The Gujarat High Court has quashed a reassessment notice concerning a company’s capital loss set-off, holding that the Assessing Officer could not reopen an assessment beyond four years merely by reconsidering an issue already examined during scrutiny.

The Bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati found that the taxpayer had disclosed the relevant particulars concerning the sale of its assets and the computation of capital gains. No fresh tangible material had emerged after the original assessment to justify reopening.

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The petitioner/assessee was engaged in manufacturing wire harnesses. It discontinued business operations with effect from February 2, 2009, and subsequently decided to dispose of its assets.

During Assessment Year 2011-12, the company entered into an agreement to sell its land, building, plant and machinery, and furniture and fixtures for a total consideration of ₹7.30 crore. The sale deed was executed and the assets transferred during Assessment Year 2012-13.

The stamp valuation authority subsequently enhanced the value of the land and building for stamp duty purposes. The judgment records that this attracted Section 50C, concerning substitution of the stamp duty value for sale consideration. The company filed a revised return on March 6, 2014.

The revised return was selected for scrutiny. The Assessing Officer completed the assessment under Section 143(3) on January 8, 2015, accepting the income returned.

During the original assessment proceedings, the Assessing Officer issued a notice dated August 8, 2014, raising specific queries regarding the computation of capital gains.

The company furnished detailed responses through letters dated December 24, 2014, and January 7, 2015, along with relevant particulars and supporting documents. It also explained the issue during a personal hearing.

The High Court found that the capital gains computation had therefore formed part of the original scrutiny and had been examined before the assessment order was passed.

Nevertheless, the department issued a reassessment notice on March 28, 2019. The recorded reasons were supplied to the company on May 22, 2019.

The company submitted objections on July 25, 2019, challenging both the assumption of jurisdiction and the proposed reassessment. Following rejection of those objections on July 30, 2019, it approached the High Court.

The reopening centred on the company’s adjustment of losses arising from the sale of plant and machinery and furniture against capital gains from the sale of land.

According to the taxpayer’s account of the recorded reasons, the Assessing Officer believed that the company had not sold the machinery and furniture because those assets were not reflected in the balance sheet in the manner expected by the officer.

The department questioned losses of ₹83,68,557 relating to furniture and fixtures and ₹3,10,96,233 relating to plant and machinery. It alleged that income of ₹3,94,64,790 had escaped assessment.

Defending the notice, the Revenue argued that the transactions were not exhibited in the profit and loss account and that the cash flow statement showed only the receipt of ₹7.30 crore.

It maintained that the company had wrongly claimed short-term capital losses on assets it had not sold and adjusted those losses against capital gains. The Revenue asserted that sufficient tangible material existed to justify reopening and urged the Court not to interfere at that stage.

The company contended that reopening beyond four years was impermissible without a failure to disclose fully and truly all material facts necessary for assessment.

It emphasised that the Assessing Officer had specifically questioned the capital gains computation during the original scrutiny and accepted its explanation after considering the supporting documents.

The proposed reassessment, it argued, rested entirely on a change of opinion concerning material already available on record.

After examining the record, the High Court accepted the taxpayer’s challenge.

The Bench found that the balance sheet disclosed fixed assets held for sale, along with cash flow from investing activities.

The company had also furnished its revised capital gains computation, stamp duty particulars, the valuation order concerning the land and building, the relevant GIDC circular prescribing rates, and the sale deed relating to the land, building, plant and machinery.

The Court further noted that the taxpayer had disclosed the sale values and particulars of long-term and short-term gains and losses. These matters had been considered before completion of the original assessment.

Consequently, the Bench found that the reassessment sought to revisit an issue already examined by the Assessing Officer.

The High Court expressly found that no new or fresh tangible material had been unearthed after the assessment order dated January 8, 2015.

Applying the requirements governing the reassessment in question, the Bench held that reopening beyond four years under Section 147 was permissible only where the escapement of income resulted from the assessee’s failure to disclose fully and truly all material facts.

Since the relevant documents and computations had already been disclosed and examined, the Court concluded that the reopening amounted to a mere change of opinion.

The Bench accordingly allowed the writ petition and quashed the reassessment notice dated March 28, 2019.

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