2011 (10) TMI 494 - AT - Income Tax

Revision u/s 263 - business loss which comprised of professional charges, bank charges, etc. ought not have been allowed since it did not relate to any business activities - Held that - No doubt, assessee might have shown the shares held in BPL Communications Ltd. under the head Investments however, nomenclature given in the balance sheet alone will not be sufficient to come to a conclusion that the shares were held as investments. In the previous year relevant to assessment year 2005-06, not only had it sold shares acquired during assessment year 2004-05, but had also made further acquisition of 49,97,69,241 shares of BPL Communications Ltd. for a sum of Rs. 7 Crores. These shares were sold during previous year relevant to impugned assessment year viz. assessment year 2006-07. Hence, the claim of assessee that it did not indulge in trading in shares does not hold any water. The shares of BPL Communications Ltd. were acquired based on an agreement with one M/s Suryasamudra Finance and Investments Pvt. Ltd. and the said agreement dated 1.7.2004 though produced before Assessing Officer, was never examined by him. Said agreement was filed without the annexures relevant thereto and this finding of CIT has not been rebutted by the assessee. Conclusion of CIT that through the said agreement, not only had the assessee acquired shares of BPL Communications Ltd. but had also taken over receivables and liabilities of M/s Suryasamudra Finance and Investments Pvt. Ltd. has not been disputed by the assessee. There has been a total non-examination of the issue as to whether the assessee was indulging in any business activity by trading in shares or whether it was engaged in a business of buying and selling investment. An order without application of mind is definitely prejudicial to the interests of the revenue. CIT was justified in invoking powers vested in him u/s 263 - Decided in favor of Revenue.

Summary

Issues Involved:
1. Classification of surplus from the sale of shares as Long Term Capital Gain or Business Income.
2. Disallowance of professional charges and bank charges.

Issue-wise Detailed Analysis:

1. Classification of Surplus from Sale of Shares:
The primary issue in this case was whether the surplus arising from the sale of shares in BPL Communications Ltd. should be classified under "capital gains" or "profits and gains from business/profession." The assessee, a company engaged in cable network services, had declared this surplus as Long Term Capital Gain in its return. The Assessing Officer (A.O.) accepted this classification during the assessment completed on 30.12.2008.

However, the Commissioner of Income Tax (CIT) issued a notice to the assessee on 30.12.2009, questioning this classification. The CIT argued that the shares were purchased as part of a consolidated business transaction, including receivables and liabilities from M/s Suryasamudra Finance and Investments Pvt. Ltd., and thus should be considered as business income. The CIT observed that the assessee had been trading in unquoted shares since the assessment year 2004-05 and that such trading was an ancillary object of the company.

The assessee contended that the shares were held as investments, not stock-in-trade, and there was no frequency or regularity in the sale of shares to constitute a trading activity. The assessee relied on Circular No. 4/2007 of CBDT to support its classification under "Investments."

The CIT, however, was not convinced, noting that the shares were part of a consolidated transaction and no dividend income was derived from them, indicating they were not held as investments. The CIT concluded that the A.O. had erroneously accepted the surplus as Long Term Capital Gain without proper examination of the agreement and the nature of the transaction.

2. Disallowance of Professional Charges and Bank Charges:
The second issue was the disallowance of professional charges and bank charges. The A.O. had disallowed a portion of the professional charges for non-deduction of tax at source under Section 40(a)(iva) of the Income-tax Act. The CIT argued that the A.O. did not properly examine the nature of the services rendered by J.P. Morgan and Stanley Pvt. Ltd., which raised the bills for professional charges. The CIT found that the A.O. had not scrutinized the evidence related to these charges adequately.

The assessee argued that the professional charges were incurred in connection with the transfer of shares and should be allowed as a deduction, irrespective of the head under which the surplus was classified. The assessee also claimed that the A.O. had already disallowed a part of the charges, indicating some level of scrutiny.

Tribunal's Findings:
The Tribunal reviewed the orders and rival contentions. It noted that the A.O.'s assessment order lacked a detailed examination of the facts and relied on the nomenclature given in the balance sheet without scrutinizing the underlying transactions. The Tribunal agreed with the CIT that there was a non-application of mind by the A.O., which rendered the assessment order erroneous and prejudicial to the interests of the revenue.

The Tribunal upheld the CIT's decision to invoke Section 263 of the Act, directing the A.O. to re-examine the classification of the surplus and the nature of the professional charges, ensuring a thorough investigation and proper application of the law.

Conclusion:
The appeal filed by the assessee was dismissed, affirming the CIT's order to reassess the classification of the surplus from the sale of shares and the disallowance of professional charges and bank charges. The Tribunal emphasized the necessity of a detailed and reasoned examination by the A.O. to avoid prejudicial errors in the assessment process.