2014 (11) TMI 472 - AT - Income Tax

Jurisdiction of CIT u/s 263 Failure to make inquiry by AO - LTCG and STCG on sale of shares Gifts received by assessee - Held that - AO has not asked any query whatsoever with regard to the capital gains - it cannot be said that some enquiry was done by the AO - The assessment order is also very short and does not contain any reference to such enquiry. Hence, it cannot be said that AO has formed any opinion - the long term and short term capital gains have arisen only in respect of dealing of shares of Mawana Sugar Ltd. - frequency and magnitude of transaction are also important factor to decide whether the transaction is business transaction or investment transaction - the magnitude of share transaction does call for any enquiry on the part of the AO as to whether these are investments transactions or business transactions AO is not only an adjudicator but also an investigator - AO has totally failed to make any enquiry - the invocation of section 263 by the CIT is correct. Creditworthiness of the donor is also to be established by the assessee - No document in this regard has been submitted, nor the AO has made any enquiry - AO has not made any enquiry whatsoever in this regard and the same is not at all reflected in the enquiries made and the entries of the order sheet - CIT is correct in holding that this aspect needs further examination - It can also not be said that AO has adopted one of the two possible views when no enquiry has been made, when the same was required CIT rightly observed that AO has made the assessment in haste without applying his mind properly relying upon Gee Vee Enterprises Versus Additional Commissioner Of Income-Tax, Delhi I, And Others 1974 (10) TMI 29 - DELHI High Court - CIT s direction to make enquiry on the issue of capital gain earned by the assessee and the gift received by the assesse is sustainable the order of the CIT is upheld Decided against assessee.

Issues Involved:
1. Classification of income from the sale of shares as capital gains or business income.
2. Verification of the source of investment in shares for previous assessment years.
3. Verification of the cost basis for shares showing zero cost.
4. Examination of the source and creditworthiness of gifts received by the assessee.

Detailed Analysis:

1. Classification of Income from Sale of Shares:

The Ld. CIT found that the long-term capital gains (LTCG) of Rs. 59.11 crores and short-term capital gains (STCG) of Rs. 8.26 crores were earned by the assessee from the sale of shares of Mawana Sugars Ltd., a company belonging to the same group as the assessee. The Ld. CIT opined that these transactions were not normal investment activities but business activities, and hence the income should be taxed as business income rather than capital gains.

The assessee contended that he was neither a Director nor an employee of Mawana Sugars Ltd. and held the shares as investments, thus qualifying the income as capital gains. The assessee argued that the assessment order, which accepted the income as capital gains, was not erroneous and that different views on the classification could exist, making it a debatable issue.

Upon review, it was found that the Assessing Officer (AO) did not conduct any enquiry regarding the capital gains, and the assessment order lacked reference to such an enquiry. The Tribunal held that the magnitude and frequency of the transactions warranted an investigation by the AO to determine whether they were investment or business transactions. The Tribunal upheld the Ld. CIT's direction to examine this aspect under section 263 of the I.T. Act.

2. Verification of Source of Investment in Shares:

The Ld. CIT noted that the investment of Rs. 6.83 crores in shares, which generated LTCG, was made in the assessment years 2004-05 and 2005-06. The Ld. CIT opined that the AO should have verified the genuineness and source of these investments.

The Tribunal found that action under section 263 is not warranted for verifying facts related to earlier years, especially when the position for those years was accepted. Therefore, the Tribunal did not sustain the Ld. CIT's direction on this issue.

3. Verification of Cost Basis for Shares Showing Zero Cost:

The Ld. CIT observed that out of 700,000 shares on which STCG was earned, the cost of 679,000 shares was shown as zero. The Ld. CIT held that the AO should have verified the source of these shares.

The assessee argued that the total sale consideration was shown as taxable capital gain, and no adverse position could arise from showing the acquisition value as nil. However, the Tribunal agreed with the Ld. CIT that the AO should have enquired into the acquisition of these shares, as no enquiry was made. The Tribunal upheld the Ld. CIT's direction for further examination under section 263.

4. Examination of Source and Creditworthiness of Gifts Received:

The Ld. CIT noted that the assessee received gifts of Rs. 7.92 crores from his mother and Rs. 1.83 lacs from his father. Although a confirmation from the mother was obtained, there was no indication of the source of her income for the gift, which required further examination.

The assessee argued that the source of the source need not be explained and that the AO accepted the gifts after due verification. However, the Tribunal found that the documents submitted were insufficient to prove the receipt of such a significant gift. The AO did not make any enquiry into the creditworthiness of the donor. Hence, the Tribunal upheld the Ld. CIT's direction for further examination of this aspect under section 263.

Conclusion:

The Tribunal found that the AO had made the assessment in haste without proper enquiry and upheld the Ld. CIT's directions under section 263 for further examination of the issues related to capital gains, the cost basis of shares, and the gifts received. The Tribunal dismissed the appeal filed by the assessee, affirming the Ld. CIT's order for a fresh assessment.

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