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2013 (6) TMI 173 - HC - Income TaxExemption under Sec.10 (38) on Long Term Capital Gains from the sale of quoted shares and equity oriented Mutual Funds - Income derived from sale of shares - capital gain v/s income from business or profession - assessee is a private limited company registered as NBFC initially was a franchisee of M/s Coca-Cola Company was taken over by the said Company as a going concern and the assessee received Rs.56.23 Crores as consideration/compensation which was invested in stages in shares of Companies quoted on the Stock Exchange and in units of Mutual Funds - Jurisdiction power u/s 263 by CIT(A) - Held that - The contention of the Revenue that there are no reasons given by the AO about the nature of activity of the assessee cannot be accepted because a query was raised by him in the course of the assessment proceedings and was replied by the assessee. Obviously, he was satisfied with the explanation of the assessee and therefore did not think that the issue needs to be specifically mentioned. It is settled law that the Assessing Officer in the assessment order is not required to give detailed reasons and once it is clear that there was application of mind by an enquiry, the respondent, merely because he entertains a different opinion in the matter, cannot invoke his powers u/s. 263. It is therefore not correct to say that there was no proper enquiry by the AO. The decision in P.V.S Raju (2011 (7) TMI 818 - Andhra Pradesh High Court) does not apply to the present case because in the said case, the assessee had accepted that it was a trader in the earlier years but in the assessment years 2005-06 and 2006-07, in view of the amendment to S.111-A brought into effect from 01.04.2005, the assessees sought to change their stand contending that they were investors in order to claim the benefit of S.111-A. It was also found as a fact that all the shares were held by the assessee for less than two months and some shares were sold even before the purchase indicating the mind of the assessee that they were not intending to hold the same as investment. On those facts it was rightly held that the assessee was only doing trading activity and was not an investor. Moreover it was not a case u/s.263 to which totally different parameters would apply. AO had not only taken a possible view but in the circumstances the only view possible and therefore his order could not have been termed as erroneous or prejudicial to the revenue warranting exercise of revisional jurisdiction u/s.263 of the Act by the respondent. The fact that the Revenue from A.Y 1998-99 had accepted that the assessee is an investor and the shares and mutual funds are investments and not stock-in-trade (except for A.Y 2006-07), the fact that 99 % of the shares were held for considerable time after their purchase before their sale; that the action of the assessee in undertaking large volume of transactions in March,2006 was because of the change in law sought to be made effective from 01.04.2006 with regard to treatment of LTCG u/s.115JB for book profit tax and was not a colourable action and was permissible under the law, lead to an irrefutable conclusion that the assessee was only an investor and the Assessing Officer had rightly taxed his income under the head Capital Gains . The respondent had no different or new material to take different view from the one taken by the AO and the reasons given by him to reopen the assessment and sustain the revision are totally unacceptable. The respondent is not vested any power u/s.263 to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. The Tribunal had grossly erred in agreeing with the order of the respondent and in upholding it on grounds which have not been found in the show cause notice of the respondent, that too without considering the several issues of fact and law raised by the assessee in his written submissions and grounds of appeal. Both the respondent and the Tribunal have based their orders on preconceived notions, conjunctures and surmises, manifestly misread the facts and twisted them to justify their conclusions. Thus the order of the AO dated 16.12.2008 for the A.Y.2006-07 accepting the assessee to be an Investor and holding that the income chargeable from sale of shares and units of Mutual Funds was chargeable under the head Capital Gains is restored.
Issues Involved:
1. Jurisdiction of the Commissioner under Section 263 of the Income Tax Act, 1961. 2. Nature of the assessee's activity: Whether it is an investor or a trader in shares. 3. Validity of the revised show cause notice issued by the Commissioner. 4. Principle of consistency in tax assessments. 5. Tribunal's upholding of the Commissioner's order on different grounds. 6. Merits of the case regarding the classification of income from shares as "Capital Gains" or "Business Income". Issue-wise Detailed Analysis: 1. Jurisdiction of the Commissioner under Section 263 of the Income Tax Act, 1961: The court noted that under Section 263, the Commissioner must satisfy two conditions: the order of the Assessing Officer (AO) must be erroneous and prejudicial to the interests of the Revenue. The Supreme Court in Malabar Industrial Co. Ltd. v. CIT and Max India Ltd. v. CIT held that merely because the Commissioner disagrees with the AO's view does not make the order erroneous or prejudicial unless it is unsustainable in law. The Delhi High Court in Vikas Polymers and Sunbeam Auto Ltd. ruled that if the AO has made inquiries and applied his mind, the order cannot be revised under Section 263 merely because the Commissioner has a different opinion. 2. Nature of the assessee's activity: Whether it is an investor or a trader in shares: The court observed that the assessee had retained shares for periods ranging from 11 months to 5 years, indicating investment rather than trading. The Commissioner and Tribunal incorrectly assumed frequent buying and selling within the same year. The court highlighted that the assessee's substantial dividend income, lack of borrowing, and the long-term holding of shares supported the conclusion that the assessee was an investor. 3. Validity of the revised show cause notice issued by the Commissioner: The court noted that the revised show cause notice raised a new issue of whether the assessee was an investor or trader, which was not part of the original notice. The assessee's challenge to the revised notice was valid as it was based on new material not part of the original record. The court held that the Commissioner could not change the grounds for revision midway through the proceedings. 4. Principle of consistency in tax assessments: The court emphasized the principle of consistency, citing Radhasoami Satsang v. CIT and CIT v. Escort Ltd., which held that the Revenue cannot change its view on a fundamental aspect of a transaction unless there is a change in circumstances. The court noted that the Revenue had consistently accepted the assessee as an investor in previous and subsequent years, and there was no material change to justify a different view for the assessment year 2006-07. 5. Tribunal's upholding of the Commissioner's order on different grounds: The court criticized the Tribunal for upholding the Commissioner's order on grounds not mentioned in the show cause notice or the Commissioner's order. Citing Jagadhri Electricity Supply and Industrial Co. and Howrah Flour Mills Ltd., the court held that the Tribunal cannot uphold the Commissioner's order on new grounds not stated in the original notice or order. 6. Merits of the case regarding the classification of income from shares as "Capital Gains" or "Business Income": The court found that the AO had made inquiries and applied his mind to the nature of the assessee's activity, concluding that the income should be taxed under "Capital Gains." The court noted that the assessee's transactions in March 2006 were due to changes in tax laws effective from April 2006 and were legitimate tax planning. The court rejected the Commissioner's and Tribunal's conclusions that the assessee was trading in shares, noting the substantial dividend income and long-term holding of shares. Conclusion: The court set aside the order of the Commissioner dated 31.03.2011 and the Tribunal's order dated 05.08.2011, restoring the AO's order dated 16.12.2008 for the assessment year 2006-07. The court emphasized the importance of consistency in tax assessments and the need for the Commissioner to provide adequate reasons for invoking Section 263.
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