2019 (2) TMI 1127 - AT - Income Tax

Reopening of assessment - non-fulfilment of conditions stipulated to invoke jurisdiction under s.147 - loss arising from switching over from one plan of mutual funds to another is of capital nature and therefore, the assessee is not entitled to deduct the aforesaid loss from profits of business activity & the loss arising from derivative contracts are speculative in nature for the relevant AY 2005-06 and therefore the assessee is not entitled to adjust the same against the non-speculative business income HELD THAT - The action of the AO in formation of such belief after the completion of the assessment appears entirely untenable in the facts and the context of the case. As pointed out on behalf of the assessee, we notice that the assessee has both earned income as well loss on sale of mutual funds. The loss transaction from sale of mutual funds thus cannot be given a differential treatment and singled out from other transactions similarly placed. The AO has not assigned and reasons for do so. It is clearly an unjust act in the circumstances. The belief for escapement of income is thus a pretense and is not sustainable in law. As advert to the second ground for alleged escapement of income i.e. the future contracts of derivative nature in stock market are alleged to be of speculative nature allegation has been made after the completion of the assessment based on appreciation of material already available on record - the reasons recorded are ostensibly abstract without reference to any material. The assessee in the instant case having disclosed the relevant facts at the time of the original assessment has thus discharged its primary onus. Consequently, the onus was shifted on the AO to draw inference thereon. The plausible inference would be that the AO has applied his mind to the facts and concluded that the loss in derivative transactions to be ordinary business loss. The AO could have displaced the original action only upon showing the fallacy therein. As noted earlier, the AO has not recorded anything to suggest as to what change in circumstances prompted him to invoke Section 147 of the Act subsequent to completion of assessment - A bare glance of the reasons recorded gives an impression that the reopening has been carried out on shallow reasonings which is not sustainable in law. The action under s.147 of the Act is thus void ab initio and consequent reassessment order framed thereunder is bad in law - Decided in favour of assessee.

Summary

Issues:
Challenge to exercise of powers under s.147 of the Income Tax Act and additions/disallowances on merits.

Analysis:
1. The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) concerning assessment year 2005-06. The assessee challenged the AO's exercise of powers under s.147 of the Act and additions/disallowances on merits.

2. The AR for the assessee primarily focused on contesting the validity of the AO's jurisdiction under s.147 of the Act. The reasons recorded under s.148(2) of the Act alleged escapement of income due to the treatment of loss from mutual funds as capital loss and derivative contracts as speculative loss.

3. Regarding the treatment of loss from mutual funds, the AR argued that the AO sought to change the character of income without a valid basis, as the assessee consistently treated gains/losses from mutual funds as business income. The AR contended that the AO's action was based on a mere change of opinion, not permissible in law.

4. Concerning the derivative contracts, the AR highlighted that the AO initially accepted the loss as business loss during the original assessment. The AR referenced a decision supporting this treatment. The AR emphasized that the AO did not provide any valid reason for changing this stance during reassessment.

5. The Tribunal found the AO's reasons for reopening the assessment to be abstract and lacking material reference. The AO failed to demonstrate any change in circumstances or fallacy in the original assessment to justify invoking s.147. The Tribunal concluded that the AO's actions lacked objectivity and were not sustainable in law.

6. Ultimately, the Tribunal held that the AO's exercise of powers under s.147 was void ab initio, rendering the reassessment order invalid. Consequently, the reassessment notice and order under s.143(3) r.w.s. 147 of the Act were quashed and set aside, leading to the allowance of the assessee's appeal.