2021 (11) TMI 259 - AT - Income Tax

Revision u/s 263 by CIT - Reopening of assessment u/s 147 initiated - eligibility of reason to believe - unexplained investments transactions-HELD THAT - As established that during re-assessment proceedings u/s. 147 of the Act, the Ld. AO had done detailed enquiry and the assessee had duly explained that separate portfolios for trading and investments were maintained by the assessee. The transactions were carried out in separate D-mat accounts and shares were received in the separate d-mat account. Therefore, there was no question of any manipulation. After duly verifying the explanations of the assessee, the Ld. AO accepted/assessed the assessee's returned income. However, subsequently on the proposal of the Ld. AO, the Ld. PCIT, without applying his mind to the above factual position, exercised his revision jurisdiction u/s. 263 of the Act. The Ld. PCIT has not pointed out any discrepancy/error in the reply/explanation so submitted by the assessee during the reassessment proceedings, which was part of the assessment records. PCIT has resorted to the revision proceedings u/s. 263 of the Act in a mechanical manner on the basis of the proposal of the Ld. AO. It has not been pointed out as to what error has been committed by the Ld. AO in accepting the explanation/evidences so furnished by the assessee in the process of verifying the nature of transactions. Even the CBDT's Circular cited by the Ld. PCIT in his order, in fact, comes to the support the assessee. As the assessee has duly explained that separate portfolios were maintained and trading and investments transactions were carried out in a separate d-mat accounts from the very beginning and that there was no bar for the assessee to carry out both the trading and investment activities. The impugned order passed u/s.263 of the Act by the Ld. PCIT, in this case, is, therefore, not sustainable and the same is accordingly quashed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the exercise of revision jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Examination of the nature of income from share trading as business income or capital gain.
3. Adequacy of inquiries made by the Assessing Officer (AO) during reassessment proceedings.

Issue-Wise Detailed Analysis:

1. Legality of the Exercise of Revision Jurisdiction under Section 263:
The assessee appealed against the orders dated 23-03-2021 and 19-03-2021 by the Learned Principal Commissioner of Income-tax (PCIT), who exercised revision jurisdiction under Section 263 of the Income Tax Act, 1961. The PCIT set aside the assessment order dated 27-12-2018 for a denovo assessment, citing that the AO had not properly examined whether the income from share trading was business income or capital gain.

The Tribunal observed that the show cause notice issued by the PCIT under Section 263 was a verbatim copy of the reasons recorded by the AO for reopening the assessment under Section 147. It was established that during the reassessment proceedings, the AO had conducted a detailed inquiry and accepted the explanations provided by the assessee. The PCIT did not point out any specific discrepancies or errors in the AO's assessment. Therefore, the Tribunal concluded that the PCIT's exercise of revision jurisdiction was not justified and quashed the revision orders.

2. Examination of the Nature of Income from Share Trading:
The AO noted that the assessee was involved in share trading and had made investments in shares, deriving dividends and long/short term capital gains. The AO observed that the assessee maintained three different DEMAT accounts marked as "Trading," "Investments short term," and "Investments long term." The AO suspected that these nomenclatures were misleading and that the assessee manipulated transactions to earn exempt income while showing losses for tax adjustments.

The PCIT issued a show cause notice under Section 263, questioning why the AO did not properly examine whether the income from share trading was business income or capital gain. The PCIT referenced CBDT Circular No. 6 of 2016, which provides guidelines to determine the nature of income from share transactions. The PCIT concluded that the AO's failure to consider these guidelines made the assessment order erroneous and prejudicial to the revenue.

However, the Tribunal noted that the AO had indeed considered these guidelines and conducted a detailed inquiry during the reassessment proceedings. The assessee had provided explanations and evidence to support the separation of trading and investment portfolios, which the AO had accepted. Thus, the Tribunal found no error in the AO's assessment regarding the nature of income.

3. Adequacy of Inquiries Made by the AO:
The Tribunal examined whether the AO had made adequate inquiries during the reassessment proceedings. The AO had issued notices, raised queries, and obtained information from the assessee and the broker, M/s. C.D Equisearch Pvt. Ltd. The assessee provided detailed explanations, including SEBI circulars, DEMAT statements, and statements of long-term capital gains. The AO verified these documents and accepted the assessee's returned income.

The Tribunal concluded that the AO had conducted a thorough inquiry and that the PCIT's claim of inadequate inquiry was unfounded. The PCIT's revision order did not identify any specific deficiencies in the AO's inquiries or the assessee's explanations.

Conclusion:
The Tribunal quashed the revision orders passed by the PCIT under Section 263 of the Income Tax Act, 1961, for the assessment years 2011-12 to 2014-15. The Tribunal found that the AO had conducted adequate inquiries and properly assessed the nature of the income from share trading. The PCIT's exercise of revision jurisdiction was deemed unjustified and mechanical, lacking specific identification of errors in the AO's assessment. Therefore, all the appeals filed by the assessee were allowed.