2019 (3) TMI 986 - AT - Income Tax

Reopening of assessment - reopening after the end of four years from the end of relevant assessment year - Assessment was originally completed u/s 143(3) - conversion from investment to stock in trade merely because the investment was treated as inventory for considering the diminution in its value in books of account - assessee has followed the accounting standard issued by ICAI - HELD THAT - AO has called for the information relating to investment in shares and valuation of the same. He has applied his mind and formed an opinion, but, he has not discussed elaborately in his order. It is settled precedent that AO cannot reopen the assessment merely on change of his opinion. Further, we notice that AO recorded the reasons for reopening, in which, he has not recorded anywhere that there is failure on the part of the assessee. Since, the assessment was reopened after four years, it is the duty of the AO to bring on record the failure on the part of the assessee, as held in the case of Tecumseh Products India Pvt. Ltd. Vs. ACIT and Anr. 2014 (4) TMI 239 - ANDHRA PRADESH HIGH COURT . We notice that AO has not recorded any reasons of failure on the part of the assessee. Hence, the reopening itself is illegal. Therefore, in our considered view, the reopening was bad in law and therefore, the same is hereby quashed. Accordingly, we allow the grounds raised by the assessee in this regard. Penalty u/s 271(1) - HELD THAT - As the reopening of assessments made by the AO u/s 147 of the Act were quashed by us in these appeals, penalty levied u/s 271(1) on such assessments were null and avoid

Summary

Issues:
1. Reopening of assessment u/s 147 of the Income-tax Act, 1961.
2. Treatment of shares as stock in trade and denial of loss.
3. Validity of penalty levied u/s 271(1)(c) of the IT Act, 1961.

Reopening of assessment u/s 147:
The appeals were directed against the orders of ld. CIT(A) confirming the orders passed u/s 271(1)(c) of the Act for AY 2001-02. The AO observed that the assessee had acquired shares of an unlisted company as 'investment' and later converted them into stock in trade, creating an artificial loss. The AO concluded that this was a colorable device to evade tax. The CIT(A) upheld this decision, noting that unquoted shares cannot be treated as stock in trade and should be valued at acquisition price. The assessee argued that the AO's conclusion was unjustified, as the shares were valued based on accounting standards. The Tribunal found that the assessment was reopened after four years without demonstrating a failure on the part of the assessee to disclose material facts, quashing the reopening based on legal precedents.

Treatment of shares as stock in trade and denial of loss:
The assessee contended that the AO's denial of loss was unjustified, as the shares were treated as inventory due to diminution in value, following accounting standards. The AO held that the assessee's actions were a colorable device to evade tax and denied the loss. The CIT(A) upheld this decision, stating that unquoted shares should be valued at cost. The Tribunal, after considering the material on record, found that the AO had not recorded any failure on the part of the assessee in the original assessment. Referring to legal precedents, the Tribunal concluded that the reopening was illegal, as the AO did not establish any failure on the assessee's part. Consequently, the Tribunal quashed the reopening of assessments and allowed the grounds raised by the assessee in this regard.

Validity of penalty levied u/s 271(1)(c):
The assessees raised common grounds against the levy of penalty u/s 271(1)(c), arguing that there was no deliberate act to evade tax and full disclosure was made regarding transactions and share valuation. As the reopening of assessments was quashed, the penalties levied were deemed null and void. Therefore, the appeals against the penalties were dismissed as infructuous. The Tribunal allowed the appeals related to the reopening of assessments and dismissed the appeals against the penalties.

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