2013 (12) TMI 356 - AT - Income Tax

Assessment under u/s 143(3) read with section 147 The assessee is a non-residential banking company Loss on sale of investments - Held that - Following Bank of Baroda 2003 (3) TMI 80 - BOMBAY High Court The assessee is required to make investment in securities for its capital growth purpose - Such an investment is a part of banking business only - Any loss arising on sale of such investments will be in the nature of business loss Decided in favour of assessee. Profit on sale of shares not credited to profit and loss account Held that - The profit on sale of shares is separately added to the income computed as per income tax provisions The income has not escaped assessment - Decided in favour of assessee. Indexation of purchase cost of shares Held that - Keeping in view provisions of section 48 The proviso to section 48 are not applicable to the assessee - The reasons recorded by the Assessing Officer do not meet the requirement of law - The entire proceedings based on such reasons recorded are void ab initio Decided against Revenue.

Summary

Issues Involved:
1. Validity of reopening of assessment under section 147 of the Income-tax Act, 1961.
2. Grounds for reopening the assessment including:
- Treatment of loss on sale of investments.
- Identification of profit on sale of shares in the profit and loss account.
- Applicability of indexed cost of acquisition for long-term capital gains for non-resident companies.

Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147:
The primary issue raised by the assessee was the validity of the reopening of the assessment under section 147. The original assessment was completed under section 143(3) after detailed scrutiny, and the reopening was initiated after the expiry of four years from the end of the relevant assessment year. The assessee argued that the Assessing Officer (AO) did not establish that the income chargeable to tax had escaped assessment due to the failure of the assessee to disclose fully and truly all material facts necessary for its assessment. This is a prerequisite for reopening an assessment beyond four years, as stipulated in the proviso to section 147.

2. Grounds for Reopening the Assessment:
The AO recorded three grounds for reopening the assessment:

a. Treatment of Loss on Sale of Investments:
The AO contended that the loss on the sale of investments amounting to Rs. 6,15,66,000 was a capital loss and not allowable as a deduction. The assessee countered this by citing the Supreme Court judgment in United Commercial Bank v. CIT and the Bombay High Court judgment in CIT v. Bank of Baroda, which established that loss on the sale of investments in the case of banks should be treated as a business loss. The Tribunal agreed with the assessee, stating that the loss on the sale of investments for a banking company is indeed a business loss and allowable as a deduction.

b. Identification of Profit on Sale of Shares:
The AO observed that the profit on the sale of shares amounting to Rs. 90,86,453 was not identifiable in the profit and loss account. The assessee demonstrated that the profit was correctly reflected in the computation of total income and had been added back in the computation. The Tribunal found the AO's observation to be misconceived and upheld the assessee's contention.

c. Applicability of Indexed Cost of Acquisition:
The AO argued that the assessee, being a non-resident, was not entitled to the benefit of indexed cost of acquisition under the second proviso to section 48. The assessee clarified that the shares were purchased in Indian currency, and thus, the first proviso to section 48, which applies to non-residents using foreign currency, was not applicable. The Tribunal agreed with the assessee, stating that the AO's interpretation was erroneous and that the indexed cost of acquisition was allowable.

Conclusion:
The Tribunal concluded that the AO did not have valid "reasons to believe" that income chargeable to tax had escaped assessment, as required under section 147. The Tribunal held that the reopening of the assessment was void ab initio due to the absence of failure on the part of the assessee to disclose fully and truly all material facts. Consequently, the entire assessment order was quashed. The assessee's appeal was allowed, and the Revenue's appeal, which was based on the merits of the additions, was dismissed as it had no legs to stand on after the quashing of the assessment order.

Order Pronounced:
The order was pronounced in the open court on January 23, 2013.