2015 (5) TMI 818 - AT - Income Tax

Revision u/s 263 - directing AO to treat income from sale of shares as business income instead of income from short term capital gains - Held that - Perusal of the questionnaire as well as reply given by the assessee exhibits that Assessing Officer has conducted inquiry before accepting the stand of the assessee. In the impugned order, Ld. Commissioner has nowhere pointed out, as to how the order of the Assessing Officer is erroneous. He simply observed that since assessee has earned huge margin on short term investment, therefore, the transaction ought to have been treated as speculative transaction. Even otherwise, the assessee has pointed out that delivery of the shares was taken by it in its Demat account. Speculative transaction means, a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is periodically settled, otherwise than by actual delivery or transfer of the commodity or scripts. The Ld. CIT had nowhere establishes, as to how, it was speculative transaction. It is merely replacement of the opinion of the Assessing Officer with other possible view. Therefore, in our opinion Ld. Commissioner is not justified to take action u/s. 263. We allow the appeal of assessee and quash the impugned order passed u/s. 263 of IT Act by Ld. CIT. - Decided in favour of assesse.

Summary

Issues Involved:
1. Legality of the Commissioner's action under Section 263 of the Income Tax Act.
2. Classification of income from the sale of shares as business income or short-term capital gains.
3. Examination of the Assessing Officer's (AO) inquiry and decision-making process.

Detailed Analysis:

1. Legality of the Commissioner's Action under Section 263:
The core issue is whether the Commissioner was justified in invoking Section 263 of the Income Tax Act, 1961. The Commissioner believed that the AO's order was erroneous and prejudicial to the interests of the revenue. Section 263 empowers the Commissioner to revise any order passed by the AO if it is deemed erroneous and prejudicial to the revenue. The judgment outlines that the Commissioner must follow a four-stage process: calling for records, forming an opinion, issuing a show-cause notice, and passing an order after inquiry. The ITAT emphasized that both conditions-erroneous and prejudicial-must be satisfied for Section 263 to be invoked. The judgment also references various legal precedents, including the Supreme Court's decision in Malabar Industries and the Delhi High Court's ruling in CIT vs. Sun Beam Auto, to illustrate the principles guiding the exercise of power under Section 263.

2. Classification of Income from Sale of Shares:
The Commissioner directed the AO to treat the income from the sale of shares as business income instead of short-term capital gains, citing the explanation to Section 73 of the Income Tax Act. The assessee contended that the shares were purchased for investment purposes and not for trading. The shares of Aarvee Denim were held for over ten years, and the shares of Praneta Industries were also held for a significant period before being sold. The assessee argued that the transactions were not speculative as they involved actual delivery of shares, which was supported by the demat account records. The ITAT found that the AO had conducted an inquiry and accepted the assessee's explanation, which was a plausible view.

3. Examination of the Assessing Officer's Inquiry and Decision-Making Process:
The ITAT scrutinized whether the AO had conducted a proper inquiry before accepting the assessee's claim. The AO had issued a questionnaire specifically asking why the profit from the sale of shares should not be treated as business income. The assessee responded, explaining the investment nature of the shares. The ITAT noted that the AO had examined the accounts, made inquiries, and applied his mind to the facts before concluding that the income was short-term capital gains. The ITAT emphasized that if the AO has made inquiries and the assessee has provided detailed explanations, the decision cannot be deemed erroneous merely because the Commissioner disagrees. The judgment highlighted that the Commissioner did not provide specific reasons or evidence to classify the transactions as speculative or business income.

Conclusion:
The ITAT concluded that the Commissioner was not justified in invoking Section 263 as the AO had conducted a proper inquiry and taken a plausible view. The judgment quashed the Commissioner's order and allowed the appeal in favor of the assessee. The ITAT reiterated that the Commissioner cannot replace the AO's possible view with another unless the AO's view is unsustainable under the law. The order was pronounced in the open court on 22-05-2015.