2017 (2) TMI 1183 - AT - Income Tax

Revision u/s 263 - whether the order of the AO is open to attack as erroneous in so far as prejudicial to the interests of the Revenue in terms of section 263 of the Act when the STCGs returned by the assessee has been accepted by the AO in the given facts? - Held that - AO has noted that necessary details and evidences thereof have been furnished by the assessee. In the circumstances, it is difficult to accept the allegation that the action of the AO was without requisite enquiry and application of mind on facts. Possibly, the CIT is not happy with the quality of the outcome on the enquiry. However, this by itself would not give occasion to the CIT to pass order under s.263 of the Act. On facts, we note from the order of the CIT itself that the assessee has maintained separate records whereby intention to hold certain shares as capital assets as compared to other class of trading assets of similar nature can be deciphered. This act of the assessee by itself is a strong indicator of the declaration of the underlying intention of the assessee. We also take note of the fact that Circular No.4 of 2007 dated 15/06/2007 issued by the CBDT clearly lays down that it is possible for a taxpayer to have two types of portfolios simultaneously, i.e. an investment and trading portfolio. We simultaneously note that substantial majority of the transactions giving rise to the capital gains are mere resale of shares acquired in the initial public offer for allotment of shares by companies. Thus, shares were acquired in the primary market and sold in the secondary market after obtaining delivery thereof. The transactions involving purchase and sales are limited in number and does not indicate any continuous and systematic course of activity or conduct with set purpose. We observe that the manner in which the books of accounts are kept is an important piece of evidence for determination of the factual issue in hand. The shares held at the end of the year towards investment has also not been shown to be valued at cost or market price whichever is lower. We also notice that the investments giving rise to the capital gains are not driven primarily by the borrowed funds which were claimed to be not obtained on commercial basis. In these facts, the action of the AO accepting the capital gain declared by the assessee as such cannot be faulted per se. The view of the AO on the issue is clearly a plausible view which in our view cannot be toppled and substituted by the opinion of the CIT in this regard.- Decided in favour of assessee.

Summary

Issues Involved:
Assessment of Short Term Capital Gains (STCGs) under section 111A of the Income Tax Act, 1961 - Jurisdiction under section 263 of the Act - Nature of transactions in shares - Application of concessional tax rate - Separate portfolios for investment and trading - Enquiry and application of mind by Assessing Officer (AO) - Validity of Commissioner's order.

Analysis:

1. Assessment of Short Term Capital Gains (STCGs):
The case involved the assessment of STCGs under section 111A of the Income Tax Act, 1961, pertaining to the Assessment Year 2010-11. The Assessing Officer (AO) accepted the STCGs declared by the assessee at ?25,32,011 after collecting necessary details and evidences. The Commissioner observed that most transactions in shares were in the nature of trading, not investment, and that the concessional tax rate of 15% under section 111A was wrongly applied. A Show Cause Notice was issued to the assessee, leading to a dispute over the nature of the gains.

2. Jurisdiction under Section 263 of the Act:
The Commissioner invoked jurisdiction under section 263, considering the assessment order erroneous and prejudicial to the interest of the Revenue. The assessee contended that the surplus arising from the sale of shares was rightly assessed as STCGs and not as business income. The Commissioner disagreed, assessing the income as profits and gains of the business. The dispute centered on whether the AO's order was open to challenge under section 263.

3. Nature of Transactions in Shares:
The Tribunal analyzed the nature of transactions in shares to determine if they constituted trading activity or capital transactions. The assessee maintained separate records for investment and trading portfolios, with specific details on acquisitions and sales. The Tribunal noted that Circular No.4 of 2007 allowed taxpayers to hold both types of portfolios simultaneously. Most transactions involved shares acquired in initial public offerings and sold in the secondary market, indicating a mix of investment and trading activities.

4. Enquiry and Application of Mind by AO:
The Tribunal found that the AO had collected requisite details during assessment proceedings, including purchase and sales records of shares. The AO had accepted the STCGs declared by the assessee and noted the concessional tax rate applicable. The Tribunal held that the AO's actions were based on proper enquiry and application of mind, making it challenging to deem the assessment order as erroneous per se.

5. Validity of Commissioner's Order:
After considering the submissions from both parties, the Tribunal concluded that the AO's decision to accept the declared capital gains as STCGs was reasonable and in line with the facts and evidence provided. The Tribunal set aside and quashed the Commissioner's order under section 263, ruling in favor of the assessee. The appeal of the Assessee was allowed, emphasizing the importance of maintaining separate records for different types of share transactions.

This detailed analysis highlights the key aspects of the judgment, including the nature of transactions, assessment of STCGs, jurisdiction under section 263, and the importance of maintaining separate portfolios for investment and trading activities.