Re-Assessment cannot survive without Valid Reason: Bombay HC [Read Judgment]

The High Court of Bombay while setting aside all the notices and consequential draft assessment orders held that if the very basis for re-assessment does not survive, orders on such re-opening would not survive too.

The Petitioner is Aberdeen Asia Pacific Including Japan Equity Fund. The petitioner is a sub-fund or series of Aberdeen Institutional Commingled Funds, LLC (AICFL), a Delaware (USA) based Limited Liability Company. Because of the popularity of the LLC regime i.e., Limited Liability Company across the investment funds industry, AICFL was reorganized or converted from a Trust into a Limited Liability Company (LLC) in accordance with the provisions of the Trust Act and the LLC Act in the State of Delaware, USA.

Prior to conversion, the petitioner as a sub-trust had incurred and accumulated losses under the head ‘capital gains’. Such losses were fully and properly disclosed by the petitioner in the returns filed for each of the assessment years. After conversion, these losses were carried forward by the petitioner, now organized as a sub-fund or ‘series’ of the LLC, to the assessment year 2011-12 and beyond in accordance with Section 74 of the Income Tax Act, 1961.

AICFL filed an application before the AAR seeking an advance ruling on the question that Whether on the facts and in the circumstances of the case, Aberdeen Institutional Commingled Funds, LLC i.e., the applicant was entitled to carry forward accumulated capital losses as disclosed in the application to the assessment year 2011-12 and thereafter, under Section 74 of the Act, notwithstanding its reorganization effective from April 19, 2010.

The AAR ruled that the benefit of setting off of loss is available only to the assessee. AAR however accepted the stand of the Revenue that allowance of carrying forward and set off of accumulated loss has to be examined under the provisions of the Indian income tax law, more particularly under Sections 70 to 79 of the Act, where there are no such deeming provisions.

Thereafter respondent authority issued a notice under Section 148 of the Act for the assessment year addressed to the petitioner stating that he had reasons to believe that petitioner’s income chargeable to tax for the said assessment year had escaped assessment within the meaning of Section 147 of the Act. The respondent authority stated that he proposed to re-assess the income of the petitioner for the said assessment year and called upon the petitioner to submit a return in the prescribed form for the said assessment year within the specified period.

In the reasons recorded by respondent No.1, it was precisely on the ground of change of status that the claim of the assessee i.e. the petitioner was found to be not acceptable which led to the formation of the belief that income of the petitioner chargeable to tax had escaped assessment for the assessment year 2011- 12.

The division bench of Justice Milind N. Jadhav and Justice Ujjal Bhuyan held that the very foundation for the formation of such belief is erroneous and aside all the notices and consequential draft assessment orders held that if the very basis for reopening assessment does not survive, orders on such re-opening would not survive too.

“We are of the view that the impugned notice dated 23.03.2018 under Section 148 of the Act issued by respondent No.1 for the assessment year 2011-12 cannot be sustained. Consequential draft assessment order dated 06.05.2019 for the said assessment year and all orders passed thereafter would thus also be rendered unsustainable. That apart, the draft assessment order dated 07.05.2019 for the assessment year 2012-13 in so far it followed the principle applied in the order dated 06.05.2019 while disallowing the claim of the petitioner to carry forward and set-off of loss would also be unsustainable to that extent,” the court said.