2011 (2) TMI 579 - HC - Income Tax

Revision - Allowance or disallowance of the capital loss on transactions relating to purchase and sale of units issued by UTI - Held that - the assessee had been engaged in these transactions in the preceding assessment years, CIT could have had no occasion to take recourse to revisional powers under Section 263 of the Act on the fundamental aspects of the transactions in issue on which a view had been taken and, not shown to us as having been challenged. The argument of Revenue that the CIT only sought to treat the price differential as the cost incurred by the assessee towards retention of legal ownership in the units; is premised on the transactions being different from that what the assessee claimed them to be in the earlier assessment year a position which decidedly remained unchallenged. Such an approach is against the principle of consistency. The department has not shown any special circumstances warranting deviation from the said principle. - Decided in favor of assessee.

Issues Involved:

1. Validity of the Tribunal's decision to cancel the CIT's order under Section 263 of the Income Tax Act.
2. Whether the transactions involving purchase and sale of Unit Trust of India (Unit-64) units were speculative or genuine investment transactions.
3. Whether the principle of consistency applies to income tax assessments over different years.
4. Whether the CIT's order was based on grounds different from those in the show cause notice.
5. Applicability of res judicata in income tax proceedings.

Detailed Analysis:

1. Validity of the Tribunal's Decision to Cancel the CIT's Order under Section 263 of the Income Tax Act:

The Tribunal set aside the CIT's order passed under Section 263, which had disallowed the assessee's claim of capital loss on Unit-64 transactions and directed verification of related expenses. The High Court upheld the Tribunal's decision, emphasizing that for invoking Section 263, the CIT's order must be both erroneous and prejudicial to the revenue. The Court noted that the assessee had engaged in similar transactions in previous years, and the department had accepted these transactions without challenge. The CIT's order was based on subsequent assessment year findings, which were not available at the time of the original assessment, making the reopening of the assessment inappropriate.

2. Whether the Transactions Involving Purchase and Sale of Unit Trust of India (Unit-64) Units Were Speculative or Genuine Investment Transactions:

The CIT had characterized the transactions as speculative and not genuine investments, asserting that the transactions were used to raise finance and the price differential was akin to interest. However, the Tribunal found no evidence to support that the transactions were speculative. The High Court agreed, noting that the transactions involved actual physical delivery of units and executed transfer deeds, with payments made by cheque. The Court emphasized that the department had accepted the nature of these transactions in previous years, and there was no basis for changing this view in the relevant assessment year without new evidence.

3. Whether the Principle of Consistency Applies to Income Tax Assessments Over Different Years:

The Court highlighted the principle of consistency, stating that if a fundamental aspect of a transaction has been accepted in previous years, the department cannot change its stance in subsequent years without demonstrating a change in circumstances. The Court cited several judgments, including *Radhasoami Satsang vs CIT* and *CIT vs Gopal Purohit*, to support this principle. The Court concluded that the department had not shown any new circumstances to justify a different view in the relevant assessment year.

4. Whether the CIT's Order Was Based on Grounds Different from Those in the Show Cause Notice:

The Tribunal noted that the CIT's order was based on grounds not explicitly mentioned in the show cause notice, such as the adjustment of expenditure incurred on retaining legal ownership against dividend income. The High Court agreed, stating that the CIT's order shifted the focus from the original grounds of the show cause notice, which questioned the nature of the transactions as trading rather than investment. This shift in grounds without proper notice to the assessee was deemed inappropriate.

5. Applicability of Res Judicata in Income Tax Proceedings:

The Court acknowledged that while res judicata does not strictly apply to income tax proceedings, the principle of consistency should be upheld. The Court cited the Supreme Court's observations in *Radhasoami Satsang vs CIT* and *Bharat Sanchar Nigam Ltd. vs UOI*, which emphasized that a consistent view should be maintained unless there are new grounds or material changes in circumstances. The Court found no such changes in the present case, reinforcing the need for consistency in the department's approach.

Conclusion:

The High Court dismissed the department's appeal, answering the question of law in favor of the assessee. The Court upheld the Tribunal's decision to cancel the CIT's order under Section 263, emphasizing the principles of consistency and the need for proper grounds and notice in reassessment proceedings. The Court found that the transactions were genuine investments, not speculative, and that the CIT's order was based on an inappropriate shift in grounds.

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