2016 (6) TMI 854 - HC - Income Tax

Reopening of assessment - capital gain v/s business income - Held that - Assessing Officer was acutely conscious of the nature of transactions, the assessee s contention that the income was in the nature of capital gain and not business income. It was in this context that the assessee had claimed such expenditure for earning such income. Assessing Officer disallowed such expenditure while not disturbing the source of income disclosed by the assessee. In fact, the Assessing Officer proceeded on the basis that the income was in the nature of capital gains and this is precisely why the Assessing Officer disallowed the expenditure. Any reassessment of the said issue, would permit the Assessing Officer a second innings which is not envisaged under the power of reassessment.- Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of expenditure claimed by the assessee.
2. Validity of reopening the assessment under Section 148 of the Income Tax Act.
3. Examination of the claim by the Assessing Officer (AO) in the original assessment.
4. Application of the doctrine of merger.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Claimed by the Assessee:
The primary issue was the disallowance of various expenditures claimed by the assessee related to professional services for investment portfolio management. The AO disallowed these expenditures, stating they were not for the purpose of the assessee's business. The CIT(Appeals) confirmed the disallowance on slightly different grounds. The AO highlighted that the expenses were not wholly and exclusively for business purposes, as the assessee's primary business was manufacturing and selling refrigerant gases, not investment management.

2. Validity of Reopening the Assessment under Section 148 of the Income Tax Act:
The AO issued a notice to reopen the assessment for the year 2004-2005, citing that the assessee's income from investments should be assessed under "profits and gains of the business or profession" rather than "capital gains." The Tribunal held the reopening invalid on two grounds: (a) The AO had already examined the claim at length during the original assessment, and reassessment without new information was not permissible as per the Supreme Court's judgment in CIT v. Kelvinator of India Ltd. (2010) 320 ITR 561. (b) The issue had been carried in appeal before the CIT(Appeals), and thus the decision of the AO merged with that of the CIT(Appeals).

3. Examination of the Claim by the AO in the Original Assessment:
The AO, during the original assessment, scrutinized the nature of the transactions and the assessee's contention that the income was capital gains, not business income. The AO disallowed the expenditure while accepting the income as capital gains. The Tribunal noted that the AO was aware of the nature of the transactions and had decided not to disturb the source of income disclosed by the assessee. Thus, reassessment would allow the AO a "second innings," which is not permitted under reassessment powers.

4. Application of the Doctrine of Merger:
The Tribunal's second ground for invalidating the reopening was the doctrine of merger, suggesting that the AO's decision merged with that of the CIT(Appeals). However, the court did not agree with this ground but upheld the Tribunal's decision based on the first ground. The court referenced previous judgments, including Gujarat Power Corporation Ltd. v. Assistant Commissioner of Income-tax (2013) 350 ITR 266 (Guj) and Cliantha Research Ltd. v. Deputy Commissioner of Income-tax, Ahmedabad Circle-I (2013) 35 taxmann.com 61 (Guj), to support the view that reassessment based on a change of opinion is not permissible.

Conclusion:
The court dismissed both tax appeals, agreeing with the Tribunal that the reassessment proceedings were invalid due to the AO's prior examination of the claim during the original assessment. The court emphasized that reassessment cannot be used to re-evaluate a claim already scrutinized and decided upon, as it would constitute a change of opinion, which is not allowed.