2011 (8) TMI 1115 - AT - Income Tax

Revisional Power of Commissioner u/s 263 - Assessee contended that initially a show cause notice u/s 263 was issued - After a long pause, the successor Commissioner of Income-tax issued again a show cause notice under S.263 of the Act on proposing revision on entirely different grounds - The commissioner was not justified in assuming the revisional jurisdiction u/s 263 - HELD THAT - As held in the case of MALABAR INDUSTRIAL CO. LTD. VERSUS COMMISSIONER OF INCOME-TAX 2000 (2) TMI 10 - SUPREME COURT , the Commissioner can exercise revision jurisdictional u/s 263 if he is satisfied that the order of the assessing officer sought to be revised is (i)erroneous; and also (ii) prejudicial to the interests of the revenue. The view so taken by the AO without making the requisite inquiries or examining the claim of the assessee will per se be an erroneous view and hence will be amenable to revisional jurisdiction u/s 263. Second reason is that it is not taking of any view that will take the matter under the scope of Section 263. The view taken by the Assessing Officer should not be a mere view in vacuum but a judicial view. As already stated earlier, we are not able to appreciate on what material was placed before the Assessing Officer at the assessment stage to take such a view. The assessee has also not been able to lead enough evidence to show to us that any inquiry was made by the Ao in this regard. Therefore mere allegation that the Assessing Officer has taken a view in the matter will not put the matter beyond the purview of Section 263 unless the view so taken by the Assessing Officer is a judicial view consciously based upon proper inquiries and appreciation of all the relevant factual and legal aspects of the case. In the case of income tax matters each assessment year is an independent assessable distinct unit in which principles of res judicata are not applicable. The income of each assessment year and admissible expenses are determined in each year considering the facts and circumstances of the case prevailing during the year. As per the facts and circumstances of the case if there is a change in the facts and circumstances, a different view as per the changed facts and circumstances is required to be taken - Thus Principle of consistency can't be followed in income tax matters. In this case, the CIT came to conclusion that the assessee is engaged in the business of buying and selling of shares and income arising out of these transactions has to be considered as income from business instead of considering the same as income from capital gain. Accordingly, we do not find any infirmity in the order of the CIT. The same is confirmed - Decision against Assessee. Profit arising out of sales of shares - Income from business or Capital Gain? - Assessee was frequently purchasing and selling the shares and mutual funds - CIT(A) treated such income as income from profit and gains of business or profession instead of Capital gain - HELD THAT - In our opinion, whether or not a person carried on business in a particular commodity must depend upon volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transaction must ordinarily be entered into with a profit motive. After analysing the statement, it is observed that assessee is buying and selling shares and mutual funds in the same year very frequently. Looking into the volume, frequency, continuity and regularity of transactions of purchase and sale in shares by the assessee, it cannot be said that these transactions were entered into only for the purpose of investment and there was no motive of the assessee to earn profit. Therefore, only inference which can be drawn is that the income earned by the assessee out of sale and purchase of these shares was an income under the head profit and gains of business or profession.' Therefore, the CIT is justified in treating the profit arising out of sale of shares acquired by the assessee as income from business - Decision against Assessee.

Issues Involved:

1. Legality of invoking Section 263 of the Income-tax Act.
2. Classification of income from the sale of shares and mutual funds as business income or capital gains.
3. Consistency in the treatment of income from previous years.
4. Adequacy of the Assessing Officer's examination of the assessee's claims.

Issue-wise Detailed Analysis:

1. Legality of invoking Section 263 of the Income-tax Act:
The Tribunal examined whether the Commissioner of Income-tax (CIT) was justified in invoking Section 263, which allows revision of an order that is erroneous and prejudicial to the interests of the revenue. The Tribunal affirmed that an order can be considered erroneous if it is based on incorrect facts, incorrect application of law, or non-application of mind. It was noted that the Assessing Officer (AO) had accepted the assessee's claims without proper scrutiny, making the order erroneous and prejudicial to the revenue. The Tribunal cited the Supreme Court's rulings in Malabar Industrial Co. Ltd. v. CIT and other cases to support this view, emphasizing that the AO must act fairly and investigate claims thoroughly.

2. Classification of income from the sale of shares and mutual funds as business income or capital gains:
The Tribunal analyzed the nature of the assessee's activities, including the volume, frequency, and regularity of transactions in shares and mutual funds. The CIT had concluded that the assessee's activities constituted a business rather than mere investment, given the substantial scale of transactions, day-trading activities, and the primary objective of earning profits rather than dividends. The Tribunal agreed with the CIT's findings, noting that the assessee's activities showed characteristics of a business, such as high volumes of transactions and repetitive buying and selling of the same shares. The Tribunal concluded that the income from these activities should be treated as business income.

3. Consistency in the treatment of income from previous years:
The assessee argued that its activities had been consistently treated as investment in previous years, and the principle of consistency should apply. However, the Tribunal clarified that each assessment year is independent, and the principle of res judicata does not apply to income tax matters. The Tribunal emphasized that if there is a change in facts and circumstances, a different view may be warranted. The Tribunal found no merit in the assessee's argument for consistency, given the substantial evidence of business activity in the year under appeal.

4. Adequacy of the Assessing Officer's examination of the assessee's claims:
The Tribunal noted that the AO had failed to scrutinize the nature of the assessee's activities adequately. The AO had accepted the assessee's claims without proper inquiry or verification, making the assessment order arbitrary and non-speaking. The Tribunal stressed that the AO must investigate claims thoroughly and not merely accept the assessee's statements. The lack of proper examination by the AO justified the CIT's invocation of Section 263 to revise the assessment order.

Conclusion:
The Tribunal upheld the CIT's order under Section 263, directing the AO to treat the income from the sale of shares and mutual funds as business income. The Tribunal dismissed the assessee's appeal and the related stay application, affirming that the AO's failure to scrutinize the claims adequately rendered the original assessment order erroneous and prejudicial to the revenue. The Tribunal emphasized the importance of thorough investigation and proper application of law in income tax assessments.

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