2014 (5) TMI 1060 - AT - Income Tax

Revision u/s 263 - CIT directed the AO to re-examine whether share profits disclosed by the assessee as short-term capital gain fell under the head Business income ? - Held that - In the present case as we have already pointed out that the assessee furnished the details relating to the shares transactions, disclosed the profit on the basis of books of account wherein all the transactions were entered. The assessee was maintaining the shares transactions with three brokers under two portfolios i.e. investment portfolio and trading portfolio. The assessee disclosed short-term capital gain of ₹ 27,42,135 on the sale of shares which were held as an investment and also declared profit of ₹ 2,23,199 as business income on the day trading of shares. The assessee also paid security transaction tax. The AO during the course of assessment proceedings, asked the assessee to furnish the details relating to the sale transactions and the assessee furnished the same before the AO as well as before the learned CIT. So, it cannot be said that the assessee had not furnished the details relating to the shares transactions or the AO had not examined those details while framing the assessment under s. 143(3) of the Act. We therefore, by considering the totality of the facts of the present case, are of the view that the learned CIT was not justified in treating the assessment order passed by the AO under s. 143(3) of the Act as erroneous and prejudicial to the interest of the Revenue. In that view of the matter, the impugned order is set aside and the assessment order passed by the AO is restored. - Decided in favour of assessee

Issues Involved:
1. Justification of the order under Section 263 of the IT Act, 1961.
2. Adequacy of reasoning provided by the CIT for initiating proceedings under Section 263.
3. Basis of the CIT's order being grounded in suspicion and doubts.
4. Adequate opportunity for the assessee to explain their side.
5. Assessment order's accuracy and its prejudicial impact on the Revenue.
6. Classification of short-term capital gain as business income.
7. Miscellaneous grounds including the right to amend grounds of appeal.

Issue-wise Detailed Analysis:

1. Justification of the Order under Section 263 of the IT Act, 1961:
The primary grievance of the assessee relates to the initiation of proceedings under Section 263 by the CIT. The assessee contends that the order passed by the CIT is not justified both on facts and in law. The CIT exercised revisionary powers under Section 263, observing that the assessee disclosed short-term capital gain and claimed set off of brought forward short-term capital loss. The CIT noted extensive share transactions and questioned the classification of income as short-term capital gain instead of business income.

2. Adequacy of Reasoning Provided by the CIT for Initiating Proceedings under Section 263:
The CIT did not provide a clear method or criteria for distinguishing between business income and capital gain from share transactions. The CIT's observations included the lack of a clear identification method for transactions considered as business income versus capital gain, the high frequency and short holding period of shares, and the small amount of dividend income disclosed. The CIT concluded that the AO had not examined the basis for classifying income under different heads, thus rendering the assessment order erroneous.

3. Basis of the CIT's Order Being Grounded in Suspicion and Doubts:
The assessee argued that the CIT's order was based on mere suspicion and doubts, without any material evidence to suggest that the AO's order was erroneous and prejudicial to the interest of the Revenue. The assessee maintained that the AO had examined all relevant details, including books of account and contract notes, before accepting the returned income.

4. Adequate Opportunity for the Assessee to Explain Their Side:
The assessee contended that they were not given adequate opportunity to explain their side before the CIT passed the order under Section 263. The assessee had submitted detailed explanations and evidence during the assessment proceedings, which were duly examined by the AO.

5. Assessment Order's Accuracy and Its Prejudicial Impact on the Revenue:
The CIT's direction to the AO was to re-examine whether the short-term capital gain should be treated as business income. The CIT believed that the AO had not made proper inquiries or applied a justifiable method for classifying income. However, the Tribunal noted that the AO had examined the issue thoroughly during the assessment proceedings and accepted the assessee's classification based on detailed verification of records.

6. Classification of Short-term Capital Gain as Business Income:
The CIT questioned the classification of short-term capital gain as business income, citing frequent and short-term transactions. The assessee argued that they maintained separate portfolios for investment and trading, and the AO had accepted this practice. The Tribunal observed that the AO had examined the assessee's records and found the classification justified, thus the CIT's direction lacked a proper basis.

7. Miscellaneous Grounds Including the Right to Amend Grounds of Appeal:
The assessee sought the right to add, alter, amend, modify, or withdraw any grounds of appeal before or at the time of hearing. The Tribunal did not specifically address this issue, focusing instead on the substantive grounds related to the Section 263 proceedings.

Conclusion:
The Tribunal concluded that the CIT was not justified in treating the assessment order as erroneous and prejudicial to the interest of the Revenue. The AO had examined all relevant details and made a reasoned decision. The Tribunal set aside the CIT's order and restored the assessment order passed by the AO. The appeal of the assessee was allowed.

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