The Tax Publishers2013 TaxPub(DT) 1603 (AP-HC) : (2013) 354 ITR 0035 : (2013) 261 CTR 0499 : (2013) 091 DTR 0289

Income Tax Act, 1961

--Revision under section 263--Erroneous and prejudicial order Non-reasoned order of assessing officer--Assessee-company was incorporated in the year 1963. It was registered as non-banking finance company (NBFCC with RBI, initially it was a franchisee of M/s 'C' company and was engaged in bottling business. Subsequently business of assessee was taken over by the said company out of compensation received by assessee from 'C' company it invested the same in shares and securities, mutual fund units, etc. During relevant year it (assessee) claimed exemption under section 10(38), on long-term capital gains (LTCG) from sale of quoted shares and equity oriented mutual funds. It had also offered short-term capital gains (STCG) for taxation. During scrutiny assessment proceedings assessing officer raised certain queries and sought some details, which were replied and furnished details. Accordingly 'assessing officer' computed total income accepting assessee to be an investor and holding that the income chargeable from sale of shares and units of mutual funds was chargeable under the head 'capital gains'. However, Commissioner invoked section 263 and observed that shares and mutual fund units, etc., were stock-in-trade of assessee and surplus on sale of same amounts to business income and not capital gains. Commissioner observed and held that a reasoned order was not passed by assessing officer and assessee was not an investor of share and units of mutual funds. Tribunal upheld order of assessing officer. Held: Justified. An assessment order made by the assessing officer cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. There must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation, a lesser tax than was just, has been imposed.

Whether there was application of mind before allowing the expenditure in question has to be seen ; that if there was an inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 merely because he has a different opinion in the matter; that it is only in cases of lack of inquiry that such a course of action would be open ; that an assessment order made by the Income Tax Officer cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately ; there must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation, a lesser tax than what was just, has been imposed. [Para 31] The assessing officer had passed the assessment order on 16-12-2008, accepting the case of the assessee that its income has to be taxed under the head 'Capital gains' as he was satisfied with the explanation and data submitted by the assessee, vide its letters dated 8-2-2008, 15-5-2008, 29-8-2008 (to his queries made, vide his letter dated 22-2-2008, 17-4-2008, 4-8-2008), that it is an investment company carrying on business in shares and such investment is made for the sole purpose of deriving dividend income. The correspondence exchanged between the parties shows that the assessing officer raised specific queries about the business activity of the assessee and also its claim of long-term capital gains income from quoted shares, unquoted shares and mutual fund units apart from short-term capital gains from the sale of shares and mutual fund units. The assessee had also given details of computation of capital gains under various categories. It is settled law that the assessing officer is not called upon to write an elaborate judgment giving detailed reasons. In para. 5 and 5.2 of his order under section 263, Commissioner also held that substantial information had been furnished by the assessee, and at para. 5.1 he held that there was application of mind by the assessing officer but the conclusion of the assessing officer is wrong. [Para 33] It may be that in the assessment order, the assessing officer has not made an elaborate discussion on the issue as to the nature of activity of the assessee, i.e., whether it is an investment or whether it is business income and did not refer to his query on the issue to the assessee before passing the order. [Para 34] When it is not incumbent on the assessing officer to pass a detailed order, merely because the order does not contain reasons as to why he accepted that the assessee is a trading company, his order does not become susceptible for revision. The assessing officer while making an assessment had examined the accounts, made inquiries, applied his mind to the facts and circumstances of the case and determined the income of the assessee. Therefore, it is not open to the Commissioner, on the ground that a different view is possible, to reopen the assessment on the ground that the assessing officer did not make an elaborate discussion in that regard. [Para 34] But both the respondent (at para. 5.4 of his order) and the Tribunal (at para. 45 of its order) do not take note of the dates of acquisition of the shares which are sold in March, 2006, and presume that the assessee was purchasing and selling shares in the same year. Both the respondent and the Tribunal refer only to the purchase and sale by the assessee of its shares in M/s. AS Ltd. and conclude (at para. 5.4 and para. 45 of their respective orders) that similar pattern is found in respect of several other scrips also without considering the details of the date of purchase and sale of the other scrips. This shocks judicial conscience. [Para 37] Both the respondent and the Tribunal state (at para. 5.4 and para. 45 of their respective orders) that on 31-1-2006, the assessee bought 15,500 shares and sold 1,500 shares of M/s. AS Ltd. This is clearly erroneous as the assessee had in fact sold 15,000 shares of the said company on that date as cart be seen from the written submissions made by the assessee before the Tribunal. Also the respondent at para. 2.5 and para. 5.15(i) of his order states that the assessee sold 1,01,23,003 shares of 53 listed companies during the year but in fact the assessee had sold only 10,23,003 shares. The figure '1' was interpolated after the figures ''0' and before the figures '23003' to give a misleading impression of the volume of shares traded. Even though this error was pointed out by the assessee in the written submissions made' by' it to the Tribunal at para. 29, the Tribunal does not deal with it. [Para 38] One of the reasons assigned by the respondent to base his conclusion that the assessee carried out day-trading (at para. 5.15(ii) of his order) was the sole instance of the assessee purchasing and selling 500 shares of Reliance Industries Ltd., on 8-8-2005, i.e., on the same day by squaring the account without taking delivery. This was not pointed out in the original show-cause notice dated 20-1-2010, or in the revised show-cause notice dated 21-2-2011, specifically. The assessee in its written submissions before the Tribunal sought to explain at para. 17 that this was a solitary transaction which happened by mistake on the part of the broker; that when the assessee was informed of the purchase, it immediately told the broker to cancel the transaction which was done accordingly even though this resulted in a loss of 1,197; that there was nothing wrong if the assessee had availed of the services of three leading brokers for the purpose of investment in shares and that fact has no bearing on the nature of the activity; that more than 90 per cent, of the transactions are carried out by one broker who has only National Stock Exchange terminal and that for shares listed only on Bombay Stock Exchange, the transactions are being done with other two brokers; and this sole instance cannot be taken to conclude that the assessee is a trader in shares as other transactions show that the shares were held for a long time after their purchase before being sold. The Tribunal in its order makes no reference to this submission at all and does not deal with it. [Para 39] Merely because of large frequency and volume of transactions, a conclusion that an assessee is a trader cannot be drawn without considering the period of holding of those shares by the assessee. A trader in shares normally holds them for a short time only; is unlikely to invest in unquoted shares or in mutual funds (which the assessee did); and is likely to borrow funds for its trading activity. The fact that the assessee is monitoring the stock markets and buying at dips and selling at highs with an intention to make profit from these transactions is not conclusive of the fact that the assessee is a trader because even an investor would not buy or sell blindly and take the risk of suffering losses. The fact that the assessee has an administrative set up and incurs considerable administrative expenditure also cannot be a factor to hold that the assessee is a trader because online trading is prevalent today and there is nothing special about the assessee having a few computer terminals or staff to operate them and help it in making the investments. The fact that the assessee is making repetitive purchases and sales of the same shares is a factor in favour of holding that the assessee is an investor as the assessee has explained that this was done due to amendments by Finance Bill, 2006, with effect from 1-4-2006 (the assessment year 2007-08), to section 10(38) and section 115JB. The conclusion of the respondent that the only and sole objective of purchase and sale of shares is to derive profits and not to earn dividend is belied by the admitted fact that the assessee had earned dividends more than 8,00,00,000 for the assessment years 2006-07, 2007-08 and 2008-09. Tribunal is unable to understand how the respondent at para. 5.13 infers from the name of the assessee, i.e., Spectra Shares and Scrips P. Ltd. and a statement in the director's report for the year 2005-06 that 'during the year the market is upbeat, and the directors were hopeful of good results' indicates that it is only doing trading activity as there is nothing in these circumstances to shaw that the assessee cannot be an investor. It is the total effect of all relevant factors and circumstances that determines the character of the transaction. The fact that the Revenue from the assessment year 1998-99 had accepted that the assessee is an investor and the shares and mutual funds are investments and not stock-in-trade (except for the assessment year 2006-07); the fact that 99 per cent, of the shares were held for considerable time after their purchase before their sale ; that the action of the assessee in undertaking large volume of transactions in March, 2006, was because of the change in law sought to be made effective from 1-4-2006, with regard to treatment of long-term capital gains under section 115JB for book profit tax and was not a colourable action and was permissible under the law, lead to an irrefutable conclusion that the assessee was only an investor and the assessing officer had rightly taxed his income under the head 'capital gains'. [Para 47] Admittedly, the Revenue had accepted that the assessee was an investor whose income is chargeable under the head 'Capital gains' for a number of years from 1999-2000, particularly for the assessment years 2005-06 and 2007-08, i.e., before and after the assessment year 2006-07 which is the subject matter of these proceedings. The assessee has filed assessment orders for 2004-05, 2005-06, 2007-08 from which it is clear that the department had accepted that the assessee is only investing in shares and mutual funds and his profits from sale of shares or mutual fund units should be taxed under the head 'Capital gains'. It is admitted by the Revenue that only after the impugned order of the respondent dated 31-3-2011, the assessment orders for 2005-06 and 200-7-08 were reopened. [Para 48] In view of the above, the respondent cannot under section 263 interfere on an issue which has been accepted by the Revenue for a number of years particularly when the assessing officer in the assessment order for the assessment year 2006-07 takes the same view by terming it erroneous as the respondent is able to demonstrate a change in circumstances in the said assessment year. [Para 50] Tribunal could not have upheld the action of the respondent under section 263 on a ground different from what has been mentioned in the notice under section 263 or the order of the respondent under section 263. In the present case, the respondent had held that the assessing officer had applied his mind but has come to an erroneous conclusion at para. 5.1 of his order dated 31-3-2011. The Tribunal at para 34 of its order dated 5-8-2011, held that the assessment order was passed without proper examination or inquiry or verification or objective consideration of the claim made by the assessee and hence, the Commissioner was justified in revising the order. [Para 51] The contention of the counsel for the Revenue that the assessee had not raised any submission before the respondent as to the justification for high frequency of transactions in March, 2006, on account of the provisions of the Finance Bill 2006, is not tenable because the respondent, in his show-cause notice dated 20-1-2010, or revised show-cause notice dated 21-2-2011, did not indicate that he is going to focus on that period. Consequently, the assessee had no opportunity to highlight this fact in his replies to the respondent. The fact remains that this contention was not only raised in the written submissions before the Tribunal but also argued before it, but it did not deal with it. The contention of the Revenue that the assessing officer had not applied his mind to the material on record cannot be accepted because the respondent in his order dated 31-3-2011, specifically records a finding at para. 5.1 that there is application of mind by the assessing officer. The Revenue cannot raise a plea which is not contained in the order of the respondent and is contrary to it and to the record. The contention of the Revenue that there are no reasons given by the assessing officer about the nature of activity of the assessee cannot be accepted because a query was raised by him in the course of the assessment proceedings and was replied by the assessee. Obviously, he was satisfied with the explanation of the assessee and therefore did not think that the issue needs to be specifically mentioned. It is settled law that the assessing officer in the assessment order is not required to give detailed reasons and once it is clear that there was application of mind by an enquiry, the respondent, merely because he entertains a different opinion in the matter, cannot invoke his powers under section 263 . It is, therefore, not correct to say that there was no proper enquiry by the assessing officer. [Para 59] assessing officer had not only taken a possible view but in the circumstances the only view possible and therefore his order could not have been termed as erroneous or prejudicial to the Revenue warranting exercise of revisional jurisdiction under section 263 by the respondent. The respondent had no different or new material to take different view from the one taken by the assessing officer and the reasons given by him to reopen the assessment and sustain the revision are totally unacceptable. The respondent is not vested any power under section 263 to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. The Tribunal, had grossly erred in agreeing with the order of the respondent and in upholding it on grounds which have not been found in the show-cause notice of the respondent, that too without considering the several issues of fact and law raised by the asses-see in his written submissions and grounds of appeal. Both the respondent and the Tribunal have based their orders on preconceived notions, conjunctures and surmises, manifestly misread the facts and twisted them to justify their conclusions. [Para 61]

SUBSCRIBE TaxPublishers.inSUBSCRIBE FOR FULL CONTENT