2010 (3) TMI 874 - AT - Income Tax

Validity of initiation of reassessment u/s 148 - transfer of shares u/s 2(47) - Return processed u/s 143(1) - assessment of short-term capital gain - capital gain on sale of shares was taxed as long-term capital gains in assessment year 2001-02 only on protective basis - Escapement of income chargeable to tax - spot delivery basis for a purchase - transaction carried out on the stock exchange in settlement period. Whether the assessment for assessment year 2001-02 can be said to be a protective assessment - HELD THAT - In the present case, we are of the view that the observations of the Assessing Officer while completing assessment for assessment year 2001- 02 which we have extracted cannot be said to be an expression of his intention to make a protective assessment of the capital gain as long-term capital gain. It is an assessment pure and simple. Firstly, the words used by the Assessing Officer do not express his intention that the long-term capital gain is being brought to tax by way of protective assessment. Secondly, there is no substantive assessment already made treating the capital gain as short-term capital gain. Therefore, there can be no protective assessment. Thirdly, there has been a demand (without any limitation that it should not been recovered) raised pursuant to the above assessment which also shows that the said assessment is not a protective assessment. The decision of the Mumbai Bench of the Tribunal in the case of M .P. Ramachandran 2009 (5) TMI 121 - ITAT BOMBAY-E clearly applies to the facts of the present case. Escapement of income chargeable to tax or Not - Can the Assessing Officer entertain a belief that income chargeable to tax has escaped assessment? - According to the learned D.R., short-term capital gains are taxed at higher rate compared to long-term capital gain and if the capital gain is considered as having resulted in the hands of the assessee in assessment year 2000-01 it would be short-term capital gain since the shares were held by the assessee for less than a period 12 months. Therefore, according to the learned D.R., there was escapement of income and the belief entertained by the Assessing Officer that there was escapement of income cannot be found fault with. The law on this aspect is very clear. The belief entertained by the Assessing Officer should be that of a honest and reasonable person based upon reasonable grounds. The reason to believe should be held in good faith and should not be a mere pretence. In the present case, the Assessing Officer brought to tax the capital gain as a LTCG in assessment year 2001-02. That treatment of the capital gain in assessment year 2001-02 still remains. We have already held that such assessment is not on a protective basis but on a substantive basis. In such circumstances, how can the Assessing Officer entertain belief that the capital gain in question is short-term capital gain. His belief that capital gain has been brought to tax at too low a rate can be said to be held in good faith and not as a pretence only when the contrary belief of the Assessing Officer in the form of an assessment of the very same capital gain as long-term capital gain in assessment year 2001-02 does not exist. Therefore, there cannot be any belief that capital gain has been assessed at too low a rate. We are of the view, that in the present case, the condition precedent for valid initiation of reassessment proceedings have not been satisfied inasmuch as the belief that income chargeable to tax has escaped assessment does not exist. In the circumstances, we hold that initiation of reassessment is bad in law and consequently, the order of assessment is held to be bad, hence, annulled. Determination of the date of transfer of shares - we hold that the date of transfer shares was 12-4-2000 in the case of Vimla Jajoo and 8-4-2000 in the case of Suresh Jajoo and consequently the capital gain on transfer by sale was a long-term capital gain which was already assessed to tax by the Assessing Officer in assessment year 2001-02. The assessment of the capital gain as short-term capital gain in assessment year 2000-01 is, therefore, held to be incorrect. The relevant grounds of appeal of the assessee are allowed. In view of the above conclusion, we are not going into the admissibility of the additional evidence sought to be filed before us and the argument regarding applicability of the rule of consistency. In the result, both the appeals of the assessees are allowed.

Issues Involved:

1. Validity of Reassessment Proceedings
2. Determination of the Date of Transfer for Capital Gains
3. Applicability of Section 14A for Disallowance of Expenses

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings:

The primary issue was whether the reopening of assessments for the assessment year 2000-01 was valid. The assessees argued that the reassessment was not valid as the income had already been assessed in the assessment year 2001-02. The Tribunal noted that the Assessing Officer (AO) had already assessed the capital gains as long-term in the assessment year 2001-02, and this assessment was not protective but substantive. The Tribunal held that the AO could not have a reasonable belief that income had escaped assessment when it was already assessed in another year. The Tribunal cited the case of Naresh C. Bhargava v. ITO [1974] and held that the belief of escapement of income was not justified. Consequently, the reassessment proceedings were deemed invalid and annulled.

2. Determination of the Date of Transfer for Capital Gains:

The Tribunal examined whether the date of transfer of shares should be the date of the broker's contract note or the date of actual delivery and payment. The assessees argued that the sale was complete only upon delivery of share certificates and payment, relying on the Sale of Goods Act, 1930, and judicial precedents such as Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1975]. The AO had relied on CBDT Circular No. 704, dated 28-4-1995, which stated that the date of the broker's note should be treated as the date of transfer. However, the Tribunal noted that the Circular could not override the legal provisions and judicial interpretations. The Tribunal held that the transfer was complete only upon delivery and payment, thus the gains were long-term and correctly assessed in the assessment year 2001-02. The Tribunal cited the decision in Mrs. Hami Aspi Balsara (Taxpayer) v. Asstt. CIT [IT Appeal No. 6402 (Mum.) of 2008] to support this view.

3. Applicability of Section 14A for Disallowance of Expenses:

The AO had made disallowances under Section 14A for expenses incurred to earn tax-free income (dividends). The assessees contended that the proviso to Section 14A barred reopening of assessments for making such disallowances for years before 1-4-2001. The Tribunal agreed with the assessees, citing the decision in Thacker & Co. Ltd. v. ITO [2007] and Jt. CIT v. Bombay Dyeing Mfg. Co. Ltd. [2009], which held that the proviso to Section 14A prohibited reopening for making disallowances under this section for years prior to 1-4-2001. Consequently, the disallowances made by the AO under Section 14A were deleted.

Conclusion:

The Tribunal allowed the appeals of the assessees, holding that the reassessment proceedings were invalid, the capital gains were long-term and correctly assessed in the assessment year 2001-02, and the disallowances under Section 14A were not permissible.

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