2016 (5) TMI 404 - AT - Income Tax

Reopening of assessment - income from speculation - Held that - Learned AO had duly applied his mind on the impugned issue on the taxability of share trading profits as income from speculation . To this extent, the reasoning given by the Learned CIT(A) for upholding the validity of reassessment is not justified. We also hold that the Learned AO by his judicial behaviour in the original assessment proceedings u/s 143(3) of the Act had indeed formed an opinion on proper application of mind. We also agree with the arguments of the Learned AR that there is no fresh tangible material available with the Learned AO to justify the impugned action of resorting to reopen the assessment. We hold that where there was no new material or information which came to the knowledge of the Learned AO to re-initiate proceedings and since he had derived the facts and materials placed by the assessee itself during the original assessment proceedings , that did not constitute new information. Hence subsequent action on the part of the Learned AO in reopening the assessment based on the same materials available on record would only amount to re-appreciation of existing facts already on record which would amount to review and would only tantamount to change of opinion. Moreover we find that the proviso to section 147 of the Act would come into play in the facts of the instant case as admittedly the reopening is done after the end of 4 years from the end of the relevant assessment year. Then it is the duty of the Learned AO to prove as per the proviso that the reopening is warranted due to failure on the part of the assessee by not making full and true disclosure of material facts necessary for assessment. This crucial condition is conspicuously absent in the facts of the present case and hence reopening beyond 4 years could not be done even as per the statute. - Decided in favour of assessee.

Issues Involved:
1. Validity of reassessment proceedings initiated by the Assessing Officer (AO).
2. Whether the profits derived from share trading are speculative in nature.

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The primary issue in this appeal concerns the legal validity of the reassessment proceedings initiated by the AO. The assessee challenged the reassessment under Rule 27 of the ITAT Rules, arguing that the reassessment was initiated beyond four years from the end of the relevant assessment year without any new tangible material. The original assessment was completed under section 143(3) of the Income-tax Act, 1961, and the reassessment was initiated under section 147 of the Act.

The AO reopened the assessment based on the observation that the assessee had set off brought forward speculation loss against normal business profit, which was not allowable under the Act. The CIT(A) upheld the validity of the reassessment, stating that the issue of whether the profits from share trading were speculative was not considered in the original assessment, and thus, there was no change of opinion.

The assessee argued that the AO had already applied his mind to the issue during the original assessment, as evidenced by the computation of income from speculation and the set-off of brought forward speculation losses. The assessee relied on various judicial precedents, including the Supreme Court's decision in Kelvinator of India Ltd., which emphasized that reassessment must be based on new tangible material and not merely a change of opinion.

The Tribunal found that the AO had indeed applied his mind during the original assessment, and there was no new tangible material to justify the reassessment. The Tribunal held that the reassessment proceedings were initiated based on a mere change of opinion, which is not permissible under law. Furthermore, since the reassessment was initiated beyond four years, the proviso to section 147 required the AO to prove that the income had escaped assessment due to the assessee's failure to disclose full and true material facts, which was not the case here.

2. Nature of Profits from Share Trading:
The AO had observed that the assessee's business transactions did not qualify as speculative transactions under section 43(5) of the Act and that the assessee had wrongly claimed normal business profits as speculative profits under the explanation to section 73. The AO argued that section 73 deals only with losses in speculation business, not profits.

The Tribunal noted that in the original assessment, the AO had classified the profits from share trading as speculative and allowed the set-off of brought forward speculation losses. The Tribunal agreed with the assessee that the AO had applied his mind to this issue during the original assessment and that reopening the assessment on the same grounds amounted to a review, which is not permissible.

The Tribunal referred to several judicial decisions, including the Supreme Court's decision in Kelvinator of India Ltd., which held that reassessment must be based on new tangible material and not merely a change of opinion. The Tribunal also cited the Delhi High Court's decision in Orient Craft Ltd., which emphasized that the AO must have "reason to believe" that income has escaped assessment, and this belief must be based on new tangible material.

Conclusion:
The Tribunal concluded that the reassessment proceedings were invalid as they were based on a mere change of opinion without any new tangible material. The reassessment proceedings were quashed, and the appeal of the revenue was dismissed as infructuous.

Pronouncement:
The order was pronounced in open court on 29-03-2016.

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