2017 (2) TMI 905 - AT - Income Tax

Revision u/s 263 - assessee made applications in his own name to different companies in IPOs - Held that - The shares will be delivered to the demat account of the respective persons and the assessee has delivered the same to the demat accounts. In case of his HUF, the shares were delivered to HUF demat account which has been verified by the Ld. Assessing Officer from demat account statement filed and place on record. The assessee and his wife had demat account in joint names. AO has also verified the information regarding shares given to the assessee s wife and the assessee s HUF. He has also categorically asked and had seen whether these persons or recipients of shares had sold and disclosed Income in their respective returns and being satisfied, he has finalized the assessment. We are enclosing herewith a statement for your perusal which shows profit arising to these persons from the shares allotted to the assessee and transferred to them. The profit has been included in their respective income and they have paid taxes as short term capital gain in their return. This fact was verified by the Ld. Assessing Officer The rate of taxes are the same on short term capital gain and since taxes were correctly paid, there is no loss to the revenue. Under these circumstances, the assessment was correctly made after due and complete inquiry and by verifying the details and therefore, action U/s.263 of the I T Act on this account is unjustified and invalid. Nexux of interest paid against interest income - Held that - The bank statements were placed on record, which shows the borrowings made by the assessee on overdraft account and the amounts advanced to the parties from whom interest income is received. Direct nexus of interest income to interest expenditure has been verified not only with the bank statement but also with the return of income. In the return of income, the amounts stated by you in your notice for income and claim for deduction of interest paid both have been shown under and details regarding this, has been furnished separately to the Ld. A.O. which has been verified by him. Copy of the statement is annexed herewith for your ready reference. The nexus of interest income to expenditure was also established, allowability of expenditure was also examined and after due verification of the details, the assessment was finalized. There is no reason now to question the action of the Ld. A.O. and come to a conclusion that assessment was erroneous and prejudicial to the interest of the revenue. Income Tax Consultation Fee is business expenditure and was considered as allowable from business income. This is not personal expenditure of the assessee and therefore, it cannot be said that action of the Ld. A.O. allowing this expenditure from business income was erroneous. Short term capital gain on shares - Held that - The assessee has not carried on these transactions on regular basis but only in few cases and in some selected scripts. There is no inquiry or investigation required now to be done when the assessee had furnished all details regarding share applications, allotment of shares, sales bills and delivery of shares on sale from demat account. The transactions have been low and volume is also marginal. Therefore, once the Ld. Assessing Officer has already verified these details, his decision to tax as income from short term capital gain is just and equitable on facts. Ld. Commissioner of Income Tax s decision to consider it as business income is erroneous and a change of opinion and such change of opinion by ld. Commissioner of Income Tax to direct the Ld. A.O. to consider it as business income is outside the purview of scope of the provisions of Section 263 of the I T Act. Thus assessment proceedings taking action U/s.263 in this case is purely an action of change of opinion - Decided in favour of assessee

Issues Involved:
1. Validity of proceedings initiated under Section 263 of the Income Tax Act.
2. Legality of the Commissioner of Income Tax's (CIT) directions to re-examine four specific issues.
3. Examination of whether the Assessing Officer (AO) conducted due diligence in the assessment process.
4. Specific points of contention regarding the assessment, including share transactions, interest income and expenditure, professional fees, and classification of capital gains.

Issue-wise Detailed Analysis:

1. Validity of Proceedings Initiated Under Section 263 of the Income Tax Act:
The assessee contended that the proceedings initiated under Section 263 were void ab initio and the CIT's order was erroneous and against the law, facts, and evidence on record. The Tribunal examined whether the CIT had the jurisdiction to invoke Section 263, which requires the twin conditions that the AO's order is erroneous and prejudicial to the interests of the revenue. The Tribunal found that the AO had made adequate inquiries and applied his mind to the issues during the assessment proceedings, thus the order was neither erroneous nor prejudicial to the revenue. Therefore, the initiation of proceedings under Section 263 was deemed invalid.

2. Legality of CIT's Directions to Re-examine Four Specific Issues:
The CIT directed the AO to re-examine four issues: (i) share transactions on behalf of the assessee's wife and HUF, (ii) nexus between interest income and expenditure, (iii) allowance of professional fees as business expenditure, and (iv) classification of short-term capital gains. The Tribunal found that the AO had already examined these issues during the original assessment, and the CIT's directions were based on a change of opinion rather than any new evidence or lack of inquiry by the AO. Thus, the CIT's directions were not justified.

3. Examination of AO's Due Diligence in the Assessment Process:
The Tribunal reviewed the assessment records and found that the AO had issued notices under Sections 142(1) and 143(2), calling for detailed information on the issues in question. The assessee had provided comprehensive replies, including details of share transactions, interest income and expenditure, and professional fees. The AO had verified these details, indicating that due diligence was exercised. Therefore, the AO's assessment was not conducted in a routine manner without application of mind, as alleged by the CIT.

4. Specific Points of Contention Regarding the Assessment:
- Share Transactions: The assessee applied for shares in IPOs/FPOs on behalf of his wife and HUF, and the shares were transferred to their demat accounts. The Tribunal found that the AO had verified these transactions and the profits were included in the respective returns of the wife and HUF, thus there was no loss to the revenue.
- Interest Income and Expenditure: The assessee declared interest income and claimed interest expenditure. The AO verified the nexus between the interest income and expenditure through bank statements and other records, and found it to be allowable. The Tribunal upheld this verification.
- Professional Fees: The assessee claimed professional fees as business expenditure. The AO allowed this expenditure after verification. The Tribunal found no evidence to suggest that this was personal expenditure.
- Short-term Capital Gains: The assessee reported short-term capital gains from share transactions, which the AO classified as such after examining the holding period and volume of transactions. The Tribunal agreed with this classification, noting that the transactions were not frequent enough to be considered business income.

Conclusion:
The Tribunal quashed the CIT's order under Section 263, restoring the AO's original assessment order. The Tribunal found that the AO had conducted adequate inquiries and applied his mind to the issues during the assessment proceedings, and the CIT's directions were based on a change of opinion rather than any new evidence or lack of inquiry. The appeal of the assessee was allowed, and the order under Section 263 was deemed invalid.

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