2014 (11) TMI 397 - AT - Income Tax

Validity of proceedings u/s 147 Treatment of transactions in shares - Whether CIT(A) was justified in treating the transactions in shares by assessee as investment only and thereby treating the gain there from as capital gain in stead of business income Held that - Assessee is transacting in shares and units from the inception itself - Income shown by assessee from transactions in shares and units as capital gain was also accepted by the AO till the AY 2006-07 - Assessment completed for AY 2006-07 was revised by CIT u/s 263 by holding that income from share transactions to be assessed as business income of assessee - assessments for the impugned AY was reopened after expiry of four years from the end of relevant AY - Therefore, as per the proviso u/s 147(1) in a case where assessment is completed u/s 143(3) reopening of assessment can be made after expiry of four years if the escapement of income is on account of failure on the part of assessee to disclose fully and truly all material facts necessary for his assessment. There was no failure in furnishing material facts truly and fully is either visible or evident from the reasons recorded - It is clearly evident the assessment has been reopened primarily on the basis of the order passed by CIT u/s 263 for AY 2006-07, which was upheld by ITAT and only for the purpose of assessing the gain derived from share transaction as profits and gains of business or profession in stead of capital gain as claimed by assessee and accepted in the original assessment - as there is no failure on the part of assessee to disclose fully and truly all material facts necessary for its assessment, the reopening of assessment beyond a period of four years is in violation of statutory provision, hence, invalid in law - there are no fresh and tangible material before the AO on the basis of which AO could have formed belief that income has escaped assessment - the foundation on which assessment was reopened do not survive - the finding of the CIT(A) with regard to the validity of reopening u/s 147 has to be sustained - thus, the order of the CIT(A) is set aside Decided against revenue. Capital gains on sale of shares - STCG or business income - Held that - CIT(A) was of the view that the income derived from sale of shares and units of mutual funds is to be treated as income from capital gains - the transactions in sale of shares and units of mutual funds in the impugned assessment year is any way different from AY 2006-07 - income derived from sales of shares and units of mutual funds has to be assessed as income from capital gains as they are in the nature of investment only - in the latest assessment order for the AY 2011-12, the AO himself while completing assessment u/s 143(3) vide order dated 26/03/2014 has accepted assessee s transaction in shares and units of mutual fund as investment activity and assessed the gain derived therefrom as capital gain Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening the assessment under section 147.
2. Classification of income from share transactions as capital gains or business income.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147:

The department challenged the CIT(A)'s finding that the initiation of proceedings under section 147 was invalid. The CIT(A) noted that the reopening was done after four years from the end of the relevant assessment year, invoking the proviso to section 147. The CIT(A) observed that the Assessing Officer (AO) did not specify any failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The AO's reasons for reopening relied heavily on the CIT's order under section 263 for AY 2006-07, which was later set aside by the High Court. The CIT(A) concluded that there was no tangible material to indicate escapement of income, rendering the reopening null and void. The Tribunal upheld this view, stating that the assessment was reopened primarily based on the CIT's order for AY 2006-07, which was invalidated by the High Court. Therefore, the reopening beyond four years was deemed invalid.

2. Classification of Income from Share Transactions:

The department contended that the CIT(A) erred in treating the assessee's share transactions as investments, thereby classifying the gains as capital gains instead of business income. The AO argued that the assessee was involved in frequent buying and selling of shares and mutual funds, indicating a business activity. The AO also cited the Director's report and the company's name to support this view. However, the CIT(A) referred to the High Court's judgment for AY 2006-07, which accepted the assessee's claim of treating the gains as capital gains based on several factors, including the valuation of closing stock at cost, substantial dividend income, and the nature of transactions being delivery-based.

The Tribunal noted that the AO's conclusion was heavily influenced by the CIT's order for AY 2006-07, which was overturned by the High Court. The High Court had laid down several parameters indicating that the transactions were investments, such as the use of own funds, substantial long-term capital gains, and no involvement in futures or options. The Tribunal found no material difference in the facts for the impugned assessment years and upheld the CIT(A)'s decision to treat the gains as capital gains.

Conclusion:

The Tribunal dismissed the department's appeals, affirming the CIT(A)'s findings on both the validity of reopening the assessment and the classification of income from share transactions. The Tribunal allowed the assessee's appeal, confirming that the gains from share transactions should be assessed as capital gains.