2012 (2) TMI 608 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction u/s 263 of the IT Act.
2. Treatment of Income from Capital Gains as Business Income.
3. Adequacy of Inquiry by the Assessing Officer (AO).

Summary:

1. Jurisdiction u/s 263 of the IT Act:
The assessee contested the jurisdiction of the learned Commissioner of Income Tax (CIT) in assuming powers u/s 263 of the IT Act, arguing that the assessment order was neither erroneous nor prejudicial to the interest of the revenue. The CIT observed that the AO accepted the income under "Short Term Capital Gain" without adequate inquiry, making the order erroneous and prejudicial to the revenue. The Tribunal upheld the CIT's jurisdiction, noting that the AO's assessment lacked detailed investigation and reasoning, thus justifying the invocation of section 263.

2. Treatment of Income from Capital Gains as Business Income:
The CIT directed the AO to reclassify the income from "Short Term Capital Gain" to "Profits & Gains of Business or Profession," based on the nature of the assessee's transactions in shares and mutual funds. The assessee argued that the shares were held as investments, not stock in trade. However, the Tribunal supported the CIT's view, emphasizing the need for proper verification of the nature and frequency of transactions to determine the correct classification of income.

3. Adequacy of Inquiry by the Assessing Officer (AO):
The Tribunal noted that the AO's assessment order was cryptic and lacked discussion on the nature of the capital gains. The AO did not conduct a thorough inquiry or provide reasons for accepting the assessee's claim. The Tribunal highlighted that the AO is expected to investigate and ascertain the correctness of the return filed. The CIT's action to invoke section 263 was deemed appropriate due to the lack of adequate inquiry by the AO.

Conclusion:
The Tribunal upheld the CIT's order u/s 263, dismissing the assessee's appeal. The CIT was justified in revising the assessment order due to the AO's failure to conduct a proper inquiry into the nature of the income, thereby making the original assessment erroneous and prejudicial to the interest of the revenue.