh.
For the Respondent : Mr Kamal Sawhney, Senior Standing Counsel
with Mr Shikhar Garg.
CORAM:
HON'BLE DR. JUSTICE S. MURALIDHAR
HON'BLE MR. JUSTICE VIBHU BAKHRU
JUDGMENT
VIBHU BAKHRU, J
1. This appeal under Section 260A of the Income Tax Act, 1961
(hereafter the `Act'), has been filed by the Oriental Insurance Company
(hereafter the `Assessee') impugning an order dated 22nd July, 2011 passed
by the Income Tax Appellate Tribunal (hereafter the `Tribunal') in ITA No.
3910/Del/2007. The said appeal was filed by the Assessee challenging an
order dated 16th August, 2007 passed by the Commissioner of Income Tax
(Appeals) [hereafter `CIT(A)'] in Appeal no. 170/2006-07 whereby the
appeal filed by the Assessee against the assessment order dated 25th
ITA 174/2013 Page 1 of 26
January, 2007 passed by the Assessing Officer (hereafter `the AO') for the
assessment year 2004-05, was dismissed.
2. By an order dated 10th July, 2013, this Court admitted this appeal and
framed the following questions of law for consideration:-
(1) Whether the Income Tax Appellate Tribunal was correct in
law in upholding the addition on account of income arising
on sale of investments in spite of the fact that no addition
on account of grounds mentioned in the reasons to believe
has been sustained?
(2) Whether the Income Tax Appellate Tribunal was correct·
in law in holding that the income earned on
sale/redemption of investment is chargeable to tax?"
At the outset, the learned Senior Counsel appearing for the Revenue
submitted that the present appeal also raises the issue whether the AO's
decision to tax income arising on sale of investments was the result of
change in opinion and whether the same is permissible.
It is not disputed that the above issue arise from the impugned order
passed by the Income Tax Appellate Tribunal and, accordingly, the
following question of law is framed as the third question:-
"(3) Whether the AO had assumed jurisdiction under Section
147 of the Act on account of change in opinion as to the
taxability of the income arising on sale of investments
ITA 174/2013 Page 2 of 26
and whether the Income Tax Appellate Tribunal was
correct in law in upholding the assumption of jurisdiction
under Section 147 of the Act"
Background
3. The relevant facts necessary to address the aforesaid issues are
briefly stated as under:-
3.1 The Appellant Company is a subsidiary of General Insurance
Corporation of India and is engaged in the business of General Insurance
comprising of Fire, Marine and Miscellaneous Insurance Business.
According to the Assessee, it invests its policy holder's funds as per the
statutory guidelines provided under The Insurance Act, 1938 and IRDA
(Investment) Regulations, 2000.
3.2 The AO computed the assessable income at `35,87,12,674 but since
the adjusted book profits were higher at `3,91,45,35,826, the AO passed an
assessment order dated 30th January, 2006 for the Assessment year 2004-05
assessing the tax payable at `30,09,30,018 under section 115JB of the Act.
3.3 The Assessee claimed that the profits on sale/redemption of
investments amounting to `505.33 crores for the year ending 31.03.2004,
were exempt from tax in view of the omission of clause (b) of Rule 5 of the
ITA 174/2013 Page 3 of 26
First Schedule of Income Tax Act w.e.f. 01.04.1989 and in terms of the
CBDT Circular No. 528 dated 16th December, 1988, providing explanatory
notes to Finance Act, 1988. The Assessee also claimed deduction of
`3,57,54,000/- on account of amount written off in respect of depreciated
investments in support of which, it relied upon an order passed by the
Tribunal in its own case for an earlier assessment year.
3.4 The AO, however, disallowed the claim for "Investments Written
Off". He held that after the omission of clause (b) of Rule 5 of the First
Schedule of the Act, neither the losses on depreciation of investments were
allowable as a deduction nor were the profits on sale/redemption of
investments taxable.
3.5 Subsequently, the AO issued a notice dated 28th November, 2006
under Section 148 of the Act as the AO was of the view that income from
sale/redemption of investments had escaped assessment and initiated
proceedings under Section 147 of the Act. In response to the said notice,
the Appellant stated that the return of income filed on 29 th October, 2004 be
treated as its return in compliance of the notice. Thereafter, notices under
Sections 143(2) and 142(1) of the Act were issued by the AO. The Assessee
ITA 174/2013 Page 4 of 26
responded to the said notices by a letter dated 22nd January, 2007, inter alia,
claiming that the profits on sale of investments were exempt in view of the
omission of Rule 5(b) of the First Schedule of the Act. The AO, however,
was not satisfied with the said response and, accordingly, passed an order
dated 25th January, 2007 reassessing the income of the Assessee by
including the sum of `505.33 crores in the total taxable income.
3.6 The Appellant filed an appeal, before the CIT (A), against the said
order of reassessment, inter-alia, challenging both the assumption of
jurisdiction to reopen the assessment as well as including of profit on
sale/redemption of investment in the total income.
3.7 By an order dated 16th August, 2007, the CIT(A) upheld the
reassessment order dated 25th January, 2007. In so far as the issue of
assumption of jurisdiction is concerned, the CIT(A) held that the AO had
recorded adequate reasons to believe and, therefore, the AO had the
jurisdiction to issue a notice under Section 148 of the Act. Insofar as the
merits of the addition were concerned, CIT(A) upheld the addition of
`505.33 crores to the total income of the Assessee. The CIT(A) held that:
(i) in absence of a specific statutory provision, the Assessee could not be
ITA 174/2013 Page 5 of 26
granted exemption merely on basis of the CBDT Circular No. 528 dated
16th December, 1988 explaining the provisions of the Finance Act 1988; (ii)
CBDT Circular being contrary to the legal position is not binding; and (iii)
once income is credited to the Profit and Loss Account no adjustment to the
same was permitted as per Rule 5 of the First Schedule of the Income-Tax
Act, and that the Tribunal had held so in the Assessee's own case for AY
1990-91 (in ITA No. 2998/Del/93).
3.8 The Assessee appealed against the aforesaid order of CIT(A), before
the Tribunal, inter alia, contending that the AO had initiated the
reassessment proceedings solely on the basis of a `change of opinion',
which was not permissible. The Assessee also urged that the reasons to
believe recorded by the AO were based on erroneous factual assumptions
that the assessee was carrying on business other than Non-Life Insurance
business, and that the assessee had credited a sum of `505,33,63,209/-
directly into the General Reserve Account in the Balance Sheet as "profit
on sale of investment" without routing the same through the Profit and Loss
Account for the Previous Year.
3.9 In respect of the addition of profit on sale of investment, the
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Assessee reiterated that the provisions of clause (b) of Rule 5 were omitted
by the Finance Act, 1988 and the legislative intention for such statutory
amendment was explained vide CBDT Circular No. 528 dated 16th
December, 1988. As per the said Circular, Rule 5 of the First Schedule of
the Act was amended to provide tax exemption in respect of profits earned
by General Insurance Companies on sale of investments. The provisions of
clause (b) to Rule 5 were re-instated by virtue of the Finance (No.2) Act,
2009 w.e.f. 01-04-2011. It was further submitted by the Assessee that
Circular No.5 of 2010, dated 3rd June, 2010 indicated the reasons for the
statutory amendment. The said Circular indicated that post introduction of
"Insurance Regulatory and Development Authority of India (hereafter
`IRDA') (Preparation of Financial Statements and Auditors Report of
Insurance Companies) Regulations in 2002", Insurance Companies are
required to include income from sale of investments directly in their Profit
& Loss Account and, therefore, provisions of Rule 5 were amended so as to
tax this income. The Assessee urged that this amendment was not
retrospective and, therefore, the income from sale/redemption of
investments during the Previous Year 2003-04 was not taxable.
3.10 The Tribunal did not accept the submissions made by the Assessee
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and rejected the appeal.
4. Before the Tribunal, it was conceded by the Revenue that the reasons
recorded by the AO for issuing notice under Section 148 of the Act were
erroneous. Concededly, the profit and loss on sale of investments had been
credited to the Profit & Loss Account and not entered directly to the
General Reserve Account as assumed by the AO. The second reason
provided by the AO for reopening the assessment was that the Assessee
was carrying on two streams of business; (1) non-life insurance business
and (2) business in shares and securities as a public financial institution.
Concededly, this assumption was also erroneous. However, the Tribunal
upheld the reassessment on the ground that the Assessee had not brought
the decision of the Tribunal in respect of Assessment Year 1991, which was
against the Assessee, to the knowledge of the AO. The Tribunal held "that
such an issue should have been brought to the notice of the Assessing
Officer specially, failing which it can be held that special circumstances
exist by way of facts on record so as to lead to the conclusion that the
Assessing Officer had reason to believe that income had escaped
assessment". The Tribunal was of the view that since relevant information
had been withheld from the AO, it was within the powers of the AO to
ITA 174/2013 Page 8 of 26
reopen the assessment.
Submissions
5. Mr Syali, learned counsel appearing on behalf of the Assessee
contended that the validity of reopening of assessment must be tested on the
reasons provided by the AO and the reopening of assessments cannot be
sustained on additional grounds provided subsequently. He argued that
once it was clear that the reasons as indicated by the AO for issuing notice
under Section 148 of the Act were found to be palpably erroneous; the
reopening of the assessment could not be sustained. He submitted that it
was not open for the Income-tax Authorities to sustain re-opening of
assessment under Section 147 of the Act on grounds other than those
indicated as reasons for forming the belief that income had escaped
assessment and for issuance of notice under Section 148 of the Act. He
relied upon the decision of this Court in Ranbaxy Laboratories Ltd. v. CIT:
336 ITR 136 and CIT v. Software Consultants: 341 ITR 240 in support of
his contentions.
6. Mr Syali further argued that the AO had no jurisdiction to reopen the
assessment for taxing the profits and gains from sale of investments as the
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issue with regard to taxability of that income had been considered by the
AO in the initial assessment order in the context of the Assessee's claim for
deduction on account of diminution in the value of investments. He
submitted that in the first round of assessment the AO had considered the
effect of omission of clause (b) of Rule 5 of the First Schedule by virtue of
the Finance Act, 1988 and held that with the omission of the said clause,
profit and gains on sale/redemption of investments were not chargeable to
tax. He submitted that the notice under Section 148 of the Act was
occasioned by a change of opinion on the issue of taxability of profits from
sale/redemption of investments and the same was not permissible.
7. Mr Sawhney, learned counsel for the Revenue countered the
arguments made on behalf of the Assessee and submitted that the decisions
of this Court in Ranbaxy Laboratories (supra) and Software Consultants
(supra) were wholly inapplicable in the facts of the present case. He
submitted that the said decisions related to the question whether other
incomes could be taxed where the income that was alleged to have escaped
assessment and which had occasioned a notice under Section 148 of the Act
had not been assessed or the assessment, if made, had not been sustained.
ITA 174/2013 Page 10 of 26
Reasoning and Conclusion
8. It is now well established that the powers under Section 147 of the
Act of an AO can be invoked only in cases where the AO has reason to
believe that the income chargeable to tax has escaped assessment. It has
been held in several decisions that reason to believe must be based on
tangible material and cogent facts; the powers under Section 147 of the Act
cannot be exercised merely on suspicion or on an apprehension that the
income of an Assessee has escaped assessment.
9. A bona fide reason to believe that income has escaped assessment is
a necessary pre-condition that clothes the AO with the power to reopen the
assessment, which has otherwise attained finality. The reasons to believe
must have a `direct nexus' and a `live link' with the formation of an opinion
by the AO that taxable income of an Assessee has escaped assessment. In
Commissioner of Income-Tax v. Chintoo Tomar: (2015) 54
Taxmann.com 160 (Delhi), a Division Bench of this Court had observed
as under:
"reason to believe predicates a belief which is founded and
induced by existence of palpable or cogent material or
information. Reason to suspect cannot amount to reason to
ITA 174/2013 Page 11 of 26
believe. As it is the beginning of the inquiry, having a
prima facie opinion is sufficient; and irrebuttable
conclusive evidence or finding is not required. But the
prima facie formation of belief should be rational,
coherent and not ex facie incorrect and contrary to what is
on record."
10. In the present case, the reasons recorded by the AO for issuance of
notice under Section 148 of the Act are quoted as under:-
"Under the prescribed statutory provisions only the profits
and gains of insurance (other than life insurance) shall be
taken to be the balance as disclosed in the annual' accounts
by the assessee, the copies of which were required under
the Insurance Act, 1938(4 of 1938) to be submitted to the
prescribed Controller of Insurance (referred to in Schedule
1 of the I.Tax Act, 1961). It is, therefore, clear that the
income earned by the assessee form the noninsurance
activities are taxable like profit and gains of business and
profession. After the omission of Rule 5(b) of first
schedule of the I.Tax Act, 1961, with effect from A.V.
1989-90, the assessee has been crediting directly the
profits on the realization of investments/sale of shares of
companies and redemption of such investment into the
balance sheet
Under the head general reserve account without
subjecting it to the profit and loss account of the
corresponding year. Since this part of the profit and gains
is not attributable to the insurance business, the same does
not constitute a valid cause for claiming it exempted.
Further, taking profit and gains attributable to such
activities directly to the balance sheet without subjecting it
to the profit and loss account of the corresponding year
constitute furnishing of inaccurate particulars of income
on the part of the assessee. Besides the profit arising out of
sale of investments being non-obligatory under the
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Insurance Act, 1938, constitute the business income of the
assessee not incidental to. the Insurance business. During
the previous year under consideration the assessee has
inter-alia credited a sum of Rs. 5,05,33,63,209/- directly
into the General Reserve Accounts in the· Balance Sheet
as "profit on sale of investment" without routing it through
the profit and loss account of the corresponding year. Thus
the income of Rs. 5,05,33,63,209'- has escaped assessment
within the meaning of section 147 of the I.Tax Act, 1961
during the previous year relevant to the assessment year
under consideration ."
11. As indicated hereinbefore, it is not disputed that the reasons that led
the AO to reopen the assessment were factually incorrect. It is not disputed
that the Assessee was carrying on only one business - General Insurance
Business, which is regulated under The Insurance Act, 1938. Indisputably,
the insurers cannot carry on any business other than the insurance business
or any prescribed business. The business of General Insurance is regulated
and there is no allegation that the regulatory authority has found the
Assessee to be in default of any provisions of The Insurance Act, 1938.
The learned counsel for the Revenue also did not dispute that the AO's
assumption that the Assessee was carrying on two streams of business was
incorrect. Thus, this reason to believe that the Assessee's income had
escaped assessment is clearly without any factual basis.
ITA 174/2013 Page 13 of 26
12. The assumption that the Assessee had not credited the profits in
question to the Profit and Loss Account is also, admittedly, factually
incorrect. Thus, the reasons which led the AO to form a belief that income
of the Assessee had escaped assessment are admittedly based on palpably
incorrect assumptions. It is well established that reasons to believe that
income had escaped assessment is a necessary precondition for the AO to
assume jurisdiction. Clearly, it would be difficult to sustain that this pre-
condition is met if such reasons to believe that income of an Assessee has
escaped assessment are based on palpably erroneous assumptions. The
reason to believe must be predicated on tangible material or information. A
reason to suspect cannot be a reason to believe; the belief must be rational
and bear a direct nexus to the material on which such a belief is based. In
the present case, the very assumption on the basis of which the AO is stated
to have formed his belief that the Assessee's income had escaped
assessment has been found to be erroneous. There was no basis for the AO
to assume that the Assessee had not credited the profits from the sale of
investments, which are alleged to have escaped assessment in its Profit and
Loss account.
13. Before the Tribunal, the Revenue had contended that the errors in the
ITA 174/2013 Page 14 of 26
reasons recorded were minor errors, which did not detract from the fact that
income had escaped assessment. In our view, this contention is without
merit as reasons to believe that income had escaped assessment is a
necessary pre-condition which enables the AO to assume jurisdiction to
proceed further. In the event such reasons are found to be erroneous, the
AO would not have the jurisdiction to make an assessment and any
proceedings initiated on the basis of palpably erroneous reasons would be
without authority of law. Therefore, even if it is assumed that, infact, the
Assessee's income has escaped assessment, the AO would have no
jurisdiction to assess the same if his reasons to believe were not based on
any cogent material. In absence of the jurisdictional pre-condition being
met to reopen the assessment, the question of assessing or reassessing
income under Section 147 of the Act would not arise.
14. Thus, in our view, the proceedings under Section 147 of the Act are
liable to be quashed as being without jurisdiction.
15. The decisions of this Court in Ranbaxy Laboratories Ltd. (supra)
and Software Consultants (supra) are, in our view, inapplicable to the facts
pertaining to the issues involved in the present case. As rightly pointed out
ITA 174/2013 Page 15 of 26
by Mr Sawhney, the said decisions relate to the jurisdiction of the AO to
tax other income being income other than the income which the AO has
reason to believe has escaped assessment and has occasioned issuance of
notice under Section 148 of the Act that has escaped assessment and
comes to the notice of the AO during the course of the proceedings initiated
under Section 147 of the Act. This Court had held that other income
chargeable to tax could be assessed only once the income which the AO
had reason to believe had escaped assessment and which occasioned the
AO to reopen the assessment under Section 147 of the Act is sustained. In
the present case, the AO has not sought to tax any other income but the
income, which the AO believed had escaped assessment, that is, profits
from sale of investments. The point in issue involved in the present case is
whether the reopening could be sustained on grounds other than those
which led the AO to believe that income has escaped assessment. This
Court was not convinced with this issue in the decisions referred above.
16. The next issue to be addressed is whether the AO would have
jurisdiction to examine the question as to the taxability of the profits and
gains from sale of securities as it is contended that the AO had already
expressed his opinion in that regard in the initial assessment. According to
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the Assessee, the decision of the AO to tax profits and gains from sale of
investments, amounts to a change of opinion, which is impermissible under
Section 147 of the Act.
17. By virtue of Section 44 of the Act, the income of an insurance
company is to be computed in accordance with the Rules contained in the
First Schedule of the Act. Rule 5 of the First Schedule provides for
computation of profits and gains of insurance business other than life
insurance business. The said Rule as in force prior to 1st April, 1989 reads
as under:-
"Computation of profits and gains of other insurance
business.
5. The profits and gains of any business of insurance other
than life insurance shall be taken to be the profit before tax
and appropriations as disclosed in the profit and loss
account prepared in accordance with the provisions of the
Insurance Act, 1938 (4 of 1938) or the rules made
thereunder or the provisions of the Insurance Regulatory
and Development Authority Act, 1999 (4 of 1999) or the
regulations made thereunder, subject to the following
adjustments:-
(a ) subject to the other provisions of this rule,
any expenditure or allowance including any amount
debited to the profit and loss account either by way of a
provision for any tax, dividend, reserve or any other
provision as may be prescribed which is not admissible
ITA 174/2013 Page 17 of 26
under the provisions of sections 30 to 43B in computing
the profits and gains of a business shall be added back;
(b ) Any amount either written off or reserved in the
accounts to meet depreciation of or loss on the realization
of investments shall be allowed as a deduction and any
sum taken credit for in the accounts on account of
appreciation of or gain on the realization of investment
shall be treated as part of the profits and gains.
(c ) such amount carried over to a reserve for
unexpired risks as may be prescribed in this behalf shall be
allowed as a deduction."
18. By virtue of Finance Act, 1988, clause (b) of Rule 5 of the First
Schedule of the Act was deleted. In the initial assessment proceedings
relevant to the Assessment Year 2004-05, the Assessee claimed a deduction
in respect of a sum of `3,57,54,000/- on account of amount written off in
respect of depreciated investments. The Assessee contended that the
deletion clause (b) of Rule 5 did not affect the deduction claimed as the
same had been debited to the Profit & Loss Account and was not
representing any loss on realization of investments. In support of its
contention, the Assessee relied on paragraph seventeen of the
Memorandum explaining the provisions of the Finance Act, 1988 which
reads as under:-
ITA 174/2013 Page 18 of 26
"17) Under the existing provisions of section 44 of the
Income Tax Act, the profits and gains of any insurance
business is computed in accordance with the rules
contained in the first Schedule to the Act. In Rule 5 of this
Schedule, profits and gains of any business of insurance,
other than life insurance, are taken to be balance of profits
disclosed in the annual accounts furnished to the Controller
of Insurance subject to certain adjustments. One of the
adjustments provided therein is in respect of an amount
either written off or reserved in the account to meet
depreciation or loss on the realization of investment, which
is allowed as deduction. Similarly, any sum taken credit for
in the accounts of appreciation of or gain on the realisation
of investments is taken as part of the profits and gains of
the business.
With a view to enable the General Insurance Corporation
and its subsidiaries to play a more active role in capital
markets for the benefit of policy holders, it is proposed to
provide for exemption of the profits earned by them on the
sale of investments. As a corollary, it is proposed to
provide that the losses incurred by the General Insurance
Corporation on the realization of investment shall not be
allowed as deduction in computing the profits chargeable to
tax. To achieve this objective, clause (b) of Rule 5 of the
First schedule of the Act will take effect from 1st April,
1989, and will, accordingly, apply in relation to the
assessment year 1989-90 and subsequent years."
19. The AO rejected the above contention of the Assessee and held that
the intention of the Legislature in deleting clause (b) of Rule 5 of the First
Schedule of the Act was to exempt all types of gains on investments
whether by way of appreciation or by way of realization and
simultaneously to disallow all types of losses on investments whether by
ITA 174/2013 Page 19 of 26
way of depreciation or by way of realization. The relevant extract of the
assessment order dated 30th January, 2006 is quoted below:-
"The above contention of the assessee is taken into
consideration by me and I think that the assessee has not
understood the provision of clause 5(b) in totality. When
clause 5(b) stood in the Income Tax statute, it talked about
for not allowing deduction for all type of losses from
investments either it is due to writing off or reserved in the
account to meet depreciation of investment or it is due to
loss in the realisation of investments and simultaneously it
talked about taking the amount as part of profits and gains,
which is taken credit for in the accounts on account of
appreciation of the investments earned as gain on the
realization of investments. Therefore, when it is deleted,
the intention of the legislature is very clear that it has
exempted all types of gains on investments whether by
way of appreciation or by way of realization and
simultaneously all type of losses on investments whether
by way of depreciation or by way of realisation are to be
disallowed. As far as para 17 of the Memorandum quoted
by the assessee is concerned, firstly the Memorandum is
not law and secondly this explains the basic idea behind an
amendment and does not give the exact effect of an
amendment. Therefore, in general term it has been
explained that when profit on sale of investment is not
being taxed, loss on the realisation of investment will not
be deducted. However, while applying provision of a
particular clause or section we have to see its effect in
totality. Had the intention of legislature been that only loss
on the realisation of investments is to be disallowed, there
was no need of deleting the whole clause 5(b) and only the
phrase "or loss on the realization of investments" and "or
gains on the realization of investments" could have been
deleted from clause 5(b). Since, the whole clause 5(b) is
deleted, all the profit on investments whether by way of
appreciation or gains on the realization of investments
ITA 174/2013 Page 20 of 26
shall be exempted from taxation and at the same time all
type of losses on investments whether by way of
depreciation or loss on the realization of investments are to
be disallowed. Once depreciated value of investment is
written off, no loss would be incurred by the assessee on
realization of these investments. Therefore, it is quite
logical and also in consonance with the deletion of clause
5(b) that any loss booked by the assessee company on
depreciation in value of investment should not be
allowed."
(emphasis added)
20. It is at once clear from the above that the AO had expressed its firm
opinion that profits and gains on realization of investments were exempt
from taxation. Admittedly, such profits had been included by the Assessee
in its Profit & Loss Account, which was subjected to scrutiny in the
assessment proceedings.
21. It is also not disputed that the Assessee had appended a note
expressly explaining that a sum of `5,05,33,63,209/- had been deducted
from the taxable income. The relevant note being Note No. 2 appended
along with the return of income reads as under:-
"Profit/loss on sale/redemption of investment amounting to
Rs.5,05,33,63,209/- during the year ended on 31.03.2004
has been credited to revenue and profit and loss account as
per IRDA requirement made applicable from the F.Y.
ending 31.03.2002. Till 31.03.2001, this amount was being
credited directly to General Reserve as per our consistent
accounting policy and was treated as exempt by us and also
ITA 174/2013 Page 21 of 26
accepted by the Assessing Officer. We, therefore, deducted
Rs.5,05,33,63,209/- out of taxable income."
22. In the above circumstances, it cannot be disputed that the exemption
claimed by the AO in respect of the profit on sale/redemption of
investments was duly disclosed and the AO had also opined on the merits
of the taxability of profits on sale/redemption of investments. The income
from profit on sale/redemption of investments is now sought to be taxed as
income which had escaped assessment. This, in our view, clearly represents
a change in the opinion with regard to the taxability of the income in
question. It is well settled that the power under Section 147 of the Act is not
a power of review but a power to reassess. Permitting reopening of
assessment on a change of opinion as to the taxability of the income of the
Assessee is, thus, outside the scope of Section 147 of the Act. The Supreme
Court in the case of Commissioner of Income-Tax v. Kelvinator of India
Ltd.: 320 ITR 561 (SC) had held as under:-
"6. On going through the changes, quoted above, made to
section 147 of the Act, we find that, prior to the Direct Tax
Laws (Amendment) Act, 1987, reopening could be done
under the above two conditions and fulfilment of the said
conditions alone conferred jurisdiction on the Assessing
Officer to make a back assessment, but in section 147 of the
ITA 174/2013 Page 22 of 26
Act (with effect from 1st April, 1989), they are given a go-
by and only one condition has remained, viz., that where the
Assessing Officer has reason to believe that income has
escaped assessment, confers jurisdiction to reopen the
assessment. Therefore, post-1st April, 1989, power to
reopen is much wider. However, one needs to give a
schematic interpretation to the words " reason to believe"
failing which, we are afraid, section 147 would give
arbitrary powers to the Assessing Officer to reopen
assessments on the basis of " mere change of opinion",
which cannot be per se reason to reopen. We must also keep
in mind the conceptual difference between power to review
and power to reassess. The Assessing Officer has no power
to review ; he has the power to reassess. But reassessment
has to be based on fulfilment of certain preconditions and if
the concept of " change of opinion" is removed, as
contended on behalf of the Department, then, in the garb of
reopening the assessment, review would take place. One
must treat the concept of " change of opinion" as an in-built
test to check abuse of power by the Assessing Officer.
Hence, after 1st April, 1989, the Assessing Officer has
power to reopen, provided there is "tangible material" to
come to the conclusion that there is escapement of income
from assessment. Reasons must have a live link with the
formation of the belief. Our view gets support from the
changes made to section 147 of the Act, as quoted
hereinabove. Under the Direct Tax Laws (Amendment) Act,
1987, Parliament not only deleted the words " reason to
believe" but also inserted the word " opinion" in section 147
of the Act. However, on receipt of representations from the
companies against omission of the words " reason to
believe", Parliament reintroduced the said expression and
deleted the word " opinion" on the ground that it would vest
ITA 174/2013 Page 23 of 26
arbitrary powers in the Assessing Officer. We quote
hereinbelow the relevant portion of Circular No. 549 dated
October 31, 1989 ([1990] 182 ITR (St.) 1, 29), which reads
as follows :
"7.2 Amendment made by the Amending Act, 1989, to
reintroduce the expression ' reason to believe' in section
147.--A number of representations were received against
the omission of the words ' reason to believe' from section
147 and their substitution by the ' opinion' of the Assessing
Officer. It was pointed out that the meaning of the
expression, ' reason to believe' had been explained in a
number of court rulings in the past and was well settled and
its omission from section 147 would give arbitrary powers
to the Assessing Officer to reopen past assessments on mere
change of opinion. To allay these fears, the Amending Act,
1989, has again amended section 147 to reintroduce the
expression ' has reason to believe' in place of the words ' for
reasons to be recorded by him in writing, is of the opinion' .
Other provisions of the new section 147, however, remain
the same."
(emphasis added)
23. This Court in the case of Prabhu Dayal Rangwala v. Commissioner
of Income-Tax: 373 ITR 596 (Delhi) referred to the decision of the
Supreme Court in Kelvinator of India (supra) and earlier decisions of this
Court and held as under:-
"18. In view of the dictum of the Supreme Court in the case of
Kelvinator of India Ltd. (supra), the Full Bench of this court in
Kelvinator of India Ltd. (supra) and Usha International (supra),
the present case would fall in the category of "change of
opinion" as the "reasons to believe" proceed on the premise that
the opinion formed in the original assessment orders was wrong
ITA 174/2013 Page 24 of 26
or erroneous. A wrong or erroneous opinion is not a good
ground for reopening. This would be contrary to the
jurisdictional requirements and the mandatory pre-conditions
which should be satisfied. The said aspect has been highlighted
in the aforesaid ratio by the Supreme Court and this court.
Erroneous decisions can be corrected by resort to exercise of
power under section 263 of the Act, which is the appropriate
remedy. The said power can be exercised if the order passed by
the Assessing Officer was erroneous and prejudicial to the
interests of the Revenue. The error and mistake made by the
Assessing Officer/Revenue in the present case is that it did not
resort to and exercise the power under section 263 of the Act but
erringly selected to exercise the power of reopening under
section 147 of the Act. Exercise of the said power under section
147 of the Act is faulty and flawed, as jurisdictional pre-
conditions are not satisfied."
24. In view of the aforesaid, we find considerable merit in the contention
of the Assessee that the AO did not have the jurisdiction to tax the profits
and gains from sale/realization of investments under Section 147 of the Act.
The first and the third questions of law are, therefore, answered in favour of
the Assessee and against the Revenue. In view of our decision that the AO
could not assume jurisdiction to reopen the assessment under Section 147
of the Act, it is not necessary to address the second question of law, which
relates to the taxability of profits on sale of investments on merits.
25. The appeal is allowed. The reassessment order dated 21 st January,
2007; the order dated 16th August, 2007 passed by the CIT(A) and the order
ITA 174/2013 Page 25 of 26
dated 22nd July, 2011 passed by the Tribunal are set aside.
26. The parties are left to bear their own costs.
VIBHU BAKHRU, J
S. MURALIDHAR, J
SEPTEMBER 15, 2015
RK
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