2012 (10) TMI 1092 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessment order passed u/s 143(3) of the Income Tax Act for A.Y. 2006-07 is erroneous and prejudicial to the interest of the Revenue.
2. Whether the Short Term Capital Gain (STCG) declared by the assessee should be assessed under the head 'profit and gains of business and profession' or 'capital gain'.

Summary:

Issue 1: Erroneous and Prejudicial Assessment Order
The assessee challenged the order passed u/s 263 by the Ld CIT(A)-II, Pune, which held that the assessment order u/s 143(3) for A.Y. 2006-07 was erroneous and prejudicial to the interest of the Revenue. The Ld CIT observed that the Assessing Officer (AO) did not conduct any enquiry regarding the proper head of income under which the profit from the sale of shares should be taxed, nor did he verify whether the shares were held as investments or stock-in-trade. The Ld CIT considered the AO's failure to investigate as a lack of enquiry, rendering the assessment order erroneous and prejudicial to the Revenue's interest.

Issue 2: Classification of Short Term Capital Gain
The core issue was whether the STCG of Rs. 65,33,174/- declared by the assessee should be assessed under 'profit and gains of business and profession' or 'capital gain'. The Ld CIT argued that the AO did not properly examine the nature of the transactions and the utilization of Portfolio Management Services (PMS), which indicated a systematic and organized business activity rather than an investment activity. The Ld CIT directed the AO to reassess the STCG under the appropriate head.

Tribunal's Findings:
The Tribunal found that the AO had indeed made enquiries regarding the STCG during the assessment proceedings, as evidenced by the order sheet entries and the assessee's responses. The Tribunal noted that the AO had considered the explanations provided by the assessee and concluded that the gains should be assessed under 'capital gain'. The Tribunal emphasized the distinction between 'lack of enquiry' and 'inadequate enquiry', stating that the AO's enquiries, though possibly inadequate, did not constitute a lack of enquiry. Therefore, the Ld CIT's invocation of u/s 263 was not justified.

Conclusion:
The Tribunal held that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue, as the AO had made necessary enquiries and applied his mind to the issue. Consequently, the Tribunal cancelled the order passed u/s 263 by the Ld CIT and allowed the assessee's appeal.

Result:
The assessee's appeal was allowed, and the order u/s 263 was cancelled. The judgment was pronounced in the open Court on 19th October 2012.