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TMI Blog2015 (7) TMI 813X X X X Extracts X X X X X X X X Extracts X X X X ..... s as 'business income' instead of capital gains as shown by the assessee company In so far as the assessment year 2006-07 is concerned, return of income was processed under section 143(1) of the Act and assessment was completed After completing the assessment for the assessment year 2008-09, the assessment for 2006-07 was reopened by the Assessing Officer invoking his power under section 147 of the Act Accordingly, assessment was completed under section 143(3), where also, the income of the assessee from the purchase and sale of shares, which was originally treated as short term capital gains and taxed at the lower rate, was assessed as business income The assessment for the year 2010-11 was also completed under section 143(3) as in the case of the assessment year 2008-09 These orders were confirmed by the Commissioner of Income Tax (appeals) and the Tribunal, dismissing the appeals filed by the assessee This is the background in which these appeals are filed 3.The questions of law framed in ITA.267/14, which is common in these appeals, are the following: "(1) Whether on the facts and circumstances of the case, the Appellate Tribunal is right in confirming the reopening of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue. 7.We have considered the submissions made The first issue that is required to be considered is the scope of the power of the Assessing Officer under section 147 of the Act Section 147 of the Act provides that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or re- assess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned Under the first proviso, a time limit of 4 years from the end of the relevant assessment year has been fixed for taking action under section 147, unless any income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice under section 142(1) or section 148 or to disclose fully and truly all material facts necessary for his assessment for that year This provision, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stood prior to such substitution Under the old provisions of Section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed To confer jurisdiction under Section 147(a) two conditions were required to be satisfied firstly the Assessing Officer must have reason to believe that income profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under Section 148 read with Section 147(a) But under the substituted Section 147 existence of only the first condition suffices In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment It is however to be noted that both the conditions must be fulfilled if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s: "It is, therefore, clear from the aforesaid position that: (1) Reassessment proceedings can be validly initiated in case return of income is processed under Section 143(1) and no scrutiny assessment is undertaken In such cases there is no change of opinion (2) Reassessment proceedings will be invalid in case the assessment order itself records that the issue was raised and is decided in favour of the assessee Reassessment proceedings in the said cases will be hit by the principle of "change of opinion" (3) Reassessment proceedings will be invalid in case an issue or query is raised and answered by the assessee in original assessment proceedings but thereafter the Assessing Officer does not make any addition in the assessment order In such situations it should be accepted that the issue was examined but the Assessing Officer did not find any ground or reason to make addition or reject the stand of the assessee He forms an opinion The reassessment will be invalid because the Assessing Officer had formed an opinion in the original assessment, though he had not recorded his reasons In the second and third situation, the Revenue is not without remedy In case the assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:- (a) the total income or loss shall be computed after making the following adjustments, namely:- (i) any arithmetical error in the return; or (ii) an incorrect claim, if such incorrect claim is apparent from any information in the return; (b) the tax and interest, if any, shall be computed on the basis of the total income computed under clause (a); (c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax and interest, if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self- assessment and any amount paid otherwise by way of tax or interest; (d) an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent to make certain adjustments in the income or loss declared in the return They were as follows : (a) any arithmetical errors in the return, accounts and documents accompanying it were to be rectified; (b) any loss carried forward, deduction, allowance or relief which on the basis of the information available in such return, accounts or documents, was prima facie admissible, but which was not claimed in the return was to be allowed; (c) any loss carried forward, relief claimed in the return which on the basis of the information as available in such returns accounts or documents were prima facie inadmissible was to be disallowed. What were permissible under the first proviso to Section 143(1)(a) to be adjusted were, (i) only apparent arithmetical errors in the return, accounts or documents accompanying the return, (ii) loss carried forward, deduction allowance or relief, which was prima facie admissible on the basis of information available in the return but not claimed in the return and similarly (iii) those claims which were on the basis of the information available in the return, prima facie inadmissible, were to be rectified/ allowed/disallowed What was permissible was cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36 ITR 287] This again is an untenable argument for the reason that in the matter of assessment of income tax, the decision arrived at in the previous year cannot be regarded as binding in the assessment for the subsequent years It has been so held by the Apex Court in Dwarakadas Kesardeo Morarka v Commissioner of Income Tax [(1962) XLIV ITR 529], the relevant paragraph of which is extracted herein: ".....It cannot be said that because in the previous years the shares were held to be stock- in-trade, they must be similarly treated for the assessment year 1949-50 In the matter of assessment of income-tax, each year's assessment is complete and the decision arrived at in a previous year on materials before the taxing authorities cannot be regarded as binding in the assessment for the subsequent years....." Therefore, though consistency is desirable, the desirability of consistency cannot operate against the Revenue in completing assessments for subsequent years in accordance with law This is all the more so since the assessments for the previous years were completed under section 143(1) of the Act In so far as the judgment of the Bombay High Court in Gopal Purohit (supra) is concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he resale is an accretion to the capital If a transaction is in the assessee's ordinary line of business there can be no difficulty in holding that it is in the nature of trade But the difficulty arises where the transaction is outside the assessee's line of business and then, it must depend upon the facts and circumstances of each case whether the transaction is in the nature of trade It is not necessary to constitute trade that there should be a series of transactions, both of purchase and of sale A single transaction of purchase and sale outside the assessee's line of business may constitute an adventure in the nature trade Neither repetition nor continuity of similar transactions is necessary to constitute a transaction an adventure in the nature of trade If there is repetition and continuity, the assessee would be carrying on a business and the question whether the activity is an adventure in the nature of trade can hardly arise A transaction may be regarded as isolated although a similar transaction may have taken place a fairly long time before [see Commissioners of Inland Revenue v Reinhold (1953) 34 TC 389] The principles underlying the distinction between a capital sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 242, 250-1(SC)] and Janki Ram Bahadur Ram v Commissioner of Income-tax [(1965) 57 ITR 21 (SC)] In Commissioner of Inland Revenue v Fraser [(1942) 24 TC 498, 502] Lord Normand said: "The individual who enters into a purchase of an article or commodity may have in view the resale of it at a profit, and yet it may be that that is not the only purpose for which he purchased the article or the commodity, nor the only purpose to which he might turn it if favourable opportunity for sale does not occurr... An amateur may purchase a picture with a view to its resale at a profit and yet he may recognise at the time or afterwards that the possession of the picture will give him aesthetic enjoyment if he is unable ultimately, or at his chosen time, to realise it at a profit....." An accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realisation does not make it income Lord Dunedin said in Leeming v Jones at page 360: "The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinction between a capital asset and a trading asset 2 Capital asset is defined in section 2(14) of the Act Long-term capital assets and gains are dealt with under section 2(29A) and section 2 (29B) Short-term capital assets and gains are dealt with under section 2(42A) and section 2 (42B) 3 Trading asset is dealt with under section 28 of the Act 4 The Central Board of Direct Taxes (CBDT) through Instruction No.1827 dated August 31, 1989, had brought to the notice of the Assessing Officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset) In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of the assessees as well as for guidance of the Assessing Officers 5 In the case of CIT v Associated Industrial Development Company (P) Ltd [1971] 82 ITR 586, the Supreme Court observed that (headnote): Whether a particular holding of shares is by way of investment or forms part of the stock-in- trade is a matter which is within the knowledge of the assessee who holds the shares and he should, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial year for the purpose of arriving at business income or held as investment in capital assets The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions, their magnitude, etc maintenance of books of account and finding the ratio between purchases and sales It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling and realizing capital gains on investments and accounts of remittance to India for investment in India and realising capital gains on investment from such remittances The third principle suggests that ordinarily purchases and sales of shares with the motive or realising profit would lead to inference of trade/adventure in the nature of trade; where the object of the investment in shares of companies is to derive income by way of dividends etc., the transactions of purchases and sales of shares would yield capital gains and not business profits 10 The Central Board of Direct Taxes also wishes to emphasis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it had sold scrips in 72 companies 23.The authorities have also taken note of the fact that the assessee has all the infrastructure for buying and selling shares and that it has incurred establishment expenses and various establishment expenses have been charged to Profit and Loss Account which indicated an organised and systematic activity carried on by the assessee It was also found that the income earned by the company in the form of dividend was only in respect of very few scrips which gave a very low rate of return as compared to the value of shares held by it Yet another finding that has been entered into is that the involvement of the assessee in the trading of shares was not an occasional one but was carried on by it in a systematic and organised manner The authorities have also found that the short period of holding of shares reveal that the assessee had no intention to hold the shares for longer term as an investment These findings of the authorities below are absolutely unassailable and therefore, the fact that trading in shares is not the main object of the assessee or that the shares were shown as stock-in- trade in the books of accounts of the assessee cannot be of a ..... 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