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2015 (7) TMI 813 - KERALA HIGH COURT

2015 (7) TMI 813 - KERALA HIGH COURT - [2015] 376 ITR 321 (Ker) - Reopening of assessment - ITAT confirming that profit on sale of shares is to be assessed under the head “income business” and not under the head “capital gains” - Held that:- Law mandates that the Assessing Officer should have reason to believe that income chargeable to tax has escaped assessment for any assessment year to invoke the power to re-open assessments under section 147 Admittedly, assessments for the year 2006-07 were .....

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corners of section 147 of the Act.

The factual correctness of the findings of the Assessing Officer was not disputed at any stage of the proceedings It was on the basis of the assessment for the year 2008-09 that the assessment for the year 2006-07 was re-opened and the same standard has been applied in respect of the assessment for 2010-11 also These findings, the factual correctness of which has been concurrently confirmed by the first appellate authority and the Tribunal, when appr .....

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Dated:- 3-7-2015 - ANTONY DOMINIC AND SHAJI P. CHALY, JJ. For The Appellant : SRI.JOSEPH MARKOSE (SR.), SRI.V.ABRAHAM MARKOS, SRI.BINU MATHEW, SRI.TOM THOMAS (KAKKUZHIYIL), SRI.ABRAHAM JOSEPH MARKOS, SRI.ISAAC THOMAS AND SRI.NOBY THOMAS CYRIAC For The Respondent : SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) AND SRI.JOSE JOSEPH, SC, FOR INCOME TAX JUDGMENT Antony Dominic, J. 1.These three appeals are filed by the assessee, who is aggrieved by the orders passed by the Income Tax Appellate Tribunal, Co .....

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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 c .....

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the facts and circumstances of the case, the Appellate Tribunal is right in confirming the reopening of assessment under Section 147? (2) Whether on the facts and circumstances of the case, the Appellate Tribunal is right in confirming that the profit on sale of shares is to be assessed under the head income business and not under the head capital gains ? (3) Whether there was any material or documents on record to justify the finding of the Appellate Tribunal that the Appellant is engaged in tr .....

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he decisions of various High Courts including the jurisdictional High Court which were relied on at the time of hearing, without a speaking order as to why they are not followed. 4.We heard the senior counsel for the appellant and the learned senior standing counsel appearing for the Revenue. 5.According to the learned senior counsel, the re- opening of the assessment for the year 2006-07, invoking the power under section 147 of the Act, is illegal He also contended that the grounds contemplated .....

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ment of income It was also his case that even after re- opening the assessments for the year 2006-07 and completing the assessments for the years 2008-09 and 2010-11, the Department has left out assessments for the years 2007-08 and 2009-2010 According to the counsel, such picking and choosing some of the years and leaving out the remaining years when the assessee had returned loss is impermissible. 6.These contentions were contradicted by the learned senior counsel appearing for the Revenue. 7. .....

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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 .....

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the consideration of courts on various occasions In Assistant Commissioner of Income Tax v Rajesh Jhaveri Stock Brokers P Ltd [(2007)291 ITR 500], the Apex Court examined this expression and held thus: Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment The word reason in the phrase reason to believe would mean cause or justification If the Assessing Officer .....

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vinces Manganese Ore Co Ltd v ITO [1991 (191) ITR 662], for initiation of action under Section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential At that stage, the final outcome of the proceeding is not relevant In other words, at the initiation stage, what is required is reason to believe, but not the established fact of escapement of income At the stage of issue of notice, the only question is whether there was relevant .....

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also Sections 148 to 152 are substantially different from the provisions as they 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 .....

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stence 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 the case falls within the ambit of the proviso to Section 147 The case at hand is covered by the main provision and not the proviso. 9 Commissioner of Income Tax v Kelvinator of India Ltd [(2010) 228 CTR 488] is anothe .....

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ing which, we are afraid, s.147 would give arbitrary powers to the AO to reopen assessments on the basis of mere change of opinion , which cannot be per se reason to reopen We must also keep in mind the conceptual difference between power to review and power to reassess The AO has no power to review; he has the power to reassess But reassessment has to be based on fulfillment of certain pre-condition and if the concept of change of opinion is removed, as contended on behalf of the Department, th .....

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ect Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words reason to believe but also inserted the word opinion in s.147 of the Act However, on receipt of representations from the companies against omission of the words reason to believe , Parliament re-introduced the said expression and deleted the word opinion on the ground that it would vest arbitrary powers in the AO…... 10.The Full Bench of Delhi High Court had occasion to consider the above expression in its judgment .....

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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 Offic .....

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ect and position has been highlighted in CIT v DLF Power Ltd I.T.A.No.973 of 2011 decided on November 29, 2011 - since reported in [2012] 345 ITR 446 (Delhi) and BLB Ltd v Asst CIT Writ Petition (Civil)No.6884 of 2010 decided on December 1, 2011 - since reported in [2012] 343 ITR 129 (Delhi) In the last decision it has been observed (page 135): The Revenue had the option, but did not take recourse to section 263 of the Act, in spite of audit objection Supervisory and revisionary power under Sect .....

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ation of reassessment proceedings will be invalid on the ground of change of opinion. 11.From the principles laid down in the above judgments, it can be seen that the power under section 147 of the Act can be invoked by the Assessing Officer, if, on the materials available before him, he has reason to believe that any income chargeable to tax has escaped assessment in any assessment year, provided such proceedings are not barred by the time limit prescribed in the first proviso to the said secti .....

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ent was initially completed under section 143(1) of the Act The scope of enquiry that is permissible in an assessment proceedings under section 143(1) is very limited as is evident from the section itself, which reads thus: 143 Assessment - (1) 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 adj .....

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y 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 assessee under clause (c); and (e) the amount of refund due to the .....

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considered by the Apex Court in its judgment in Assistant Commissioner of Income Tax v Rajesh Jhaveri Stock Brokers P Ltd (supra), where it was held thus: It is to be noted that substantial changes have been made to Section 143(1) with effect from June 1, 1999 Up to March 31, 1989, after a return of income was filed the Assessing Officer could make an assessment under Section 143(1) without requiring the presence of the assessee or the production by him of any evidence in support of the return .....

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under Section 143(3) With effect from April 1, 1989, the provisions underwent substantial and material changes A new scheme was introduced and in the new substituted Section 143(1) prior to the subsequent substitution with effect from June 1, 1999, in Clause (a), a provision was made that where a return was filed under section 139 or in response to a notice under section 142(1), and any tax or refund was found due on the basis of such return after adjustment of tax deducted at source, any advanc .....

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mpanying 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 .....

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at was permissible was correction of errors apparent on the basis of the documents accompanying the return The Assessing Officer had no authority to make adjustments or adjudicate upon any debatable issues In other words, the Assessing Officer had no power to go behind the return, accounts or documents, either in allowing or in disallowing deductions, allowance or relief. 13.For the assessment year 2006-07, assessment under section 143(1) was completed by order dated 23.12.2008 It was thereafter .....

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d is whether the reopening of assessment is based on the mere change of opinion of the Assessing Officer as contended by the counsel for the appellant 14.In our view, the aforesaid contention cannot be accepted Law mandates that the Assessing Officer should have reason to believe that income chargeable to tax has escaped assessment for any assessment year to invoke the power to re-open assessments under section 147 Admittedly, assessments for the year 2006-07 were completed treating the income i .....

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ct 15.It is true that returns treating the income as capital gains were accepted in the previous assessment years also It is on that factual basis that contention was raised by the assessee that Department should maintain consistency in the matter of assessment In support of this contention, counsel for the appellant relied on the judgment of the Bombay High Court in Commissioner of Income Tax v Gopal Purohit [(2011) 336 ITR 287] This again is an untenable argument for the reason that in the mat .....

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e 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 .....

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e counsel, the Revenue has, therefore, adopted a pick and choose method, choosing the assessment years when the assessee had returned profit Though this contention would appear to be attractive, a closer examination thereof would show that there is no substance in it Admittedly, for the assessment years 2007-08 and 2009-2010, the assessee had returned loss The assessment for such years were also completed under section 143(1) Re-opening of those assessments is permissible only under section 147 .....

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essee cannot be heard to complain that the Revenue has adopted a pick and choose method in the matter of assessment for the years in question 18.The main question that arises for consideration is regarding the legality of assessment treating the income for the years in question as business income instead of capital gains 19.Before we proceed to consider the relevant facts, it would be appropriate to examine the legal principles which govern the issue Although both sides have cited before us vari .....

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fit arising from the 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 o .....

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solated 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 and an adventure in the nature of trade were examined by this court in G.Venkataswami Naidu & Co v Commissioner of Income-tax [(1959) 35 ITR 594 (SC)], where this court said that the character of a transaction cannot be determined solely on the application of any abstract rule, .....

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ether it is in the nature of trade will depend on the facts and circumstances Where the purchase of any article or of any capital investment, for instance, shares, is made without the intention to resell at a profit, a resale under changed circumstances would only be a realisation of capital and would not stamp the transaction with a business character (see Commissioner of Income-tax v P.K.N.Co.Ltd (1966) 60 ITR 65 (SC) Where a purchase is made with the intention of resale, it depends upon the c .....

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470, 478-9 (Rang)(FB)], Ajax Products Ltd v Commissioner of Income-tax [(1961) 43 ITR 297, 310 (Mad)], Gustad Irani v Commissioner of Income-tax [(1957) 31 ITR 92 (Bom)] and Mrs.Alexander v Commissioner of Income-tax [(1952) 22 ITR 379, 402 (Mad)] A capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment (see Leeming v Jones [(1930) 15 TC 33 .....

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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 an .....

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610, 622(SC)] that the dominant or even sole intention to resell is a relevant factor and raises a strong presumption, but by itself is not conclusive proof, of an adventure in the nature of trade The intention to resell would, in conjunction with the conduct of the assessee and other circumstances, point to the business character of the transaction. 20.We may, in this context, also refer to the judgment of the Apex Court in M/s.Rajputana Textiles (Agencies) Ltd v Commissioner of Income tax, Bom .....

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ssee in its books of accounts is not determinative of the question whether the assessee has earned any profit or suffered any loss Therefore, even if it is accepted that the objects clause in the Memorandum of Association of the assessee did not provide for trading in shares and that in the accounts it was shown as investments, that by itself would not be determinative of the issue involved in these appeals 21.While the precedents that we have referred to above lead to the irresistible conclusio .....

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2007, dated June 15, 2007 Sub: Distinction between shares held as stock- in-trade and shares held as investment-Tests for such a distinction The Income-tax Act, 1961 makes a 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 un .....

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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 normal circumstances, be in a position to produce evidence from his records as to whether he has maintained any distinction between .....

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cases afford adequate guidance to the Assessing Officers 8 The Authority for Advance Rulings (AAR) [2007] 288 ITR 641, referring to the decisions of the Supreme Court in several cases, has culled out the following principles (page 651): (i) Where a company purchases and sells shares, it must be shown that they were held as stock-in- trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction; (ii) the substantia .....

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ay of dividend etc then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt 9 Dealing with the above three principles, the AAR has observed in the case of Fidelity group as under (page 661): We shall revert to the aforementioned principles The first principle requires us to ascertain whether the purchase of shares by a FII in exercise of the power in the memorandum of association/trust deed was as stock-in-trade as the mere existe .....

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gnitude, 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 remittance .....

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lios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income 11 The Assessing Officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investmen .....

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may now proceed to consider the facts that are available before us to decide whether the authorities were right in treating the sale of shares as business income as against capital gains The transactions during the assessment year 2008-09, as reflected in the order of the Tribunal, show that the assessee has traded in the shares of 45 companies Among the 45 companies, the maximum weighted holding period is in respect of 219,641 shares held by the assessee in M/s.JK Investo Trade and the minimum .....

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e scrip wise purchase to sales also indicate that in the assessment year 2006-07, while the company purchased shares in 55 companies, it had sold shares in 57 companies In the assessment year 2008-09, the company purchased 51 scrips and sold 45 scrips Similarly, during the assessment year 2010-11, while it purchased scrips in 67 companies, 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 sha .....

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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 o .....

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the assessee, which has the maximum weighted holding period In so far as these shares are concerned, along with I.A.1518/15, the Revenue has produced before us the details of acquisition of these shares which show that the company acquired these shares over a period of time from 8.12.2005 to 1.12.2006 and sold these shares during the period from 4.4.2007 to 26.11.2007 This particular transaction has been discussed in the assessment order for the year 2008- 09, where the Assessing Officer has fo .....

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