2008 (2) TMI 867 - HC - Income Tax

Sale of shares - investment or stock-in-trade - Sale of units of Prudential ICICI Technology Fund - Notice issued under section 14A - erroneous and prejudicial order - CIT passed an order setting aside the assessment order and directing the Assessing Officer to make a fresh assessment - HELD THAT - Tribunal came to the conclusion that the shares held by the assessee in BT Tech Net Ltd. were an investment and therefore, any profit earned on the sale thereof is required to be treated as capital gains. Whether the shares were held by the assessee as an investment or stock-in-trade is a matter of fact, and we do not find any perversity in the view taken by the Tribunal that the shares were held as an investment. Sale of units of Prudential ICICI Technology Fund - HELD THAT - Tribunal noted that there is a factual error committed by the CIT inasmuch as the units were purchased by the assessee on 3-3-2000 and not on 3-3-2001. Therefore, there was no question of manipulating the loss in the month of March, 2001 itself for the purpose of avoiding tax on capital gains. Following the decision in Rayon Silk Mills case 1995 (11) TMI 39 - GUJARAT HIGH COURT we are of the view that the Tribunal has not erred in the conclusion that it has arrived at. There was enough material available to show that the assessment was not prejudicial to the interest of the revenue. Notice issued under section 14A - It has rightly been held by the Tribunal that this issue did not find a mention in the notice sent by the CIT under section 263 of the Act to the assessee. It has been held in CIT v. Smt. R.G. Umaranee 2002 (11) TMI 49 - MADRAS HIGH COURT that in the absence of a notice given by the Commissioner on a particular issue, it is not open for him to re-open the proceedings on that issue which is different altogether and initiate an inquiry thereon. We are of the opinion that since the assessee was not put to the notice in regard to any issue under section 14A of the Act, the CIT could not enlarge the scope of the proceedings on whatever issue arose during the proceedings. We do not find any error or illegality in the order passed by the Tribunal. No substantial question of law arises - Dismissed.

Summary

Issues:
1. Interpretation of section 263 of the Income-tax Act, 1961 regarding the correctness of the assessment order.
2. Determination of whether the profit earned on the sale of shares and units should be treated as capital gains or business income.
3. Examination of the applicability of section 14A of the Act in the assessment proceedings.

Analysis:
1. The first issue revolves around the correctness of the assessment order under section 263 of the Income-tax Act, 1961. The Commissioner of Income-tax issued a notice to the assessee, contending that the assessment completed by the Assessing Officer was erroneous and prejudicial to the revenue's interests. The CIT set aside the assessment order, leading to an appeal before the Tribunal. The Tribunal, after considering the reply from the assessee, upheld the decision of the CIT, directing a fresh assessment. The High Court found no error in the Tribunal's decision, emphasizing the objective consideration of material by the CIT before disturbing a completed assessment.

2. The second issue concerns the treatment of profit earned on the sale of shares and units as capital gains or business income. The Tribunal analyzed the nature of shares held by the assessee in BT Tech Net Ltd. and units of Prudential ICICI Technology Fund. The CIT argued that the shares and units were stock-in-trade, while the assessee claimed them as investments. The Tribunal noted discrepancies in the CIT's contentions, such as factual errors in dates and lack of concrete evidence to prove manipulation. Relying on precedents, the Tribunal concluded that the shares were held as investments and the loss on units sale was genuine, not manipulated to avoid taxes. The High Court affirmed the Tribunal's decision, emphasizing the factual determination of whether the shares were held as investments or stock-in-trade.

3. The third issue involves the applicability of section 14A of the Act, which was not mentioned in the notice sent by the CIT under section 263. The Tribunal held that without prior notice on this issue, the CIT could not expand the scope of proceedings. Citing legal precedents, the High Court concurred with the Tribunal's decision, stating that the CIT cannot initiate an inquiry on an issue not raised in the notice. Consequently, the High Court found no error or illegality in the Tribunal's order and dismissed the appeal, concluding that no substantial question of law arose from the case.