1992 (5) TMI 68 - AT - Income Tax

Summary

Issues Involved:
1. Validity of CIT's invocation of Section 263 for assessments completed under Section 143(1).
2. Conversion of stock-in-trade into investment and its tax implications.
3. Contribution of shares to a partnership firm as capital and its tax implications.
4. Change in the method of accounting from mercantile to cash basis and its tax implications.

Issue-wise Detailed Analysis:

1. Validity of CIT's invocation of Section 263 for assessments completed under Section 143(1):
The CIT invoked Section 263, arguing that the assessment order under Section 143(1) was erroneous and prejudicial to the interest of revenue. The CIT contended that the Assessing Officer (AO) did not apply his mind and failed to make basic inquiries regarding the transactions involving the conversion of stock-in-trade into investment and the change in the accounting method. The appellant argued that no detailed investigation was required for assessments under Section 143(1) and that the AO followed executive instructions. The Tribunal concluded that the CIT's invocation of Section 263 was not validly initiated, as the assessments were completed under Section 143(1) in accordance with executive instructions and did not transgress any provisions of the Act.

2. Conversion of stock-in-trade into investment and its tax implications:
The CIT noted that the conversion of 35,775 equity shares from stock-in-trade to investment at market rate and the transfer of the difference to the 'Investment Fluctuation Reserve Account' were not scrutinized by the AO. The appellant argued that such a conversion did not give rise to any taxable event, and no profit or gain arose from the revaluation during the conversion. The Tribunal agreed with the appellant, citing the Supreme Court's decision in Sunil Siddharthbhai v. CIT, which held that the contribution of assets as capital in a firm does not result in taxable capital gains in the absence of consideration.

3. Contribution of shares to a partnership firm as capital and its tax implications:
The CIT argued that the contribution of shares to a partnership firm as capital was not examined by the AO. The appellant contended that this action, although constituting a transfer, did not result in any taxable income, as no capital gains were exigible due to the Supreme Court's decision in Sunil Siddharthbhai v. CIT. The Tribunal agreed, noting that Section 45(3), which subjects such transactions to tax, was introduced with effect from 1-4-1988 and was not applicable to the assessment year under consideration.

4. Change in the method of accounting from mercantile to cash basis and its tax implications:
The CIT observed that the change in the method of accounting from mercantile to cash basis was not examined by the AO to determine if it was bona fide. The appellant argued that the relevant facts were disclosed in the balance sheet, and no permission was required from the AO for the change. The Tribunal noted that the change in the accounting method did not have any substantial tax effect and was accepted by the department in subsequent years.

Conclusion:
The Tribunal quashed the orders passed by the CIT under Section 263, concluding that the assessments completed under Section 143(1) were not erroneous or prejudicial to the interest of revenue. The Tribunal emphasized that the AO followed executive instructions, and the relevant facts were disclosed by the assessee. The Tribunal also highlighted that the revisionary powers under Section 263 cannot be invoked merely to direct the AO to reframe an already completed assessment by making fishing inquiries. The appeals were allowed.