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2015 (10) TMI 2048 - ITAT MUMBAI

2015 (10) TMI 2048 - ITAT MUMBAI - TMI - Reopening of assessment - Loss from transactions of mutual fund units - whether a business loss which is allowed to be reduced from other business income and not capital loss - Held that:- The AO has power to reopen provided there is tangible material to come to the conclusion that there is escapement of income from assessment and reasons must have a link with the formation of the belief. In the case in hand, the original assessment was done on the basis .....

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om mutual funds was to be assessed as capital loss was nothing but a change of opinion that too based on surmises and conjunctures and not based on any particular material fact or circumstance which can be considered to be a deciding factor for such a treatment.

Second reason regarding the applicability of amended section 94(7) is concerned, we find that the amendment brought by the said section was applicable from the assessment year 2005-06. Even the condition imposed in the said am .....

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ket value. The units were lying in the stock of the assessee at the close of the financial year. Under such circumstances, the provisions of section 94(7) were not attracted in this case. So far as the forming of reasons as to the applicability of section 94(7) for the year under consideration is concerned, the same was erroneous as the amended provisions are not applicable for the year under consideration and the reasons of the AO to believe that the income of the assessee has escaped assessmen .....

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the assessee have been directed against the order dated 01.09.2010 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2004-05. 2. The Revenue has taken the following grounds of appeal: Revenue s grounds of appeal: 1. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in holding that loss of ₹ 5,21,76,870/- arising from transactions of the mutual fund units is business loss which is allowed to be re .....

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ing Officer be restored. 4. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 3. Whereas the assessee has taken the following cross objections: Assessee s cross objection: On the facts and circumstances of the case and in law, the reopening proceedings u/s 147 of Income Tax Act, 1961 are bad in law and requires to be squashed. 4. Since the assessee in his cross objections has raised a legal issue as to the validity of the reopening of the assessm .....

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an amount of ₹ 21,96,630/- on account of profit on sale and purchase of shares and units. The said profit was set off against the loss from redemption of mutual funds amounting to ₹ 5,21,76,870/-. The AO observed that the loss from the sale of mutual funds was to be computed under the head Capital gains/capital loss as the said loss was incurred by the assessee from investment activity in mutual funds. The AO further observed that the assessee had sold/redeemed the mutual funds withi .....

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cessed u/s.143(1) on 24.03.2005 determining the amount refundable of ₹ 22,99,662/-. The case was selected for scrutiny and assessment u/s.143(3) was completed on 19.12.2006 at an income for ₹ 2,64,08,970/-. The assessee has credited the P&L A/c. with an amount of ₹ 21,96,630/- on account of profit on sale of shares and units. The profit shown was the adjusted balance after setting off the loss from redemption of mutual funds amounting to ₹ 5,21,76,870/-. The mutual fu .....

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ances, the loss from mutual fund was required to be held as loss from investment under the head 'Capital gains' and such loss was not allowable to be set off against the profit under the head 'Business Income'. Omission to do so has resulted in the escapement of income of ₹ 5,21,76,870/-. It is further observed during the assessment proceedings for A.Y.2005-06 that the assessee has incurred a loss of ₹ 1,84,13,730/- on purchase and sale of mutual funds which is covere .....

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51,221 19,37,656 Principal Index Fund- Div. (- )78,41,587 (-)37,69,664 (-)1,16,11,251 71,60,474 Reliance Growth Fund Div. (-)1,03,82,093 (- )39,45,195 (-)1,43,27,289 1,03,82,093 Total (-)2 77,07,832 (-)93,02,041 (-)3,70,01,935 2,70,51,345 These losses were incurred on account of redemption of units of mutual funds purchased during F.Y.2003-04 and included in the closing stock of the assessee as on 31.03.2004. These were redeemed during F.Y.2004-05 and such redemption was made within 9 months of .....

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nce Act (2) of 2004. Failure to disallow the loss on this account has resulted in the escapement of income to the tune of ₹ 1,84,13,730/-. In view of the above, I have reason to believe that the taxable income to the extent of ₹ 5,21,76,870/- and ₹ 1,84,13,730/- totaling to ₹ 7,05,90,600/- has escaped assessment. Therefore, the assessment is reopened u/s.147 of the Act. Notice u/s.148 is issued accordingly. 5. The Ld. A.R. of the assessee, before us, has submitted that so .....

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start of the year as opening stock and at the end of the relevant year as closing stock. The assessee company had been carrying on the share trading business and maintaining two portfolios. The shares and mutual funds traded in by the assessee were recorded in the trading portfolio and were never shown as investments in its accounts. The relevant details such as ledger copy of dividend account, copies of mutual fund statement etc. were duly provided to the AO during the original assessment proc .....

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mber of facts which differ from case to case. No single formula is prescribed to differentiate between the two. The CBDT vide its circular No.4/2007 dated 15.06.07 has laid down certain parameters to be observed while making the distinction between the shares held by the assessee as investment or stock in trade viz. the intention of the assessee at the time of purchasing/dealing in shares or units; the number of scripts dealt in with; frequency of transactions and magnitude of investment; durati .....

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mutual funds was to be treated as investment activity or as trading activity, however, the claim of the assessee was accepted by the AO after due application of mind. In relation to the second reason, the Ld. A.R. has submitted that the amended provisions of section 94(7) were applicable prospectively for assessment year 2005-06 and not to the year under consideration. Hence, the second reason recorded by the AO was factually and legally wrong and the reopening on the basis of amendment brought .....

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n from the assessment order made pursuant to the reopening of the assessment that the AO s conclusion that the loss in mutual funds was capital loss was not based on any peculiar fact but only on surmises and conjunctures. It was nothing but a change of opinion. It is pertinent to mention here that while reversing the order of the AO on merits, the Ld. CIT(A) in the impugned order has observed that the AO has not brought on record any material to justify his conclusion that the said transaction .....

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cannot be said to be income from investment. Merely because the dividend is exempt that itself cannot be a ground to hold that the mutual funds were held as investments whereas the assessee has specifically treated the same as stock in trade in its accounts. Moreover, the assessee s such treatment had already been accepted in earlier years. No new material or evidence had come into the possession of the AO to form a belief that the mutual funds transactions were to be treated as capital in natur .....

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s. DCIT (2009) 308 ITR 195 (Bom.), while relying upon the full bench decision of the Hon ble Delhi High Court in the case of CIT vs. Kelvinator India Ltd. (2002) 256 ITR 1, has observed that when a regular order of assessment is passed in terms of section 143(3) of the Act, a presumption can be raised that such an order has been passed on application of mind. Such a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act that judicial an .....

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taking recourse of the provisions of section 147 of the Act. It may be noted that the decision of the Hon ble full Bench of the Delhi High Court has been further upheld by the Hon ble Supreme Court in the case of CIT vs. M/s. Kelvinator India Ltd. reported as (2010) 320 ITR 561 (SC) holding that the AO has no power to review, he has 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 then in the garb of re .....

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reating the income/loss on mutual funds as business loss. Such a treatment was given by the AO in the case of assessee in earlier assessment years also. No further evidence or new information has come to the knowledge of the AO for change of his opinion in this respect. Hence, the reopening on the ground that the loss from mutual funds was to be assessed as capital loss was nothing but a change of opinion that too based on surmises and conjunctures and not based on any particular material fact o .....

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its within a period of nine months after such date, then the loss is to be disallowed. However, we find that during the year under consideration the assessee had not sold or transferred the securities/mutual funds. The loss arrived at by the assessee was on account of diminution in the value of the stock as compared to the market value. The units were lying in the stock of the assessee at the close of the financial year. Under such circumstances, the provisions of section 94(7) were not attracte .....

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ile framing assessment for A.Y. 2005-06 wherein the AO had formed the view to reopen the assessment for A.Y. 2004-05 i.e. for the year under consideration, the AO has observed in para 4.1.0 of the order dated 28.12.07 that the anticipated loss arrived at for A.Y. 2004-05 could have been taken into consideration in A.Y. 2005-06 at the time of actual redemption of the mutual fund units and the difference between the two could have been taken for consideration/computation of income/loss for the A.Y .....

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