2013 (2) TMI 290 - HC - Income Tax

Reopening of assessment - AO alleged that complete facts related to investment activity in India and SEBI guidelines have not been disclosed by the assessee - income on sale of shares is chargeable to tax under the head capital gains and not business income - Tribunal quashed reassessment orders - Held that - Re-opening was issued on 31st March 2010 which is beyond a period of four years from the end of the relevant assessment year 2003-2004 and the reasons recorded for re-opening the assessment does not allege that there has been any failure on the part of the respondent-assessee to disclose fully and truly all material facts necessary for the purpose of assessment. Therefore, the notice is not sustainable. Set off of business loss against Income from other sources where income from business is not liable to tax in India in the absence of PE in India - held that - Even on merits the ruling of Authority for Advance Ruling in the assessee s case would not be over-ruled by subsequent decision of the Authority for Advance Ruling in the case of another assessee. Consequently, initiation of action under Section 263 for assessment years 2004-2005 and 2005-2006 was quashed on the ground that the assessment order could not be said to be prejudicial to the Revenue or erroneous as the assessing officer was merely following a binding ruling of the Authority for Advance Ruling. ITAT relies upon the aforesaid facts and holds that the re-opening of assessment is not justified, as the finding of the Authority for Advance Ruling in the assessee s own case will continue to govern the assessee s assessments. This is particularly so as there has been no change in the law - in favour of assessee. Decision in The Prudential Assurance Company Ltd. Versus 1. The Director of Income-tax (International Taxation) 2. The Union of India (2010 (4) TMI 237 - BOMBAY HIGH COURT) followed.

Summary

Issues:
1. Validity of re-opening assessment under Sections 147 and 148 of the Income Tax Act, 1961.
2. Taxability of income from sale of shares under "capital gains" or "business income".
3. Application of Authority for Advance Ruling's decision on the tax treatment of portfolio investments in India.
4. Interpretation of the law regarding disclosure of material facts for assessment purposes.

Analysis:
1. The appeal challenged the order of the Income Tax Appellate Tribunal (Tribunal) regarding the initiation of reassessment for the assessment year 2003-2004 under Sections 147 and 148 of the Income Tax Act, 1961. The assessing officer sought to re-open the assessment based on a subsequent ruling by the Authority for Advance Ruling, contending that the income from the sale of shares should be taxed under "capital gains" instead of "business income," leading to alleged income escapement.

2. The respondent, a foreign company, had claimed a loss on the sale of shares as part of its business profits. However, the assessing officer re-assessed the income as chargeable under "capital gains" instead of "business income." The Tribunal set aside the re-assessment order, citing a previous case where a similar re-assessment under Section 263 of the Act was quashed by the High Court, emphasizing that the Authority for Advance Ruling's decision in the respondent's case should govern the assessments.

3. The Tribunal found that the notice for re-opening the assessment was issued beyond the statutory four-year period and lacked allegations of failure to disclose material facts. Moreover, the Court's previous decision in the respondent's case upheld the Authority for Advance Ruling's ruling, indicating that subsequent decisions by the Authority did not overrule the initial ruling. As there was no change in the law, the Tribunal concluded that the re-opening of the assessment was unjustified.

4. Ultimately, the High Court upheld the Tribunal's decision, emphasizing that the earlier ruling in the respondent's case regarding the tax treatment of portfolio investments should apply. The Court found no fault with the Tribunal's order and dismissed the appeal by the Revenue, highlighting the consistency in the application of the law and the binding nature of the Authority for Advance Ruling's decision in the respondent's assessments.