2016 (8) TMI 565 - HC - Income Tax

Reopening of assessment - disallowing the interest component - Held that - A close scrutiny of the reasons recorded would find a mention of the act of assessee not disallowing the interest component on such shares for the assessment year 2005-2006 which according to the Assessing Officer was done to avoid detection. If case of the Assessing Officer was that interest on borrowed funds would be a legitimate deduction, as long as the shares were held as stock, but upon the shares being converted into investment, such interest was not allowable deduction and in that sense income chargeable to tax had escaped assessment, he has not built on such case in his reasons. We say so because in the computation of income chargeable to tax escaping assessment, he has referred to a sum of ₹ 389.03 crores which, as noted earlier, is the total of the profit computed by him upon transfer of shares of M/s. Sun Pharmaceuticals Industries Ltd. and transfer of shares of Zigma Software Ltd. This computation of the profit was based on the original cost of acquisition in the market value on the date of transfer. This figure of income escaping assessment does not in any manner refer to the interest expenditure. In other words, a brief reference to the assessee claiming interest expenditure for the assessment year 2005-2006 was confined only to suggest that the same was done to avoid detection during the scrutiny assessment and the Assessing Officer did not built his case any further in the context of income chargeable to tax having escaped the assessment. - Decided in favour of assessee.

Issues Involved:
1. Validity of the notice for reopening assessment beyond four years.
2. Disclosure of material facts by the petitioner.
3. Examination of the conversion of shares from stock-in-trade to investment during original assessment.
4. Tax implications of converting shares from stock-in-trade to investment.

Detailed Analysis:

1. Validity of the Notice for Reopening Assessment Beyond Four Years:
The petitioner challenged the notice dated 11.1.2011 for reopening the assessment for the assessment year 2005-2006, arguing it was beyond the permissible period of four years. The court noted that the assessment was framed after scrutiny and the reopening notice was issued beyond the four-year period from the end of the relevant assessment year.

2. Disclosure of Material Facts by the Petitioner:
The petitioner contended that there was no failure on their part to disclose all material facts fully and truly. The court examined whether the petitioner had disclosed the conversion of shares from stock-in-trade to investment in their returns or during the original assessment. The department argued that this conversion was not disclosed, justifying the reopening of the assessment beyond four years.

3. Examination of the Conversion of Shares from Stock-in-Trade to Investment During Original Assessment:
The petitioner argued that the issue of converting shares from stock-in-trade to investment was already examined by the Assessing Officer during the original scrutiny assessment. The court focused on whether this specific issue was indeed scrutinized and whether the reopening was justified based on new information or lack of disclosure.

4. Tax Implications of Converting Shares from Stock-in-Trade to Investment:
The core contention was whether the conversion of shares from stock-in-trade to investment constituted a taxable event. The court referred to the Supreme Court's judgment in the case of Sir Kikabhai Premchand v. Commissioner of Income-tax, which held that mere transfer of shares from stock-in-trade to investment does not result in any immediate income, profit, or gain, and thus, is not taxable. The court also noted that the profit calculation based on the difference between the cost of acquisition and market value on the date of transfer was not valid as it did not constitute a real profit.

Conclusion:
The court concluded that the mere transfer of shares from stock-in-trade to investment does not result in a taxable event, and the reopening of the assessment on this ground was not justified. The court quashed the impugned notice dated 11.1.2011, allowing the petition.

This judgment underscores the importance of clear and full disclosure of material facts by taxpayers and the limitations on the tax authorities' power to reopen assessments beyond the statutory period without substantial new information.

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