2013 (2) TMI 352 - AT - Income Tax

Jurisdiction u/s 263 by CIT(A) - directing AO to consider the issue of loss in derivative trading - AO treated the entire short term capital gain as business income and accepted the long term capital gain as such - assessee is dealing in shares and securities maintains dual portfolios, one in trading and another for capital investment - Held that - As in the assessment years 1995-96 the capital gain was assessed as business profit by the AO as upheld by CIT(A) also confirmed by Tribunal & Hon ble High Court too. In the assessment years 1996-97, 2001-02, 2002-03, AO himself has accepted the claimed capital gain / loss in the assessment framed u/s 147(3). In assessment year 2003-04 the AO treated capital loss as speculative business loss by applying provisions of Explanation to section 73. The Tribunal gave a categorical finding that assessee is doing both the business as well as investment activities in shares uphelding the claim of capital loss and held that the provisions of Explanation to section 73 cannot be applied to capital loss. In the assessment year 2005-06 the AO treated the short term capital gain as business profit. The CIT(A) allowed the assessee s appeal upheld the short term capital gain also upheld by Tribunal. In the assessment year 2006-07 long term capital gain has been accepted by the AO. Only short term capital gain was disputed by the AO. The CIT(A) allowed assessee s appeal. And the revenue went in appeal before the Tribunal which has been dismissed. In the assessment year under consideration the material fact also remained that the AO accepted the claimed long term capital gain in the order framed u/s 143(3). The CIT(A) keeping in view the past history of the case has also accepted the assessee s claim of short term capital gain. The revenue in its appeal before the Tribunal has not raised any ground on the issue of capital gain. Thus as decided in the case of CIT vs. M/s. Escorts Ltd. (2011 (2) TMI 579 - DELHI HIGH COURT) where the nature of transactions have been accepted in the past, the CIT could have had no occasion to take recourse to revisionary powers u/s 263 on the fundamental aspect of the transactions in issue on which a view has been taken in earlier years. As per the past history of the case and in accordance with the principle of consistency, we are of the view that the only view which the AO could have taken was to accept the long term capital gain as such - thus assessment order in question was not erroneous as the AO has accepted the claimed long term capital gain and loss in derivative trading after conducting inquiry thereto and thus the assessment order cannot be held erroneous and thus also prejudicial to the interest of revenue - set aside the revisionary order - in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction under section 263 of the Income Tax Act.
2. Assessment order's validity and its alleged error.
3. Directions issued under section 263.
4. Application of mind by the CIT.
5. Long term capital gain assessment.
6. Loss in derivative trading assessment.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act:
The assessee challenged the revisional order under section 263, arguing that the Commissioner of Income Tax (CIT) wrongly assumed jurisdiction. The Tribunal found that the CIT's invocation of section 263 was not justified as the Assessing Officer (AO) had made thorough inquiries during the assessment proceedings. The Tribunal emphasized that the CIT could not invoke section 263 merely because he had a different view from the AO.

2. Assessment Order's Validity and Its Alleged Error:
The CIT set aside the assessment order, claiming it was erroneous and prejudicial to the revenue's interest. The Tribunal noted that the AO had conducted detailed inquiries regarding the long term capital gain and loss in derivative trading. The AO's acceptance of the assessee's claims was based on substantial evidence provided during the assessment proceedings. Therefore, the assessment order was not erroneous.

3. Directions Issued Under Section 263:
The CIT's directions under section 263 were deemed erroneous, vague, and untenable by the assessee. The Tribunal agreed, noting that the AO had already addressed the issues raised by the CIT. The Tribunal highlighted that the AO had accepted the long term capital gain and loss in derivative trading after conducting necessary inquiries, making the CIT's directions redundant.

4. Application of Mind by the CIT:
The assessee argued that the CIT's order was passed without proper application of mind. The Tribunal found merit in this argument, stating that the CIT overlooked the detailed inquiries and evidence considered by the AO. The Tribunal emphasized that the CIT's differing view did not justify invoking section 263.

5. Long Term Capital Gain Assessment:
The CIT questioned the AO's acceptance of the long term capital gain without sufficient inquiries. The Tribunal found that the AO had indeed made thorough inquiries and accepted the gains based on substantial evidence. The Tribunal noted that the assessee's long term capital gains had been consistently accepted in previous and subsequent assessment years, reinforcing the AO's decision.

6. Loss in Derivative Trading Assessment:
The CIT directed the AO to reconsider the loss in derivative trading, alleging it constituted speculative transactions. The Tribunal disagreed, citing express provisions of clause (d) of proviso to subsection (5) of section 43 and relevant notifications. The Tribunal noted that the AO had raised queries and accepted the losses based on the assessee's satisfactory responses. The Tribunal concluded that the AO's decision was not erroneous.

Conclusion:
The Tribunal set aside the CIT's revisional order, restoring the original assessment order. The Tribunal emphasized that the AO had conducted necessary inquiries and accepted the assessee's claims based on substantial evidence. The CIT's differing view did not justify invoking section 263, and the assessment order was neither erroneous nor prejudicial to the revenue's interest. The appeal was allowed, and the assessment order was restored on the issues raised in the revisional order.