Telangana High Court
Melvillie Finvest Ltd., 63666/B, … vs Incometax Officer, Ward 21, Aayakar … on 19 June, 2025
Author: P.Sam Koshy
Bench: P.Sam Koshy
THE HON'BLE SRI JUSTICE P.SAM KOSHY
AND
THE HON'BLE SRI JUSTICE NARSING RAO NANDIKONDA
WRIT PETITION No.22221 of 2003
ORDER:
(per the Hon’ble Sri Justice Narsing Rao Nandikonda)
The present writ petition is filed challenging reopening of
the assessment of the petitioner for the Assessment Year 1996-
1997 and also to quash the notice dated 28.03.2003 issued by
the respondent under Section 148 of the Income Tax Act, 1961
(briefly ‘the Act’ hereinafter) on the ground that the same is
without jurisdiction and time barred.
2. Heard Sri C.V. Narasimham, learned counsel for the
petitioner, and Sri P. Murali Krishna, learned counsel for the
respondent. Perused the entire material on record.
3. The brief facts of the case, are that, the petitioner is
engaged in the business of investment in shares and trading and
had filed its return of income for the Assessment Year 1996-
1997 on 27.11.1996 showing loss of Rs.54,75,960/- and the
said return was scrutinized by the Assessing Officer under
Section 143(1)(a) of the Act on 14.03.1997 without making any
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further adjustment and later a notice dated 07.04.1998, under
Section 148 of the Act, was issued to the petitioner for reopening
the assessment on the ground that the income chargeable to tax
for the year 1996-1997 has escaped assessment within the
meaning of Section 147 of the Act. Pursuant to the reopening of
the assessment, the petitioner filed the same return on
14.05.1998 with the purchase and sale transactions of the
shares done on 31.03.1995 and considered during the
assessment year 1996-1997 and the said assessment was
completed and an order was passed by the respondent.
4. Thereafter, the petitioner filed an application under
Section 154 the Act seeking rectification of the assessment order
for setting-off the carry forward loss. But the Assessing Officer
rejected the said application. Against the said rejection order, an
appeal was preferred before the Commissioner of Income Tax
(Appeals) under Section 154 of the Act, dated 02.12.1999. The
Assessing Officer / Joint Commissioner of Income Tax filed his
report on 02.06.2000 before the Commissioner of Income Tax
(Appeals) against the order of Joint Commissioner under Section
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154 of the Act. In the said report, the Assessing Officer observed
that the petitioner’s business is speculative in nature and loss
from speculation cannot be set-off. The Commissioner of Income
Tax (Appeals) finally held that the Assessing Officer was not
competent to review the decision of his predecessor regarding
set-off of the loss of earlier year against the profits of the current
year.
5. Challenging the same, the Department filed an
appeal in ITA No.550/Hyd/2000 before the Income Tax
Appellate Tribunal (for short, the ‘ITAT’) against the order of
Commissioner of Income Tax (Appeals). The same was dismissed
by ITAT vide its order dated 28.10.2005. Meanwhile, another
notice dated 28.03.2003 under Section 148 of the Act was
issued to reopen the assessment for second time on the ground
that there were certain reasons for the respondent to believe that
the income chargeable to tax has escaped assessment.
6. According to the petitioner there was a limitation of 4
years’ time under Section 147 of the Act to issue notice under
Section 148 of the Act which expired on 31.3.2001. For which
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the petitioner filed a reply to consider the return filed earlier on
27.11.1996. The petitioner also sought for the reasons to be
furnished for reopening the assessment and issuance of notice
under Section 148 of the Act, for which the Assessing Officer
refused to provide the reasons for reopening of assessment and
further intimated that the reasons recorded for re-opening of
assessment need not be communicated to the petitioner and
asked for certain information to be furnished on 26.09.2003.
The petitioner filed reply on 10.10.2003 stating the facts of filing
return of income and the rectification petition and the
consequential orders and asked for reasons for issuance of
notice once again.
7. It is argued by the learned counsel for the petitioner
that having reopened the assessment first time in the year 1998
and having examined sale and purchase of the shares and value
thereof in depth, the respondent cannot validly claim that since
he did not examine the issue of deemed speculative loss in the
light of explanation to Section 73 of the Act, the respondent now
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cannot consider the same after expiry of the time limit of four
years under Section 147 of the Act to re-open the assessment.
8. It is further argued that the petitioners case cannot
be treated as speculative loss since there is no actual sale of
shares and the decrease in value of the stock is only on account
of valuing stock in trade at cost or market price which is lower
and that the said principle was accepted by various High Courts
and the Hon’ble Supreme Court in also in the case of CIT vs.
British Paints Limited 1 and Chainrup Sampatram vs. CIT 2.
9. It is also argued that the said issue is also covered in
the case of Mahalaxmi Motors Ltd. vs. Deputy Commissioner
of Income-tax and Another 3. He further contended that mere
failure of the Assessing Officer to draw necessary inference from
the primary facts disclosed by the assessee cannot be a ground
to reopen assessment as per the limitation of four years
prescribed under Section 147 of the Act. The Assessing Officer
could have, if so, advised invoked Section 147 of the Act only
1
188 ITR 44
2
24 ITR 481
3
2003 SCC OnLine AP 1376
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within the period of 4 years limitation which he failed to do so.
The entire exercise of the respondent to reopen the assessment
beyond 4 years limitation period is an illegal exercise of power
under Section 147 and it is wholly without jurisdiction.
10. It is the case of the petitioner that the assessment
was reopened for the first time in the year 1998 and having
examined sale and purchase of shares and value thereof in
depth, the respondent cannot validly claim that since he did not
examine the issue of deemed speculative loss in the light of the
explanation to Section 73 of the Act. Further, the respondent
also now cannot consider the same after expiry of the time limit
of four years prescribed under Section 147 to reopen the
assessment. The learned counsel further contended that facts of
the petitioner’s case cannot be treated as a speculative loss
since there is no actual sale of shares and the decrease in value
of stock is only on account of valuing stock in trade at cost or
market price whichever is lower.
11. Lastly, it is argued by the learned counsel for the
petitioner that this is a mere change in opinion of the Assessing
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Officer which is sought to be justified by illegally invoking the
power under Section 147 of the Act. It is further argued that the
contention of the respondent that the reopening is not barred by
limitation since the escapement of income is more than
Rs.1,00,000/- and assessment can be reopened within 6 years
is wholly misplaced, since beyond the 4 years limit, the
Assessing Officer does not have power to reopen assessment
except on specific allegation and finding that there was failure to
disclose true and full material facts by the petitioner which is
clearly absent in the present case.
12. The learned counsel for the petitioner in support of
his contentions, relied upon the following decisions:
2) Commissioner of Income Tax, Delhi vs. Kelvinator of
India Limited. 5
3) Duli Chand Singhania vs. Assistant Commissioner of
Income-Tax 6
4) Mahalaxmi Motors Ltd. vs. Deputy Commissioner of
Income-tax and Another 74
(2023) 458 ITR 566
5
(2010) 2 SCC 723
6
2003 SCC OnLine P&H 1818
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7) Sita World Travels (India) Ltd. vs. Commissioner of
Income Tax and Anr. 10
13. Per contra, it is argued by the counsel for the
respondent that since the loss derived by the assessee is
speculation business in nature, the same cannot be allowed to
be set-off against the other income of the assessee. As per the
provision of the Section 73(1) of the Act the loss arising from the
speculation business cannot be set-off except against the profits
and when the assessee has put in a petition the point that the
claim of the petitioner was not allowed in the order under
Section 154 dated 02.12.1999, in view of the provision of Section
73 (1) of the Act.
7
2003 SCC OnLine AP 1376
8
1991 SCC OnLine AP 480
9
(2005) 275 ITR 451
10
(2005) 274 ITR 186
11
(2001) 251 ITR 802
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14. Having considered the rival considerations of both
the counsel, the points which arise for consideration are:
1. Whether the notice issued under Section 148 of
the Act by the respondent is barred by limitation
prescribed under Section 147 and 149 of the
Act?
2. Whether the respondent is competent to reopen
the assessment on the change of opinion and to
review the said assessment made by his
predecessor? and
3. Whether the reopening of the assessment is
illegal on the ground of non-recording of any
reasons regarding any income chargeable to tax
has escaped assessment?
15. POINTS: Before going further, for convenience, we
would like to extract the provisions under Section 147 of Act and
Section 73(1) of the Act, which reads thus:
“Carry forward and set off of losses by specified
business.–
73A. (1) Any loss, computed in respect of a speculation
business referred to in section 35AD shall not be set off except
against profits and gains, if any, of any other specified
business.
(2) Where for any assessment year any loss computed in
respect of the specified business referred to in sub-section (1)
has not been wholly set off under sub-section (1), so much of
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assessee has no income from any other specified business,
shall, subject to the other provisions of this Chapter, be carried
forward to the following assessment year, and–
(i) it shall be set off against the profits and gains, if any,
of any specified business carried on by him assessable
for that assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of
loss not so set off shall be carried forward to the following
assessment year and so on.”
Income escaping assessment.–
147. If any income chargeable to tax, in the case of an
assessee, has escaped assessment for any assessment year,
the Assessing Officer may, subject to the provisions of sections
148 to 153, assess or reassess such income or recomputed the
loss or the depreciation allowance or any other allowance or
also any other allowance or deduction for such assessment
year (hereafter in this section and in this sections 148 to 153
referred to as the relevant assessment year)
Explanation.–For the purposes of assessment or reassessment
or recomputation under this section, the Assessing Officer may
assess or reassess the income in respect of any issue, which
has escaped assessment, and such issue comes to his notice
subsequently in the course of the proceedings under this
section, irrespective of the fact that the provisions of section
148A have not been complied with.”
16. We would also like to quote herein below the
relevant portion of Circular No.549 dated 31st October, 1989,
which reads as follows:
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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 Commnr. Of Income Tax, Delhi vs M/S.
Kelvinator Of India Ltd on 18 January, 2010 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.”
17. On going through the changes made to Section 147
of the Act, we find that, prior to Direct Tax Laws (Amendment)
Act, 1987, re-opening could be done under above two conditions
and fulfillment of the said conditions alone conferred jurisdiction
on the Assessing Officer to make aback assessment. However,
Section 147 of the 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 re-open the
assessment. Therefore, post 1st April, 1989, power to re-open is
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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 re-open assessments on the basis of “mere
change of opinion”, which cannot be per se reason to re-open.
18. We must also keep in mind the conceptual difference
between power to review and power to re-assess. The Assessing
Officer has no power to review; he has the power to re-assess.
But re-assessment has to be based on fulfillment of certain pre-
conditions and if the concept of “change of opinion” is removed,
as contended on behalf of the Department, then, in the garb of
re-opening 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, Assessing Officer has power to re-open, 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.
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19. 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”, the law makers reintroduced the said
expression and deleted the word “opinion” on the ground that it
would vest arbitrary powers in the Assessing Officer.
20. The petitioner has filed the returns for the year 1996-
1997. Pursuant to the same, the Dy. Commissioner of Income
Tax issued notice under Section 148 of the Act that he has
reasons to believe that the income chargeable to tax for the
assessment year 1996 -1997 has escaped assessment within the
meaning of Section 147 of the Act. An order was passed on
20.05.1998 under Section 143(3) of the Act making re-
assessment and at page 2 of the order it is specifically stated
that in response to the notice issued under Section 143 (2) of the
Act, Smt. Srilatha Ramchandran, C,A, authorized representative
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of the assessee’s company and Sri J.V. Ramaiah, Accounts
Manager of the assessee’s company appeared and filed the
information and details called for. The case was discussed with
them and examined. This itself shows that the re-assessment
was made after considering the information and details that
were submitted.
21. Against the order passed above, an appeal was
preferred before the Commissioner of Income Tax (Appeals)
wherein it was directed that the Assessing Officer is directed to
allow the set-off of business loss of earlier year against the profit
of the assessment year 1996-1997.
22. Considering the entire material on record, this Bench
is of the view that re-opening of the assessment is clearly evident
from the record that the notice issued under Section 148 of the
Act dated 29.03.2003 is within recording the reasons and that it
is clearly barred by limitation as the period for the assessment
for the relevant assessment year is 4 years and the period
prescribed under Section 149(1)(a) of the Act for issuance of a
notice under Section 148 of the Act would expire by 31.03.2001.
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Hence the notice is liable to be set aside on this ground also.
Besides, the Assessing Officer is having no power or jurisdiction
to re-open or review the assessment for the second time. For the
reasons stated above, the points are answered in favour of the
petitioner. Thus, this Bench is of the opinion that the very
notice is liable to be set aside / quashed accordingly.
23. Accordingly, the Writ Petition is allowed quashing the
notice dated 28.03.2003, issued by the respondent under
Section 148 of the Income Tax Act, 1961. There shall be no
order as to costs.
Miscellaneous petitions, if any, pending shall stand closed.
____________________________
JUSTICE P.SAM KOSHY
_________________________________________
JUSTICE NARSING RAO NANDIKONDA
Date:19.06.2025
YVL
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