2012 (5) TMI 367 - AT - Income Tax

Revision u/s 263 - on the issues regarding assessment of capital gain on mutual funds as business income and the capital contribution received from partner companies as deemed dividend U/S 2(22)(e) of the Act though both the issues are highly debatable and two opinions are possible - The only activity carried on by the assessee during the year under consideration was purchase and sale of mutual funds and securities - It is the claim of the assessee that by modifying clause (2) of the partnership deed the transactions entered into by the assessee become investments made by the assessee and recouping of the same investment - On the issue of applicability of section 2(22)(e) of the Act, it was contended by the Ld DR that the Assessing Officer did not examine this issue at all. It was submitted by him that if the Assessing Officer failed to make enquiry which was required to be made, the Ld CIT can assume jurisdiction u/s 263 - Held that the Ld CIT was justified in coming to the conclusion that the impugned assessment order passed by the Assessing Officer was erroneous and prejudicial to the interest of revenue as the Assessing Officer has failed to take into consideration Circular No.4/2007 dated 15.6.209097 and Instruction No.1527 dated 31st August, 1989 of the CBDT while computing the total income of the assessee - Appeal is rejected Regarding applicability of section 2(22)(e) - Ld CIT in his order u/s 263 of the Act has directed the Assessing Officer to enquire as to whether the partnership deed by which the assessee came into being was a device or not and if it was a device whether section 2(22)(e) of the Act was attracted in assessee s case - Held that Ld. CIT has given specific finding on certain issues even though he has directed the AO to reframe the assessment as per the correct provisions of law and after giving the assessee adequate opportunity of being heard. We are of the considered opinion that he was not justified in giving such specific findings - Decided in favor of the assessee by way of remand to AO

Summary

Issues Involved:
1. Whether the income shown by the assessee should be assessed under the head "business or profession" or "capital gains".
2. Applicability of section 2(22)(e) of the Income Tax Act regarding deemed dividends.

Issue-wise Detailed Analysis:

1. Assessment of Income as Business Income or Capital Gains:

The primary issue was whether the income from mutual funds should be assessed as business income or capital gains. The assessee argued that the income should be considered as capital gains since the investments were made for long-term purposes, and there was no regular business activity of purchase and sale of mutual funds. The assessee relied on various case laws to support this claim. However, the CIT observed that the transactions were substantial and frequent, indicating a business activity. The CIT referred to CBDT Circular No.4/2007 and concluded that the assessment order was erroneous and prejudicial to the interests of revenue, directing the Assessing Officer to reassess the income under the correct provisions of law.

2. Applicability of Section 2(22)(e) - Deemed Dividends:

The second issue was whether the capital contributions received from partner companies should be treated as deemed dividends under section 2(22)(e). The assessee contended that the contributions were not loans or advances but capital contributions for a share in the profits. The CIT, however, noted that the partnership seemed to be a device to transfer accumulated profits of the controlled companies to the partners, who were also shareholders in those companies. The CIT cited the Supreme Court's judgment in CIT v. Mukundray K. Shah, which held that such arrangements could attract section 2(22)(e). The CIT directed the Assessing Officer to reassess the applicability of section 2(22)(e) and whether the partnership was a mere device for tax avoidance.

Tribunal's Observations and Conclusion:

The Tribunal observed that the Assessing Officer did not apply his mind to the complex issues involved and mechanically accepted the assessee's submissions. The Tribunal agreed with the CIT that the assessment order was erroneous and prejudicial to the interests of revenue. However, the Tribunal noted that the CIT should not have given specific findings on certain issues and modified the CIT's order to allow the Assessing Officer to reframe the assessment without being bound by those specific findings.

Final Decision:

The Tribunal upheld the CIT's assumption of jurisdiction under section 263, allowing the appeal to the extent that the Assessing Officer should reframe the assessment as per law, without being bound by specific findings of the CIT. The appeal was allowed to this extent, and the order was pronounced in the open court.