2015 (10) TMI 2048 - AT - Income Tax

Reopening of assessment - Loss from transactions of mutual fund units - whether a business loss which is allowed to be reduced from other business income and not capital loss - Held that - The AO has power to reopen provided there is tangible material to come to the conclusion that there is escapement of income from assessment and reasons must have a link with the formation of the belief. In the case in hand, the original assessment was done on the basis of material produced by the assessee before the AO. No new material or information has come into the knowledge of the AO. The view taken by the AO was one of the possible views treating the income/loss on mutual funds as business loss. Such a treatment was given by the AO in the case of assessee in earlier assessment years also. No further evidence or new information has come to the knowledge of the AO for change of his opinion in this respect. Hence, the reopening on the ground that the loss from mutual funds was to be assessed as capital loss was nothing but a change of opinion that too based on surmises and conjunctures and not based on any particular material fact or circumstance which can be considered to be a deciding factor for such a treatment. Second reason regarding the applicability of amended section 94(7) is concerned, we find that the amendment brought by the said section was applicable from the assessment year 2005-06. Even the condition imposed in the said amendment is that if the assessee buys or acquires any securities or units within a period of three months prior to the record date of dividend and sells or transfers such units within a period of nine months after such date, then the loss is to be disallowed. However, we find that during the year under consideration the assessee had not sold or transferred the securities/mutual funds. The loss arrived at by the assessee was on account of diminution in the value of the stock as compared to the market value. The units were lying in the stock of the assessee at the close of the financial year. Under such circumstances, the provisions of section 94(7) were not attracted in this case. So far as the forming of reasons as to the applicability of section 94(7) for the year under consideration is concerned, the same was erroneous as the amended provisions are not applicable for the year under consideration and the reasons of the AO to believe that the income of the assessee has escaped assessment because of the applicability of section 94(7) are fallacious and are not valid and the reopening on the basis of said belief is bad in law. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening proceedings under Section 147 of the Income Tax Act, 1961.
2. Classification of loss from mutual fund transactions as business loss or capital loss.
3. Applicability of Section 94(7) of the Income Tax Act to the valuation of closing stock of mutual fund units.

Issue-Wise Detailed Analysis:

1. Validity of Reopening Proceedings under Section 147:
The assessee challenged the reopening of the assessment under Section 147, arguing that it was based on a change of opinion rather than new material. The original return was processed under Section 143(1) and later scrutinized under Section 143(3). The AO reopened the assessment, claiming that the income had escaped assessment due to the misclassification of mutual fund losses as business losses instead of capital losses. The Tribunal found that the AO's reopening was based on conjecture rather than new material, thus constituting a change of opinion. The Tribunal cited the Hon'ble Bombay High Court's decision in "Asian Paints Ltd. vs. DCIT" and the Hon'ble Supreme Court's decision in "CIT vs. M/s. Kelvinator India Ltd." to support the principle that reopening based on a change of opinion is not permissible. Consequently, the reopening was deemed invalid.

2. Classification of Loss from Mutual Fund Transactions:
The Revenue contended that the loss from mutual fund transactions should be treated as a capital loss. The assessee argued that these transactions were part of its regular business activities and should be classified as business losses. The Tribunal noted that the mutual funds were treated as stock in trade in the assessee's accounts and that similar transactions had been accepted as business transactions in previous assessment years. The Tribunal found that the AO's decision to treat the loss as a capital loss was not supported by any new material facts and was merely a change of opinion. The Tribunal upheld the CIT(A)'s decision that the mutual fund transactions were part of the assessee's business activities and the loss should be treated as a business loss.

3. Applicability of Section 94(7) to Valuation of Closing Stock:
The Revenue argued that the loss due to the valuation of closing stock of mutual fund units should be disallowed under Section 94(7). The assessee contended that the amended provisions of Section 94(7) were applicable prospectively from the assessment year 2005-06 and not to the year under consideration (2004-05). The Tribunal agreed with the assessee, noting that the amended provisions were not applicable for the year under consideration. Moreover, the loss was due to the diminution in the value of the stock, not due to the redemption of units. The Tribunal found that the AO's reasons for reopening based on the applicability of Section 94(7) were erroneous and not legally valid.

Conclusion:
The Tribunal concluded that the reopening of the assessment was not based on valid reasons and was set aside. On the merits, the Tribunal upheld the CIT(A)'s decision that the mutual fund transactions were part of the assessee's business activities and that the amended provisions of Section 94(7) were not applicable for the year under consideration. Consequently, the cross objections of the assessee were allowed, and the appeal of the Revenue was dismissed.