2013 (10) TMI 977 - AT - Income Tax

Review u/s 263 after income escaping assessment done u/s 147 of the Income Tax Act Held that - Action u/s 263 is justified as the action the AO in droppings the proceedings initiated u/s 147 and accepting the returned income during the year under consideration is erroneous and prejudicial to the interest of the Revenue AO has been directed to make a fresh assessment u/s 143(3) read with section 263 on the impugned additions/disallowances made/enhanced by the Ld.CIT(A) keeping in view of the scope of reassessment proceedings and after giving a reasonable opportunity of being heard to the assessee.

Summary

Issues Involved:
1. Validity of the order passed under Section 263 of the Income Tax Act, 1961.
2. Classification of income as business income versus capital gains.
3. Justification of additions made by the Assessing Officer (AO) based on the direction of the Commissioner of Income Tax (CIT).
4. Scope of reassessment proceedings under Section 147/148 of the Income Tax Act, 1961.

Detailed Analysis:

1. Validity of the Order Passed Under Section 263:
The CIT invoked Section 263 to revise the reassessment order, deeming it erroneous and prejudicial to the interests of the Revenue. The CIT's revision was based on the findings for the assessment year 2007-08, where the AO had classified the assessee's income from share transactions as business income. The Tribunal upheld the CIT's action under Section 263, noting that the AO had not conducted due enquiry during the reassessment proceedings and had merely accepted the assessee's submissions. The Tribunal emphasized that the CIT is empowered under Section 263 to revise orders that are erroneous and prejudicial to the Revenue's interests.

2. Classification of Income as Business Income Versus Capital Gains:
The CIT directed the AO to treat the assessee's Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) as business income. The CIT's decision was based on several factors:
- The assessee's regular and substantial trading activity in shares.
- Utilization of borrowed funds for trading.
- The volume and frequency of transactions.
- The lack of distinction between investment and trading portfolios in the assessee's accounts.
The Tribunal noted that the CIT's direction was based on a detailed examination of the assessee's activities, which indicated a business motive rather than investment intent.

3. Justification of Additions Made by the AO:
The CIT directed the AO to make specific additions to the reassessed income, including treating STCG and LTCG as business income and denying concessional tax rates/exemptions. The Tribunal, while upholding the CIT's power to revise the order under Section 263, set aside the specific directions for additions. Instead, the Tribunal directed the AO to conduct a fresh assessment, allowing the assessee an opportunity to present their case. The AO was instructed to make a fresh assessment on merit, without being influenced by the CIT's directions.

4. Scope of Reassessment Proceedings Under Section 147/148:
The Tribunal reiterated that the scope of reassessment proceedings is to bring to tax the income that has escaped assessment. The reassessment should be based on the reasons recorded for issuing the notice under Section 148 and any income that comes to the AO's notice during the reassessment proceedings. The Tribunal found that the AO had not conducted a thorough enquiry during the reassessment and had accepted the returned income without proper scrutiny. This justified the CIT's invocation of Section 263 to ensure a proper assessment in accordance with the law.

Conclusion:
The Tribunal upheld the CIT's invocation of Section 263, finding the reassessment order erroneous and prejudicial to the Revenue's interests. However, the Tribunal set aside the CIT's specific directions for additions and instructed the AO to conduct a fresh assessment. The AO was directed to reassess the income on merit, considering the scope of reassessment proceedings and providing the assessee a reasonable opportunity to be heard. The appeals were partly allowed for statistical purposes, with the AO required to make a fresh assessment in line with the Tribunal's directions.