2010 (1) TMI 900 - AT - Income Tax

Power of Commissioner of Income Tax under section 263 of the Income Tax Act - sale and purchase of shares - revenue or capital nature - capital gain or business profit - held that - Considering the totality of the facts of the case, respectfully following the decision of the Tribunal in assessee s own case for A.Y. 2002-03 and 2003-04 and further considering the fact that the order of the Assessing Officer is passed on the basis of the decision of the Tribunal for A.Y. 2002-03, we are of the considered opinion that under the facts and circumstances of this case, the CIT was not justified in assuming the jurisdiction u/s. 263 of the Act.

Summary

Issues Involved:
1. Whether the assessee's transactions in shares should be treated as 'business income' or 'short-term capital gain'.
2. Whether the order passed by the Assessing Officer (A.O.) was erroneous and prejudicial to the interest of the revenue.
3. The applicability of the principle of res judicata in income-tax proceedings.
4. The adequacy of the enquiry conducted by the A.O. while passing the assessment order.

Issue-Wise Detailed Analysis:

1. Whether the assessee's transactions in shares should be treated as 'business income' or 'short-term capital gain':

The CIT observed that the assessee engaged in a high volume, frequency, and consistency of share transactions, suggesting a business activity rather than investment. The CIT noted that the assessee had borrowed funds for these activities, which further indicated a business nature. Consequently, the CIT issued a notice proposing to treat the short-term capital gain of Rs.3,89,30,516 as business income.

The assessee contended that the accumulated income was invested in shares, leading to increased volume and frequency of transactions. The loan, mostly squared off during the year, was used for advancing loans and earning interest, not for trading shares. The assessee maintained that similar transactions had consistently been assessed as capital gains in the past, and the department should not change its stance when the facts remain unchanged.

2. Whether the order passed by the A.O. was erroneous and prejudicial to the interest of the revenue:

The CIT argued that the A.O. did not conduct a proper enquiry to determine the true nature of the transactions. The CIT relied on the decision of the Hon'ble Allahabad High Court in CIT vs. Bhagwan Das, asserting that an order passed without application of mind is erroneous and prejudicial to the revenue's interest. The CIT set aside the A.O.'s order, directing a fresh assessment with proper enquiry.

The assessee countered that the A.O. had made proper enquiries, as evidenced by the detailed submissions and responses to queries. The assessee cited the Hon'ble Bombay High Court's decision in CIT vs. Gabriel (I) Ltd., which held that the CIT cannot revise an order merely due to a difference in opinion. The Hon'ble Delhi High Court in CIT vs. Sunbeam Auto Ltd. distinguished between 'lack of enquiry' and 'inadequate enquiry,' stating that even inadequate enquiry does not justify revision under section 263 if there was some application of mind.

3. The applicability of the principle of res judicata in income-tax proceedings:

The assessee argued that the principle of res judicata should apply as similar facts had been assessed under capital gains in previous years. The CIT dismissed this argument, stating that the principle does not apply to income-tax proceedings, and each assessment year must be considered independently.

The assessee referred to the Full Bench decision of the Hon'ble Bombay High Court in CIT vs. Shree Nirmal Commercial Ltd., which held that revising an earlier decision could lead to injustice, and the department should not change its stance without a valid reason. The Tribunal's previous decisions in the assessee's own case for A.Y. 2002-03 and 2003-04, which quashed similar 263 orders, were also cited.

4. The adequacy of the enquiry conducted by the A.O. while passing the assessment order:

The Tribunal found that the A.O. had indeed made proper enquiries, as evidenced by the detailed submissions and responses from the assessee. The Tribunal noted that the A.O. had applied his mind and passed the order based on the facts and circumstances of the case. The Tribunal referred to the Hon'ble Delhi High Court's decision in CIT vs. Sunbeam (I) Ltd., which emphasized that the A.O. is not required to give detailed reasons for each item of deduction, and the presence of some enquiry suffices.

Conclusion:

Considering the totality of the facts, the Tribunal concluded that the CIT was not justified in assuming jurisdiction under section 263 of the Act. The Tribunal quashed the CIT's order and allowed the appeal filed by the assessee, thereby treating the transactions as short-term capital gains and not as business income.