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From the Courts »
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Oriental Insurance Company Vs. Commissioner Of Income Tax, Delhi
September, 23rd 2015
           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







ITA 174/2013                                                    Page 6 of 26
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



ITA 174/2013                                                    Page 7 of 26
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



ITA 174/2013                                                     Page 9 of 26
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



ITA 174/2013                                                           Page 12 of 26
               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



ITA 174/2013                                                    Page 16 of 26
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




ITA 174/2013                                                     Page 26 of 26

 
 
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